Samuel P. Sporn
Joel P. Laitman
SCHOENGOLD & SPORN, P.C.
233 Broadway
New York, NY 10279
Telephone: (212) 964-0046

Joseph J. Tabacco, Jr. (75284)
Nicole Lavallee (165755)
BERMAN, DEVALERIO, PEASE & TABACCO
425 California Street, Suite 2025
San Francisco, CA 94104-2205
Telephone: (415) 433-3200

Attorneys for Plaintiffs SHELDON KRIEGEL
and MICHAEL TSENTER

Kevin Prongay
John W. Borderud
Michael O'Keefe, Of Counsel
PRONGAY & BORDERUD
881 Alma Real Drive, Suite 211
Pacific Palisades, CA 90272
Telephone: (310) 573-3600

Robert S. Schachter
Catherine Anderson
ZWERLING, SCHACHTER & ZWERLING, LLP
767 Third Avenue
New York, NY 10017
Telephone: (212) 223-3900

Attorneys for Plaintiff HAROLD WALLACH

Plaintiffs SHELDON KRIEGEL, MICHAEL TSENTER and HAROLD WALLACH, by counsel, allege upon knowledge with respect to themselves, and upon information and belief based upon the investigation of their counsel, which included, inter alia, interviews with persons knowledgeable about the facts alleged here, consultation with experts, a review of various Pacific Scientific Company ("PacSci" or the "Company") documents filed with the Securities and Exchange Commission (the "S.E.C.") and press releases and various media reports detailed herein, with respect to all other matters, as follows:

I. SUMMARY OF CLAIMS

1. This action arises out of false, misleading, dramatic and systematic claims by PacSci that it had actually developed certain fluorescent lighting products which would revolutionize the commercial and residential lighting industry. PacSci claimed it was the technological "leader" of a billion dollar electronic ballast market for compact fluorescent lamps (i.e., bulbs)¹ ("CFL") and traditional linear fluorescent lamps, and that by virtue of their revolutionary development of a continuous dimming fluorescent bulb and ballast, a dimmable electronic ballast for both compact and linear fluorescent lamps and the Sense-A-Volt technology and ballast, they would capture a major share of the market and enjoy multi-million dollar revenues and profits.

2. Fluorescent lighting has long been recognized to have certain significant advantages over incandescent lighting. Fluorescent lighting is more energy efficient and less costly because it requires far less wattage to produce the same level of luminescence as an incandescent bulb. However, fluorescent light also has distinct limitations and disadvantages, which no manufacturer had yet been able to overcome. These disadvantages include the inability to dim most conventional fluorescent lights, the inability to use fluorescent lights in incandescent light fixtures connected to dimming circuits and the inability to use the same fluorescent lights for fixtures requiring different voltages.

3. Beginning on October 3, 1994 and continuing through July 2, 1996 (the "Class Period"), PacSci and its Chief Executive Officer Edgar S. Brower ("Brower"), Chief Financial Officer Richard V. Plat ("Plat"), and the head of the Company's subsidiary, Solium, Inc. which was established in January 1995 ("Solium"), John M. Ossenmacher ("Ossenmacher") (collectively, the "Individual Defendants") engaged in a common plan and scheme that led the investing public to believe that PacSci had developed the technology and products which eliminated each of the major obstacles to the use of fluorescent lighting. In particular, they represented that the following three new products would revolutionize the industry:

(a) The Continuous Dimming Compact Fluorescent Bulb and Ballast ("Screw-In Product")

In October 1994, PacSci misrepresented it had developed and introduced a Screw-in bulb for the CFL market which allegedly (i) had full range dimming; (ii) was capable of being screwed into any incandescent fixture to provide for dimming with no alteration of circuitry; (ii) provided enormous cost and energy savings; and (iii) would replace most general use incandescent lamps, spot/flood and down lights.

(b) Dimmable Electronic Ballast for Both Compact and Linear Fluorescent Lamps ("Wired-In Product")

In October 1994, PacSci also misrepresented it had developed and introduced an electronic ballast with built-in dimmer for use in the traditional linear and CFL markets. The Wired-In product also was touted as having continuous or full range dimming capabilities. Defendants further claimed that the introduction of these products would drive fixture manufacturers (e.g., ceiling installed down lights, table and floor lamps) to replace their short lived incandescent lamps (with lives of less than 1,000 hours) with Solium ballasted dimmable CFLs (with lives greater than 10,000 hours).

(c) Sense-a-Volt Technology and Ballasts ("Sense-a-Volt Product")

On October 25, 1995, PacSci misrepresented it had developed and introduced a Sense-a-Volt electronic compact fluorescent ballast which it claimed automatically adjusted to voltage between 120 and 277 volts. It also announced Sense-a-Volt T-8 linear fluorescent ballasts. These products were allegedly going to "globalize" fixtures by allowing fixture manufacturers to sell the same fixture in the United States and Europe despite the use of different voltages. Here again, these Sense-a-Volt ballasts also were purportedly usable with any style or wattage CFL lamps or fixtures.

4. During the Class Period and in order to sustain their fraudulent scheme, the defendants, pursuant to a common plan and scheme to defraud, made numerous fraudulent claims and engaged in fraudulent activities that were designed to and did mislead the investing public into believing that PacSci had ready for sale and shipment the above products and, as a result, was a significant "player" in the billion dollar electronic ballast market for both CFL and traditional linear fluorescent lamps. As more fully set forth in ¶¶ 111(a) to 111(aa) below, such claims included assertions that:

(i) The Screw-In, Wired-In, and Sense-a-Volt products (the "Solium Products") were marketable and ready for commercial use;

(ii) Solium Products would be shipped in 1995;

(iii) Solium Products would generate between $50 million to $100 million of revenue in 1995 and 1996;

(iv) Solium Products were "safe;"

(v) Solium Products would replace commercial and residential incandescent lamps, including spot and flood lamps;

(vi) Solium Products had established PacSci as a major competitor in the billion dollar linear ballast market;

(vii) Solium Products were ready to manufacture in PacSci's state-of-the-art automated manufacturing facility;

(viii) PacSci had a successful introduction of its Solium Product line at national lighting shows, including the 1995 LightFair in Chicago;

(ix) Solium Products had received favorable comments, following purported testing and orders, and that impending orders from major lighting companies and original equipment fixture manufacturers ("OEMs") were anticipated and received; and

(x) Mass retailers such as Pergament and Home Depot had placed substantial orders for certain Solium Products.

5. However, as set forth more fully in ¶ 111 below, virtually all of defendants' representations were materially false and contained numerous misrepresentations and omissions, including as follows:

(i) Solium continuous dimming and Sense-a-Volt technology never performed at commercial grade, and were, in fact, in the infancy of their development -- no design had been solidified. Only crude hand-made prototypes existed. Further, serious device failures persisted with the prototypes, including repeated instances of fires and explosions;

(ii) No continuous dimming Solium Products were ever ready for manufacture or mass production;

(iii) The Company had conducted no safety, energy conservation and/or field testing;

(iv) The Company's Director of Engineering for Solium Products, Mark Martich ("Martich"), repeatedly informed Ossenmacher, prior to and during the Class Period, that the Solium Products did not function as claimed, that no meaningful testing had been performed and that the Company's claims were misleading the investment and financial communities. The Company terminated Martich after he wrote to Brower in March 1995, stating that the claims being made to the investing public concerning PacSci's Solium Products were blatantly false;

(v) The $50 to $100 million revenue projection was intentionally and/or recklessly made because the Solium Products were only in their infancy. Ossenmacher received from Stephen McLeod, Solium's Marketing Manager, bona fide internal projections of $3 to $8 million for the same period, which optimistically assumed that the Company would be capable of establishing a uniform product design and overcome the serious problems which had prohibited any commercialization of the products, and would then capture nearly the entire CFL market;

(vi) The Company had no marketable dimmable Sense-a-Volt ballast for the CFL market and did not even have a prototype for the traditional linear market;

(vii) PacSci "rigged" the display models used in national light shows held in Anaheim, California in January 1995, and in Chicago in June 1995;

(viii) The representations of impending orders and projections of revenue from sales to OEMs or lighting companies were without foundation because the company did not have a continuous dimming or Sense-a-Volt product to sell and any purported "orders" were merely requests to test sample prototypes and thus did not represent market acceptance or bona fide orders for hundreds of thousands of units of product;

(ix) The sales to mass retailers, such as Home Depot and Pergament, in the third quarter of 1995 were only sales of hundreds of units of a single model "3-way" screw-in product which could not be continuously dimmed. The Company turned to these mass retailers because it was desperate to ship a product -- any product -- by the third quarter of 1995 as repeatedly forecasted. Sales to these mass retailers actually negatively impacted PacSci since the product was sold at such low prices that it undermined the Company's ability to sell the product more profitably to hotels, resorts and residential projects;

(x) When approximately 5,000 units of Solium ballasts were finally shipped to an OEM, Cooper Lighting Industries ("Cooper"), they were returned within months because of defective dimming capabilities; and

(xi) The Sense-a-Volt products at no time were automatically adjusted to voltages between 110 and 277 as claimed and thus were not novel and could not "globalize" the sale of fixtures anywhere.

6. Despite the fact that they knew that the technology was not fully developed and had significant defects, defendants also repeated throughout the Class Period a series of both forward-looking and non-forward looking statements which they knew had no basis in fact. Defendants did not mitigate the impact of the forward looking statements with any meaningful cautionary statements.

7. These dramatic misrepresentations -- which defendant Brower would later concede were made without an understanding of what the Solium Products could do -- caused a meteoric rise in PacSci's common stock price during the Class Period, which climbed 136% from approximately $11.00 per share in September 1994 to approximately $26.00 per share in December 1995.² As a result of this artificial inflation of the price of PacSci common stock, PacSci was, among other things, able to acquire Met One Inc. ("Met One") through the exchange of common stock. The hype also allowed certain PacSci officers to reap substantial profits by selling PacSci common shares at artificially inflated prices during the Class Period. Moreover, the price of PacSci's 7-3/4% Convertible Subordinated Debentures due June 15, 2003 (the "Debentures") was artificially inflated, climbing nearly 50%, from approximately $101.00 per Debenture in October 1994 to a high of approximately $151.00 per Debenture in November 1995.

8. On or about July 2, 1996, PacSci finally disclosed that its Solium Products could not meet the requirements of its major customers, its Solium technology had to be "re-engineered" and that many of its new product lines would be discontinued pending "re-engineering" (the "bad news"). Following this bad news announcement PacSci's common stock price plunged to approximately $12.00 per share. And on July 3, 1996, the Debentures closed at $99.00 when, as reported in the Los Angeles Times, defendant Brower admitted a "severe mistake" in marketing Solium Products without a "thorough understanding" of what the Products could do. On October 16, 1996, the Company announced a $4.1 million or $0.33 per share charge for "restructuring" Solium.

II. JURISDICTION

9. The claims asserted herein arise under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78, et seq. Rule 10b-5 promulgated thereunder by the S.E.C.

10. Jurisdiction is conferred upon this Court pursuant to § 27 of the Exchange Act, 15 U.S.C. § 78aa, 28 U.S.C. § 1331.

11. Many of the acts and transactions constituting the violations of law described in this complaint occurred within this judicial district. In addition, PacSci, a California corporation, has its principal place of business in this district at 620 Newport Center Drive, Newport Beach, California 92660.

12. In connection with the acts alleged herein, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including the United States mails.

III. PARTIES

15. Plaintiff Harold Wallach purchased twenty Debentures on April 10, 1996 at $110.75 per Debenture, for a total price net of commissions of $22,150.

16. Defendant PacSci designs, manufactures and markets electrical equipment and safety equipment. The Company's electrical products include motors and generators, street lighting controls, and electronic ballasts. Its safety products, which include fire detection, suppression equipment and flight control components, are used mainly in commercial and military aircraft and vehicles. PacSci has over 12,000,000 shares of common stock outstanding. PacSci's stock trades on the New York Stock Exchange (an open, efficient, impersonal and well developed market for the trading of shares of PacSci), wherein the market price reflected publicly disseminated information.

17. Defendant Brower was, at all relevant times, Chairman and Chief Executive Officer and President of PacSci. Brower owns approximately 259,331 shares, or 2.1%, of PacSci common stock and has options to purchase an additional 124,000 shares. Brower received as compensation for the year 1995 a salary of $376,640, a $155,341 bonus, and other compensation of $6,000.

18. Defendant Plat was at all relevant times PacSci's Executive Vice President, Chief Financial Officer and Secretary. As of March 15, 1996, Plat owned 208,142, or 1.7% of the outstanding shares of PacSci common stock. For the year ended December 29, 1995, Plat received a salary of $284,904, a bonus of $100,924, and other compensation totaling $4,620. In addition, as a member of PacSci's Board of Directors, Plat received a $25,000 annual retainer.

19. Defendant Ossenmacher was promoted to Vice President of the Company and President of Solium in January 1995, and served in those positions until May 1996. As of March 15, 1995, Ossenmacher owned 2,066 shares of PacSci common stock. For the year ended December 29, 1995, Ossenmacher received salary of $128,765 and a bonus of $45,000.

20. The Individual Defendants are liable as direct participants in the wrongs complained of herein. They were aware of and approved the false statements issued by or on behalf of PacSci during the Class Period. Because of their positions of control and authority as executive officers and/or directors of PacSci, the Individual Defendants were controlling persons of PacSci. They, therefore, could and did control the contents of the various financial reports and statements, reports to shareholders, and press releases of PacSci. As officers and/or directors of PacSci, the Individual Defendants had a duty to promptly disseminate accurate and truthful information with respect to PacSci's operations, product development, accounting practices, financial condition, and earnings, or to cause and direct that such information be disseminated so that the market price of the Company's stock would be based on truthful and accurate information.

21. The Individual Defendants participated in the wrongdoing complained of herein in order to continue and prolong a distorted and misleading appearance of PacSci's continued profitability and the value of its assets and its financial condition and prospects so that they could protect their executive and/or directorial positions and the substantial compensation, benefits and prestige they obtained thereby.

IV. CLASS ACTION ALLEGATIONS

22. This action is brought by plaintiffs as a class action pursuant to Rules 23(a) and (b)(3) of the Federal Rules of Civil Procedure.

23. Plaintiffs Kriegel and Tsenter seek relief on behalf of themselves and all other persons who purchased PacSci common stock during the Class Period (the "Equity Class"). Excluded from the Equity Class are the defendants herein, members of the immediate family of each of the Individual Defendants, and affiliates, successors and assigns of the individual and corporate defendants.

24. Wallach seeks relief on behalf of himself and all other persons who purchased PacSci Debentures during the Class Period (the "Debenture Class"). Excluded from the Debenture Class are the defendants herein, members of the immediate family of each of the Individual Defendants, and affiliates, successors and assigns of the individual and corporate defendants.

25. The members of the Equity Class and the Debenture Class (collectively, the "Classes") are so numerous that joinder of all members is impracticable. While the exact number of class members is unknown to plaintiffs at this time and can only be ascertained through appropriate discovery, there are over 12 million shares of PacSci common stock outstanding held by thousands of shareholders and in 1983 PacSci issued $30,000,000 of the Debentures. Both PacSci common stock and Debentures are listed and actively traded on the New York Stock Exchange, and the common stock holders and Debenture holders are believed to be geographically dispersed throughout the United States.

26. Plaintiffs will fairly and adequately protect the interests of the members of the Classes inasmuch as they are members of the class they seek to represent and their claims are typical of the claims of all members of that class. Plaintiffs have retained competent counsel experienced in class action securities litigation. Plaintiffs have no interests that are adverse or antagonistic to those of the Classes. Plaintiffs' interest is to obtain relief for themselves and for the class members for the harms arising out of the violations of law set forth herein.

27. Notice to the Classes can be provided to such record owners via first class mail and/or publication using techniques and a form of notice similar to those customarily used in class action litigation arising under the federal securities laws.

28. There are common questions of law and fact arising in this action, including, inter alia:

(i) whether defendants violated the federal securities laws by making materially misleading statements and omissions in public filings, press releases and other publicly disseminated documents during the Class Period;

(ii) whether defendants' statements during the Class Period concerning PacSci's business prospects were fraudulent and contained material misstatements and omissions resulting in a fraud on the market for PacSci stock;

(iii) whether defendants participated in and pursued the common course of conduct complained of;

(iv) whether the defendants acted willfully or recklessly in omitting and/or misrepresenting materials facts; and

(v) whether the market prices of PacSci common stock during the Class Period were artificially inflated due to the nondisclosure and/or misrepresentations complained of herein.

29. The questions of fact and law that are common to the Classes herein predominate over any questions solely affecting individual members. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. It would be impracticable and undesirable for each member of the two Classes who has suffered harm to bring separate actions. In addition, the bringing of such actions would put a substantial and unnecessary burden on the courts, while a single class action can determine the rights of all class members with judicial economy.

30. On December 16, 1996, after plaintiffs had been deposed and after a full briefing by all counsel, this Court found plaintiffs to be suitable and adequate class representatives.

V. THE BACKGROUND OF THE LINEAR AND CFL FLUORESCENT LIGHTING MARKET

31. Incandescent lighting is generated by the burning of a filament in a bulb filled with inert gas. By contrast, fluorescent lighting is generated by the charging of mercury vapor with electrodes in a glass tube coated with phosphorous powder. When the proper current is applied to the electrodes, a high speed flow of electrons travels between the electrodes. Electrons colliding with mercury atoms create ultraviolet radiation which is transformed into visible light by a phosphorous powder which coats the inside of a fluorescent lamp.

32. Fluorescent lighting has long been recognized to have certain significant advantages over incandescent lighting. For example, fluorescent lighting is far more energy efficient and less costly. It requires far less wattage to produce the same level of luminescence than an incandescent bulb. A 24 watt fluorescent bulb generates the equivalent luminescence of a 100 watt incandescent bulb.

33. However, as noted above, linear fluorescent light has significant and distinct limitations. First, it requires a special circuitry and expensive electronic controls in order to be dimmable, and thus is particularly inefficient for businesses where dimming is a cost saving practice and/or necessary for presentations. Second, it sometimes results in delayed starts, flickering, audible noises or electromagnetic interference with TVs, radios, cordless phones and computers. Third, it has a duller, green/blue tone and rendering of colors. Fourth, it cannot be used in fixtures designed for incandescent light and requires different ballasts (which regulate the flow of electricity to the lamp) for different lamp wattages. Finally, fluorescent fixtures made for use in the United States market cannot be used in Europe without substantial modifications because European countries typically use different voltage.

34. The bulk of the $1.2 billion fluorescent market has traditionally been dominated by linear fluorescent lamps. However, the market for CFLs has grown substantially recently. CFLs are smaller than linear bulbs and typically have a higher quality phosphorous that gives off a warmer light, similar to incandescent light, than conventional fluorescent lamps. CFL-based lamp systems have the same benefits as linear fluorescent lamps. They require up to 75% less energy to produce the same amount of light as an incandescent bulb. However, CFLs can be designed to fit in fixtures that traditionally have used incandescent lamps. They have narrow tubes folded back to the base at least once, and are sometimes covered by an additional bulb or globe.

35. PacSci's strategy, beginning in October 1994, was to purportedly offer electronic ballast features -- for both linear and CFLs -- that were not available in other electronic ballasts. Most significantly, PacSci claimed its electronic ballasts had full-range dimming capabilities. PacSci also claimed its ballasts were compatible with all types of conventional wall-dimmers and were equipped with safety and lamp-life-extending features. While dimming ballasts were available from other manufacturers, they required additional wiring and/or more expensive low-voltage dimmers that were not compatible with incandescent bulbs. PacSci claimed its ballasts could be installed side-by-side on the same dimmer circuit with incandescent bulbs. Additionally, Solium safety features purportedly included automatic power shut off when a lamp was broken or removed, reducing the risk of shock and fire. Further, because of the ballast's lamp-life-extending features, PacSci claimed an increase in CFL bulb life to perhaps double the conventional 10,000 hour average, and it anticipated a slight increase in energy efficiency relative to presently available electronic ballasts. The company rated the Solium ballast life at 40,000 hours.

VI. DEFENDANTS' WRONGFUL COURSE OF CONDUCT

A. PACSCI MAKES FALSE AND MISLEADING STATEMENTS REGARDING THE SOLIUM PRODUCTS

• In Need of Profitable New Products, PacSci Teams With Etta Industries Inc.

36. In 1993, the Fisher Pierce division of PacSci ("Fisher"), based in Weymouth, Massachusetts, represented the only division of PacSci which failed to contribute to the Company's net income. In announcing the Company's financial results for the year ended December 31, 1993, Brower stated "all divisions but one, Fisher, contributed to the Company's profits" -- and reported sales excluding Fisher in order to present a positive return. Brower represented, however, that although Fisher reported a substantial loss for the year, Fisher's "long term outlook was excellent."

37. By year end 1993, Brower put enormous pressure on Fisher to develop new products and business areas. Fisher had experience in providing electrical traffic lighting equipment as well as providing utilities with cost saving electrical products. As an area of potential dramatic financial growth, Fisher became interested in dimmable fluorescent lighting. Recognizing that it lacked the technological sophistication to develop this, PacSci turned to Etta Industries, Inc. ("Etta"), an engineering firm which had been working for years to develop an economical dimming fluorescent ballast and lamp. The companies never entered into a written agreement with respect to the plans to develop fluorescent lights. However, between January 1994 and April 1994, two Fisher engineers worked at Etta's lab to develop this technology.

38. PacSci wanted a screw-in, dimmable fluorescent product to present at an April 1994 Light Fair to be held at the Javitz Center in New York City. However, as that date approached, the products remained very much in the developmental stage. No design had been solidified and the prototypes, which were handmade, suffered repeated failures, sometimes resulting in dangerous fires and explosions. Nevertheless, Brower was intent on an extravagant "introduction" of the technology and products and wanted to call CNN News. PacSci even prepared promotional material and informally disseminated to the marketplace statements of its purported revolutionary technology and products. This promotional material was rife with misrepresentations -- giving no hint of the infancy of the product development and serious device failures, stating as follows:

Imagine a compact fluorescent system that couples advanced lamp technology and a revolutionary electronic ballast in a three-piece modular unit. Imagine further that the unit screws into a regular socket and that the CF system's lamp can be replaced independently of its electronic ballast. Last, imagine that the system comes both standard and DIMMABLE.

Too good to be true? Not for Pacific Scientific. We've created a unique, patented lighting system that no one else has. And in the process we've thrown a beacon on the path to greater efficiency, better commercial and residential lighting control, higher cost savings, and a safer environment.

* * *

A BRIGHT AND SHINING FUTURE WITH

SOLIUM™ LIGHTING SYSTEMS

A screw-in modular compact fluorescent system available with smooth, continuous dimming promises to revolutionize the way we think about and use light in the years to come. Now, at the touch of a fingertip, users can avail themselves of greater lighting control, a higher comfort and productivity level, and impressive energy savings. Solium Lighting systems are a breakthrough for those who must conserve and manage energy, all of us who must use light, and anyone who wants to protect the environment.

39. These representations were blatantly false since PacSci was barely able to make a functioning prototype product and certainly had not solidified a design or performed any safety or functionality testing.

40. While at the Javitz Center, Brower mentioned to one of Etta's engineers his anticipation of the benefit the announcement and presentation would have on PacSci's common stock price. Etta's engineers responded that the technology and products were not ready for commercial release. Uncomfortable with PacSci's pressure to rush to the market and force Etta to sign unfavorable licensing terms, Etta walked away from any licensing agreement with PacSci. Since PacSci lacked the technological backing of an engineering firm, even though PacSci was physically at the Javitz Convention Center in New York with a booth ready for full scale promotion of a screw-in dimmable fluorescent product, it did not go forward with its presentation.

41. Left without engineering expertise but intent on obtaining the anticipated financial premium to its stock price from the announcement of this new product, PacSci sought to develop a screw-in dimmable fluorescent ballast on its own.

42. However, by September 1994, it became apparent to Martich, PacSci's Director of Engineering for Solium Products, that PacSci did not have the capabilities to design and bring to market the screw-in dimming fluorescent lamp and ballast. Martich repeatedly told Ossenmacher of his concerns at least as early as September 1994. Yet, ignoring the true facts, instead of modifying its rhetoric, PacSci heightened it by subsequently leading the public to believe that they had developed specific revolutionary products which were ready for commercial development.

• PacSci Introduces The First Of Its Solium Line Of Products

43. On or about September 27, 1994, the PR NewsWire reported that PacSci told analysts and investors at the New York Society of Security Analysts that on October 3, 1994, it would launch a new product line for which patents were pending. Brower characterized this family of products, named Solium, as a "major technological advance . . . for the home and commercial lighting industries." He also stated that the Solium line had the potential to increase PacSci's annual sales by as much as $50 to $100 million within the next two years and that PacSci expected to start shipments of Solium Products in 1995. As a result of this announcement, PacSci's common stock price closed at $12.563 per share and the Debentures closed at $100.00 per Debenture on September 27, 1994.

44. On or about October 3, 1994, PacSci did announce the introduction of its Solium Products. The Company described these products as a "new generation of electronic screw-in, ultra compact fluorescent light systems with built-in dimming ... [which could] directly replace most general-use incandescent bulbs." Brower stated that "Solium-based CFLs will offer compelling economic advantages in terms of significant energy savings and reduced overall operating costs." They would allegedly use 15% of the energy of a standard bulb but last 13 times longer.

45. When it announced the release, the Company touted that these Solium CFLs were the "first of their kind ... [which could] be brightened or dimmed with no alterations to existing fixtures or wiring" and that they were capable of adjusting light levels equal to the equivalent of between 150 and 30 watts of incandescent light. Until then, CFLs could not be dimmed on a conventional dimming circuit due to the risk of overheating and the potential for fire. More specifically, PacSci advised that, depending on the model, Solium users could control dimming by rotating a built-in ring or knob in the base, by turning the illumination globe itself which remained cool to touch ("Screw-In base"), or by using a conventional remote wallplate dimming control ("Wired-In base"). The Company further stated that Solium Products purportedly provided "infinite dimming ranges from 100 percent to 20 percent of a CFL's rated lumen output" and that Solium's design made it possible to immediately install a Solium-based CFL in a standard incandescent light bulb socket.

46. In addition to touting that the products were safe and easy-to-use, one-for-one replacements for standard incandescent bulbs, the Company also represented on October 3, 1994 that these bulbs had (i) more pleasing aesthetics than other fluorescent lights; (ii) the ability to soften lighting and eliminate glare; and (iii) eliminated flickering and noise often associated with fluorescent lighting. Brower stated that Solium is likely to be a "direct replacement for most general-use incandescent bulbs, down lights, spot/flood lights and prior generations of CFLs." Brower added:

By resolving the dimming issue and providing lamps with more pleasing light, we believe the major stumbling blocks that have kept consumers from fully embracing the economic benefits of fluorescent lighting have been eliminated. In the course of our development efforts, we were also able to enhance significantly the ability of fluorescent lighting to match and, in some instances, surpass the convenience and ambiance of incandescent lighting. Solium thus offers consumers a no-trade-offs opportunity to take advantage of the dramatic long-term savings potential of fluorescent lighting. (Emphasis Added)

47. PacSci went on to state that:

[i]n addition to dimming, Solium reduced electromagnetic interference (EMI) to non-interfering levels; therefore, it will not normally disrupt the operation of TVs, radios, cordless telephones, computers and other electronic devices. Solium also eliminates the delayed starts, flickering and audible noise that have been associated with fluorescent lighting. Solium lighting and color quality will be maintained at all dimming levels, and energy savings are expected to run up to 80 percent when compared to incandescent bulbs.

48. That same day, Brower represented that PacSci was actually in discussions with leading lighting companies interested in forming a strategic alliance for "marketing and distributing the Solium lighting system." The Company reiterated its earlier projection that Solium had the potential to increase annual sales by as much as $50 to $100 million in the next two years.

49. On or about October 4, 1994, as reported in the Los Angeles Times, Brower claimed that PacSci had a microchip which made dimming possible in the Solium Products, and stated that he expected the Solium bulbs will be priced competitively with other Screw-In fluorescents, which range from $5 to $20 each, depending on size and shape. Brower also reiterated that he expected manufacturing to begin by the spring of 1995.

50. PacSci common stock rose 22% from $12.313 per share on September 22, 1994 to $15.00 per share on October 4, 1994. As reported in the Wall Street Journal on October 4, 1994, the increase was directly attributed to PacSci's announcements concerning the Solium Products and specifically the ease of use of the Screw-In Product and the purported early 1995 shipment date.

51. On or about October 24, 1994, PacSci announced its results for its third quarter ended September 30, 1994. Sales and net income had increased 25% to 30% over the same quarter in the prior year. The Company reiterated that the Company had announced "several major new product breakthroughs," including its "Solium family breakthrough of dimmable fluorescent light products."

52. Following the announcement of PacSci's third quarter results, PacSci's common stock rose to $19.00 per share on October 27, 1994. The Debentures rose from $100.00 per Debenture on September 27, 1994 to $112.00 per Debenture on October 27, 1994.

• PacSci Continues To Forecast Revenues Of $50-$100 Million

53. On or about November 1, 1994, as reported in the PR NewsWire, PacSci announced plans to obtain facilities and order equipment for the production of electronic Solium ballasts which would "overcom[e] many existing shortcomings with electronic ballast now being marketed."

54. That same day, PacSci also stated that it was "continuing to discuss possible agreements with major lighting companies." Around this time, John Westergaard of Westergaard Institutional Network reported that PacSci was in negotiations with General Electric, Sylvania and Phillips over joint production of these Solium based CFLs.

55. On or about November 1, 1994, PacSci also advised that "[w]ith limited production starting by mid 1995, it is expected that the sale of Solium ballast ... could add up to $10 to $15 million in revenue in 1995." PacSci reiterated that Brower's statement that the Solium technology "could increase the company's annual sales in the next 24 months by as much as $50 to $100 million over 1994 levels" remains a reasonable estimate.

56. As reported in Investor's Business Daily, on or about November 1, 1994, Plat stated that:

[w]e are enthusiastic about the Solium product and expect to begin delivery by the second quarter of 1995 .... In the next 24 months, we think the Solium bulb will bring in additional revenues of $50 million to $100 million.

57. Plat also advised that he was comfortable with analyst estimates putting the firm's total sales at $225 million that year and $250 million the next year.

58. As a result of these announcements, PacSci stock price skyrocketed roughly $4 to a new high of $23.75 on November 1, 1994, on trading of 424,000 shares, 16 times its average daily volume. The Debentures closed at $113.50 per Debenture.

59. On or about November 29, 1994, as reported on the Dow Jones News Service, PacSci again reiterated that it expected the sale of Solium ballasts to add up to $10 - 15 million of revenue in 1995. At that time, Plat confirmed that "the company's business is strong."

• PacSci Continues To Promise Shipments In 1995

60. On or about December 12, 1994, as reported on Dow Jones News Service, PacSci announced that it was forming its new subsidiary, Solium, Inc., to develop, manufacture and market fully featured electronic ballasts and controls for CFL lamps. Ossenmacher was named president of this new subsidiary, effective January 3, 1995. At that time, the Company reiterated that "[s]tate-of-the-art dimmable and energy efficient ballasts and controls are expected to begin shipping in mid-1995 for incorporation into products manufactured by others." Brower also said that "activity concerning the Solium(TM) Product line is on schedule and the demand for the products is exceeding expectations. Initial deliveries of automated manufacturing equipment are scheduled for March of 1995."

61. On or about December 16, 1994, the Boston Business Journal reported that, based in part on the potential impact of Solium, analysts were predicting that PacSci's earnings would jump from $1.70 in 1994 to $2.50 a share in 1995.

62. On or about February 6, 1995, PR NewsWire reported that PacSci announced that the "first Solium products planned to be shipped will be dimmable electronic wire-in ballasts for compact fluorescent lamps (CFLs), which Pacific Scientific will sell directly to lighting equipment manufacturers."

• PacSci Rigged Display Models Used At The January 1995 LightFair

63. Defendants perpetuated the false claims that it had already developed a Screw-in and Wired-in dimmable fluorescent lamp and ballast by "rigging" the models displayed at its booths at the January 1995 LightFair held in Anaheim (the "January 1995 Fair"). Specifically, the booth display boasted the ability of the Company's Wired-In Product to provide dimmable fluorescent lighting without the need to modify existing incandescent circuitry. However, after repeated device failure, the Company was forced to -- covertly -- use additional wiring in order to get the products to function. Further, all of the display models had been handmade -- since even by this late date no continuous dimming ballast or Screw-in Product design had been "frozen" or solidified. Many of the models failed at the time of setting up the booth, thereby requiring additional engineering support to be sent on an emergency basis from the east coast just prior to the January 1995 Fair. Brower and Plat were both aware of the device failures and the emergent need to resolve them to maintain PacSci's charade of legitimacy.

64. In the same February 6, 1995 announcement, PacSci reported that discussions with major lighting companies were progressing, that both the Solium ballast and the Solium consumer products were planned to be available for distribution in the second half of 1995 and that the Company expected a "sales contribution in the second half of 1995."

65. On or about April 24, 1995, as reported on the PR NewsWire, PacSci announced that it was installing "automated factory equipment" in the Randolph, Massachusetts plant and that "first shipments of Solium products will be made during the second half of this year."

• PacSci Denies All Rumors of Problems

66. On or about March 1, 1995, the Los Angeles Times reported that PacSci stock price fell the day before because one analyst made disparaging remarks about the Company's Solium light Products. In a CNBC interview, analyst David Eidelman said that PacSci's new bulbs could be hurt by soft demand and start-up difficulties and that the dimming is not a desired quality in fluorescent lighting. However, as reported by the Los Angeles Times, the Company quickly rebutted these concerns by stating that the people they speak with feel that dimming is very important. Plat said that "[we] continue to be optimistic about our product in that area."

• PacSci Terminates Director Of Engineering After He Specifically Told Ossenmacher And Brower Of PacSci's Solium Misrepresentations

67. Between September 1994 and March 1995, Martich, PacSci's Director of Engineering for Solium Products, repeatedly warned Ossenmacher, his direct superior, that there were serious problems in developing the Screw-in Product, that no design had been solidified, that serious device failures, including fire and explosions, persisted and that it was unlikely that PacSci would be able to bring dimmable fluorescent lamps and ballasts to market. Ossenmacher knowingly disregarded Martich.

68. Wanting to be sure Brower was aware of the true state of affairs, in the second week of March 1995, Martich sent a letter to both Ossenmacher and Brower reiterating that the Company's representations about its Solium Products were false and PacSci's conduct in issuing those claims was misleading to the financial community. The day after Brower received Martich's letter, Martich was terminated.

69. In June 1995, the Company's stock price started to drop sharply to $14.125 on June 20, 1995, amidst concerns that the new Solium bulb business was developing too slowly and the Company had still failed to form any strategic alliances to produce and distribute its Solium Products. However, the Company told investors that the concerns were unwarranted and that there was no fundamental reason for the drop in stock price. As reported in the Investor's Business Daily on June 8, 1995, the Company responded that mass merchandisers such as discount and home-improvement chains prefer to buy bulbs directly from producers and, therefore, PacSci did not intend to sign any exclusive distribution agreements with major lighting firms. Instead, the Company advised it was looking to mass retailers for distribution agreements. The Company also advised that it was working with original OEM equipment makers to distribute Wired-In ballasts and controls. On or about June 8, 1995, the Company reiterated that sales from its factory, which was being built in a suburb of Boston, Massachusetts, could reach $80 million in 1998-99. In a further attempt dispel the concerns, on or about June 22, 1995, Brower also confirmed that the Company would begin production and shipping of the Solium line by the end of the third quarter of 1995.

• PacSci "Rigged" Display Models At The June 1995 LightFair in Chicago

70. In or about June 1995, a national LightFair was held in Chicago (the "June 1995 Fair"), and PacSci again paid for a booth to demonstrate its purported models. However, certain of the products were extinguishing whenever the dimmer was turned to the maximum position. As a result, PacSci inserted a plastic stop -- under the inspection and supervision of defendant Plat -- which prevented the turning of the dimmer to the highest level and, thus, artificially prevented extinguishment of the light and concealed a significant device failure.

71. At the June 1995 Fair, Solium purportedly introduced a complete line of dimming electronic ballasts including Wired-In ballasts for compact fluorescent fixtures including down lights, Wired-In ballasts for linear fluorescent fixtures, Screw-In compact fluorescent adapters for table lamps, and Screw-In compact fluorescent adapters to down lights.

72. On or about July 20, 1995, as reported on the PR NewsWire, the Company announced that net income for the second quarter ended June 30, 1995 was up 29%. It also announced that it:

had a very successful introduction of its Solium(TM) product line of electronic lighting controls and fully-featured low-cost electronic ballast at the recent "Light Fair," the annual U.S. lighting show in Chicago. In addition to ballast for compact fluorescent lamps, the company extended its technology to ballast for linear fluorescent lamps, currently the much larger and more established market.

* * *

Brower said: "We continue to believe we are the technological leader in electronic ballast, and our strategic objective remains to be the low-cost high-volume producer, offering fully-featured ballast at competitive prices. Factory automation is being installed and the first deliveries of Solium products are expected to be made this current third quarter to OEMs in the lighting industry and other customers." (Emphasis Added)

• Over The Course Of The Following Months, PacSci Released Information About Favorable Reviews Of Its Solium Products

73. On or about October 2, 1995, PacSci announced that it made a "small initial shipment" of its energy efficient Solium electronic lighting systems to test markets in the northeast U.S. That same day, Brower reported that:

I was most pleased with the progress of and prospects for the Solium product line... [and] the potential customers who have tested Solium products have found that they meet specifications and have unique features that that satisfy an unfilled need within the lighting industry. Orders are expected from many of these companies as additional UL approvals continue to be obtained.

74. On or about October 2, 1995, as reported on the Dow Jones International News, the Company stated that while Solium startup costs had a negative impact on third quarter earning, "it expects the Solium line, which it just started shipping, to increase annual revenues by $50 million to $100 million over 1994 levels in the next two years" and that Solium will contribute to overall net income in 1996. That same day, PacSci was reported as stating that the Randolph, Massachusetts plant will have a production capacity of eight million Solium devices per year by early 1996. Defendant Brower said that current published analysts' estimates of earnings of about $1.10 a share in 1995 for the Company's base business "continue to look reasonable, exclusive of one-time Solium start-up expenses."

75. On or about October 25, 1995, the Company stated that it continued to receive new orders for its Solium line of dimmable and 3-way electronic ballasts and that the Company received notifications from major national retailers concerning their plans to stock these products. It also stated that several leading fixture manufacturers had expressed an intention to convert up to 100 percent of their electronic ballast business to Solium ballast in 1996 with firm orders pending final Underwriters Laboratories approval ("UL approval") on Solium Wired-In ballast. PacSci also represented that UL approvals for Wired-In devices were in process and were expected during the fourth quarter of 1995.

• PacSci Makes False And Misleading Statements Regarding Its New Sense-a-Volt Products

76. On October 25, 1995, the Company announced its new Sense-a-Volt CFL and Sense-a-Volt T-8 Linear fluorescent lamp ballast. It touted that its new Sense-a-Volt technology was the most significant advancement in CFL ballast technology since PacSci announced its incandescent wall dimmer compatible ballast approximately 12 months earlier. It further stated the "Sense-a-Volt ballast will automatically adjust to any line voltage between 120 or 277, including 50Hz or 60Hz frequencies, and will properly energize a wide range of CFLs." The Company represented that shipment of this product was expected to start in late 1995.

77. This new technology promised to play a significant role in the lighting industry. Until this October 25, 1995 announcement, a distinct CFL ballast was generally required for every voltage input and every size CFL. The Company touted that:

Sense-a-Volt ballast will automatically adjust to any line voltages between 120 and 277, including 50Hz and 60Hz frequencies, and will properly energize a wide range of CFLs. This product is important to fixture manufacturers since the use of Solium Sense-a-Volt ballast allows manufacturers to globalize their business without increasing manufacturing or distribution cost. Ballast and fixture inventories costs are significantly reduced since only a single Solium ballast is needed for any fixture installation, anywhere in the world with these line voltages. Currently, a separate CFL ballast is required for every voltage input and every size CFL. Shipment of this product is expected to start in late 1995.

78. On or about October 25, 1995, as reported on the PR NewsWire, Brower also stated that "by applying its proprietary Sense-a-Volt product technology to the linear T-8 ballast market, Solium has been brought very rapidly into the billion-dollar linear fluorescent ballast marketplace with a very strong competitive position." Brower emphasized that this is especially true considering that the market of Solium Product is expected to be priced comparable to a standard two-lamp electronic ballast. Brower stated that "[t]esting of this significant product advancement is in process at several fixture companies, and shipments are expected to begin in early 1996. This ballast is currently approximately one-half the size of a typical two-lamp T-8 ballast."

79. As reported in the PR NewsWire, on or about November 10, 1995, Brower advised that "we are pleased with our Solium technology for fluorescent lighting . . . we believe that Solium could become an important product for the Company and for the entire lighting industry."

80. On or about December 13, 1995, PacSci announced that it received additional UL approvals. It claimed that it received a broad customer acceptance of its Solium line of fully featured electronic ballasts and that, by this time, the Screw-In Solium Products were available at retail stores and were being supplied to Home Depot stores and Pergament Home Centers.

81. On or about December 20, 1995, PacSci announced that it had received a purchase order from a major lighting company for fluorescent lamp components. The initial purchase order allegedly called for units to be delivered by the end of the first quarter of 1996. At that time, Brower confirmed his continued confidence that the Solium sales would be in the range of $50 million.

• PacSci's February 2, 1996 Annual Report Confirmed Each Of The Above Misleading Statements Regarding The Solium Line Of Products

82. In its Annual Report for the year ended December 31, 1995 ("1995 Annual Report"), dated February 2, 1996, defendants reiterated the above misleading statements and intensified the hype regarding its line of Solium Products:

In 1995, its first year, Solium introduced ballast technology not previously available in the fluorescent lamp market. Examples of its products include:

Dimming ballasts, which use existing wiring and are controllable with low-cost incandescent wall dimmers.

Sense-a-Volt smart ballast, which automatically adjusts to line voltage between 120 and 277 volts and powers and wide range of lamps.

Full-range, high-light-output integrated dimming screw-in fluorescent lamps.

Three-way, screw-in compact fluorescent adapters for table lamps.

* * *

The U.S. market for fluorescent ballasts is currently estimated at $1.2 billion. Solium holds a significant market advantage because it can price its advanced ballasts at levels comparable to those of competitors' ballasts lacking Solium features.

The first shipment of products was made in late September from Solium's new state-of-the-art manufacturing plant. This plant will have the capacity to produce at the rate of eight million units per year in 1996. Pacific Scientific will sell its Solium wire-in products to the manufacturers of lighting fixtures in the U.S. and internationally. The Company will sell Solium screw-in products through mass merchandisers, electric wholesalers and lighting companies. The screw-in products are direct replacements for incandescent bulbs. They use the same sockets, are installable by consumers and offer significant advantages in energy efficiency, long life and safety.

In the coming months, Solium will bring its factory fully on-line and will bring additional new products to market. Solium expects to provide the benchmark of quality, performance, technology and value within the ballast market.

Linear fluorescent fixture uses a Solium Sense-a-Volt electronic ballast which accommodates a range of supply voltages and properly energizes a wide range of different lamps.

The world's first dimming ballast for compact fluorescent down lights. Works (sic) on a standard 2-wire circuit and incandescent dimming switch.

1995 Annual Report at 10.

83. PacSci's common stock price at the close of trading on February 2, 1996 was $23.75 per share. The Debentures traded at a high of $128.00 per Debenture that same day.

84. As reported on the PR NewsWire, on or about February 5, 1996, Brower touted that

[o]ur new generation of electronic ballasts and our special features, for which patents are expected to be granted, continue to receive praise from both lamp and fixture manufacturers. Both lamp and fixture manufacturers have extensively tested Solium Products and have stated that our features add value, and our products are reliable. Sizable additional orders are being discussed.

• PacSci Quickly Dispels Any Rumors Of Problems In February 1996

85. During the first week of February, 1996, PacSci common stock declined amid rumors of adverse developments in the Solium operations. However, on or about February 9, 1996, defendants quickly dispelled what they described as "misplaced anxiety" by stating that that Company was "shipping initial orders to customers whose potential can be measured in millions of units and tens of millions of dollars in sales." Brower stated that "all the trends and tests are strong and our enthusiasm and expectations are very high[,]" and that they "continue to be comfortable that our running rate of sales will grow rapidly from quarter to quarter." He further said that the projection of $50 million in Solium sales during 1996 continues to look reasonable and that "Solium shipments for the quarter ending March 31, 1996, are expected to be in the range of $1 million to $2 million, with an operating loss."

86. As reported in the PR NewsWire on February 9, 1996, PacSci stated that Solium is "the technology leader in fluorescent ballasts" and the Company concluded emphatically that "our confidence in Solium is undiminished. Indeed, if it has changed at all, our confidence of succeeding in the ballast market is higher than ever."

87. Moreover, Brower stated that "our confidence in succeeding in the ballast market is higher than ever[,]" and that "Sense-a-Volt remains not just a 'first' but an 'only' in its field[.]"

88. PacSci's common stock price closed at $21.25 per share on February 9, 1996, while the Debentures traded at $114.50 per Debenture.

89. As reported in PR NewsWire, on or about March 18, 1996, PacSci announced that its Sense-a-Volt universal ballasts and two other Solium electronic ballasts obtained UL approvals. The Company also represented that concurrent with the UL testing, the Sense-a-Volt products were tested by fixture manufacturers and lamp manufacturers. PacSci claimed that these manufacturers confirmed that these units "meet performance specifications, are reliable and energy efficient." PacSci estimated that delivery of the Sense-a-Volts would commence before the end of March 1996.

90. On or about March 29, 1996, PacSci announced that it was negotiating orders for several million dollars of Solium Products from manufacturer of fluorescent lighting fixtures. Brower explained that orders for the Solium Products are about one-quarter later than initially anticipated because of slower than expected UL approvals and extensive testing by customers. However, he stated that he did expect 1996 sales to be between $25 and $30 million, assuming the timely receipt of expected orders. He also commented that Solium was fast becoming a player in the billion-dollar-per-year electronic lighting and ballast market.

• PacSci Admits To Poor Performance In Spring 1996, But Continues Its Deception

91. PacSci's stock fell about 11% on April 1, 1996 on news that its quarter earnings would not be as strong as previously projected. However, the Company failed to disclose the problems actually plaguing its Solium technology and continued to project optimistically for the future.

92. On or about April 18, 1996, the Company reported a 36% drop in its first quarter net income to $1.9 million with sales hitting a record high of $74.7 million. The Company admitted that orders remained behind for the Solium lighting Products. Yet the Company failed to admit the true status of the Solium technology or any of the problems plaguing it. Instead, Brower actually reassured investors that the Company hoped to turn the technology profitable by the end of the year.

93. On or about May 22, 1996, as reported on the Dow Jones International News, PacSci announced that it expected current second-quarter earnings of about $0.15 per share, including a loss of ten cents or more per share from its Solium operation. On this news, PacSci shares price fell from $21.775 per share on May 21, 1996, to $18.625 per share at the close of trading on May 22, 1996. The Debentures dropped from $114.50 per Debenture to $111.25 per Debenture.

94. Yet, in attempt to counter this news, the Company stated in a press release that orders and sales of Solium Products were increasing, and that Solium had "emerged from the development phase and will begin manufacturing and ramp-up production."

95. Similarly, as reported on the PR NewsWire, Brower continued the deception by announcing that he "remains enthusiastic concerning the long-term prospects for Solium, however the new technology is taking time to gain market acceptance." PacSci also announced that Kenneth Owens would replace Ossenmacher as President of PacSci's Solium operation.

B. PACSCI FINALLY ADMITS THE TRUTH REGARDING THE SOLIUM PRODUCTS.

• Defendants Finally Reveal That The Solium Line Of Products Do Not Perform As Claimed And Need To Be "Reengineered"

96. On or about July 2, 1996, defendants finally began to reveal the truth about the Company's failure to develop its Solium Products as represented.

97. In direct contradiction of repeated claims of Solium Products' commercial readiness, PacSci announced on July 2, 1996 the need to "re-engineer" the Solium Products. PacSci also conceded that the Company was finding "it tough to make products that meet the technical requirements of its biggest customers, lamp makers" and blamed this failure on the fact that "Solium tried to bring out too many products and to establish high-volume production capability too rapidly."

98. On or about July 3, 1996, Plat admitted that "Solium has not met our expectations. ... We're not making any sales projections now."

• Defendant Brower Admits "Severe Mistake" In Marketing Without Thorough Understanding of Solium Products

99. As reported in the Los Angeles Times on or about July 3, 1996, defendant Brower admitted that the Company had made a "severe mistake" in marketing its Solium Products without "thoroughly under[standing]" them:

One of the severe mistakes we made was making any kind of projections until we thoroughly understood our product and how it would be accepted in the marketplace. I guess we were seduced by the size of the marketplace.

100. The price of PacSci common stock plummeted on this news, from $16.375 per share on July 1, 1996 to $12.75 on July 3, 1996. The Debentures closed at $96.875 per Debenture on July 3, 1996.

101. On or about July 12, 1996, PacSci, through Plat, conceded that Solium had "put too much emphasis on marketing and manufacturing its products and not enough on the engineering end. As a result, products did not meet cost targets and certain required specifications by original equipment manufactured ("OEM") customers."

102. PacSci further sought to blame the "hype" on middle managers who had little experience with electronic ballasts. Plat stated, as reported in Electrical Marketing on July 12, 1996, that:

Pacific Scientific let some of the key Solium people go because its marketing was too big and it decided to keep people who had direct experience in selling electronic ballasts. McCloud [referring to Stephen McCloud, Solium business unit director demand side management markets] and Montagu [referring to Paul Montagu, business unit director, OEM/Commercial] had come over from Pacific Scientific's Fisher Pierce division and were more experienced in selling outdoor lighting controls as opposed to electronic ballasts....

• PacSci Reports Third Quarter Results, Including Restructuring Charges For Solium, On October 16, 1996

103. On or about October 16, 1996, PacSci reported its results for the quarter and nine months ended September 27, 1996.

104. The Company announced net income for the third quarter ended September 27, 1996 of $870,000, or $0.07 per share. This compared with net income of $3.2 million, or $0.25 per share, in the third quarter of 1995. For the nine months ended September 27, 1996, PacSci reported a net loss of $977,000, or $0.08 per share, as compared to net income of $9.4 million, or $0.75 per share, for the comparable period in the prior year.

105. PacSci's third quarter results included approximately $1.4 million, or $0.11 per share, of losses and restructuring from the Solium subsidiary. For the nine months ended September 27, 1996, PacSci's results included restructuring charges of $4.5 million, or $0.36 per share, and losses of approximately $4.1 million, or $0.33 per share, for Solium.

106. On these announcements, PacSci's common stock slid further, from $11.50 per share on October 16, 1996 to $10.50 per share on October 18, 1996. The Debentures dropped from $103.00 per Debenture on October 16, 1996 to $101.125 per Debenture on October 18, 1996.

C. PACSCI AND ITS OFFICERS PROFITED FROM THE FRAUD.

• PacSci's Artificial Inflation Enabled The Company To Acquire The Met One Inc. ("Met One") For 983,000 PacSci Shares

107. On or about December 29, 1994, PacSci executed an agreement to acquire the privately held company Met One, in exchange for PacSci common stock. The agreement provided that the higher the per share price of PacSci stock, the less shares required to consummate the sale. Thus, PacSci had an incentive to artificially inflate its common stock price during the Class Period, and profited from the stock price inflation.

108. On or about January 30, 1996, PacSci announced the acquisition of Met One. PacSci paid for the purchase with 983,000 shares of its stock. Met One was a supplier of instruments that detect, count and measure contaminant particles, mainly in air.

109. On or about January 30, 1996, PacSci also touted the positive effect of this acquisition:

The company said there are "outstanding growth opportunities in particle monitoring," as an increasing number of industries recognize the need to control contamination caused by submicron-size particles. Particle monitoring is particularly important to semiconductor, pharmaceutical and food manufacturers, users of fluid power and the processors of potable water.

The combined companies will be able to offer a comprehensive array of particle monitoring instrumentation. About 35% of the 1995 sales of particle monitoring equipment by the combined companies were made in Asia and Europe, the company said.

• Certain Officers Engaged In Insider Trading During The Class Period

110. During the Class Period, while in possession of material adverse information concerning PacSci's Solium Products and their impact on PacSci's financial conditions, certain of PacSci's officers sold PacSci common stock at artificially inflated prices reaping substantial profits. These included Peer A. Swan, Ronald B. Nelson, defendant Ossenmacher, and Robert L. Day, who engaged in the following insider trading:

D. THE FALSE AND MISLEADING NATURE OF DEFENDANTS' REPRESENTATIONS

• Defendants Knowingly Or Recklessly Made False And Misleading Non-Forward-Looking Statements Regarding Solium Technology and Products

111. Throughout the Class Period, defendants, pursuant to a common plan and scheme to defraud plaintiffs and the Classes, issued a series of false, non-forward-looking statements expressly or implicitly describing the current and then present capabilities of its Products, including statements. These statements were false and misleading:

(a) The positive statements between September 1994 and March 1995 concerning the purported development of Solium "Products" and "technology" were known by the defendants to be false and misleading because Solium's Director of Engineering, Martich, repeatedly told Ossenmacher during this period that the prototypes persistently failed to function as marketed and indeed, often resulted in dangerous fires and explosions. In March 1995, Martich wrote to both Brower and Ossenmacher informing them that the claims about Solium Products and technology were false and that the Company was deceiving the financial community, upon which Martich he was immediately terminated (Complaint ¶¶ 43-68);

(b) The statements on October 3, 1994 purporting to introduce "a new generation of ultra compact fluorescent light systems with built-in dimming that can directly replace most incandescent light bulbs and provide energy savings as well as increase in life expectancy an average of 13 times" were materially false and misleading because no such "Products" existed. Only two or three hand-made and crudely constructed prototypes of a screw-in dimmable lamp were made -- no single design had been solidified nor had even the prototypes been tested for safety, functionality, life expectancy or cost savings (Complaint ¶ 44);

(c) The statement on October 3, 1994 that "perhaps most important, they [Solium Products] are safe" was materially false and misleading because no necessary safety testing had been performed (since no "product" yet existed) while use of the prototypes had resulted in dangerous device failures, including fires and explosions (Complaint ¶ 46);

(d) The statement on October 3, 1994 that there was a "screw-in" model where dimming was controlled by turning a built-in ring or knob was false and misleading because that Product did not exist -- only a handmade prototype was put together, stuffing the Solium ballast into an emptied standard GE bulb and ballast with glue to muffle the noise. This "product" was completely abandoned (without public disclosure) by 1995 (Complaint ¶ 45);

(e) The statement on October 3, 1994 that Solium would replace incandescent spot and flood lights was materially false and misleading because such lights required use of a reflector which reduced the fluorescent lamp's functionality and as of October 3, 1994 no prototype existed and to date Solium has not made such a product (Complaint ¶ 46);

(f) The statement on October 3, 1994 and November 1, 1994 of projected revenue of $50-$100 million was materially false and misleading because it disregarded that: (i) no continuous dimming product had, in fact, been developed; (ii) the Company's own internal forecasts submitted to Ossenmacher prior to October 3, 1994 by Steven Mcleod were of only $3 to $8 million (and even these projections assumed the prototypes could be rapidly developed into products, that testing was successful and that PacSci would capture almost the entire compact fluorescent market); (iii) a market study of the compact fluorescent market which Ossenmacher had obtained in no way supported the $50-$100 million projection (Complaint ¶¶ 43; 55-56);

(g) The statement on October 3, 1994 that Solium "reduces electromagnetic interference to non-interfering levels" was materially false and misleading because no such testing had been performed (Complaint ¶ 47);

(h) The statement on October 3, 1994 that "energy savings" from use of Solium Products "are expected to run up to 80 percent when compared to incandescent bulbs" was materially false and misleading because no such testing had been performed (Complaint ¶ 47);

(k) The statement on or about October 3, 1994 that the Solium ballasts and technology allowed CFLs to be "brightened or dimmed with no alteration to basic fixtures or wiring within a building" was materially false and misleading since even as of January 1995 -- the date of a Light Fair held in Anaheim, California where PacSci had a booth -- Solium ballasts needed the precise additional circuitry to work the display models that the Company claimed was no longer needed due to Solium's innovation (Complaint ¶ 45);

(j) The statement on November 1, 1994 that PacSci will "begin obtaining facilities and ordering equipment for the production of electronic ballast for compact fluorescent light systems" was materially false and misleading because it suggested that there existed a "product" to be manufactured and mass produced which was false (Complaint ¶ 53);

(i) The statement on November 1, 1994 of apparent interest from light fixture manufacturers for Solium technology and that expected sales to such manufacturers "could add up to $10 to 15 million" in 1995 was materially false and misleading since the determination of this purported demand amounted to nothing more than "cold calls" from a single PacSci sales person, Paul Montagu to OEMs where the OEMs simply stated that if PacSci truly had the technology that PacSci claimed it had the OEM would be interested in the products; no OEM manufacturer had ordered or had been sent any product or performed any testing of any PacSci prototypes (Complaint ¶ 54-56);

(l) The statement on November 1, 1994 of "possible agreements with major lighting companies for broad distribution to consumers of screw-in CFLs" was materially false and misleading because this product did not exist and thus reference to such agreements was premature (Complaint ¶ 54);

(m) The statement on December 12, 1994 that "[s]tate-of-the-art, dimmable and energy efficient ballasts and controls are expected to begin shipping in mid-1995 for incorporation into products manufactured by others" was materially false and misleading because no such continuous dimmable Screw-in or Wired-in products existed. The Company had intentionally not sent prototypes of such products to OEMs even as "samples" because they knew that the prototypes failed to perform as marketed and they continued to experience serious and dangerous failures of the prototypes, including fires and explosions (Complaint ¶ 60);

(n) Brower's statement on December 12, 1994 that "activity concerning the new Solium(TM) Product line is on schedule and the apparent demand for the products is exceeding expectations" was materially false and misleading because this statements presumed that a design for a continuous dimming product had been developed -- which was false. Since no such product existed, clearly the new Product line was not "on schedule." The "apparent demand" is based only on PacSci own description of what its products would do and not on its actual performance. Also, the reference to purported deliveries of automated manufacturing equipment falsely led investors to believe continuous dimming products existed (Complaint ¶ 60);

(o) Brower's statements on February 6, 1995 that he expects a "sales contribution in second half of 1995;" that "the first Solium Products planned to be shipped will be dimmable electronic wire-in ballasts for compact fluorescent lamps" which will be sold "directly to lighting equipment manufacturers"; that the Company was "pleased" with discussions with "major lighting companies" to distribute the Screwed-In product; and that both the Screwed-In and Wired-In products will be "available for distribution in the second half of 1995" were materially false and misleading because no such dimmable products existed, no such manufacturer or major lighting company had seen and/or successfully tested even a prototype or sample of either the Wired-In or Screw-In products (Complaint ¶¶ 62, 64);

(p) Brower's statements on April 24, 1995 that "Development and testing of Solium electronic lighting controls" and electronic ballasts are "proceeding" and automated factory equipment was being installed were materially false and misleading because no solidified design of continuous dimming Wired-In or Screw-In had not been achieved and thus development was not proceeding. Any factory equipment would have to lie dormant pending development of a marketable product and any shipments in the second half of 1995 would consist, at best, of either no continuous dimming products or mere samples (Complaint ¶ 65);

(q) Brower's statements on June 21, 1995 assuring the market that there was "no fundamental reason for the recent decline in the market price of [PacSci] shares" as a result of problems with Solium and that he expected "to begin producing and shipping Solium Products at our new factory during the third quarter ended September 29, 1995" were materially false and misleading since the Company had no continuous dimming product. While it had sent some prototypes to certain OEMs and lighting companies, defendants knew or recklessly disregarded that the prototypes did not function as marketed, the designs were differed from each other and thus, the only third quarter "sales" or "shipments" would be either of non-continuous dimming prototypes or samples of a product which had not been finally developed or tested (Complaint ¶ 69);

(r) The statements on July 20, 1995 that the Company had a "very successful introduction of its Solium Product line of electronic lighting controls and fully-featured low-cost electronic ballast at the recent "Light Fair" in Chicago" was materially false and misleading because as alleged above, the Solium Products failed to function properly so that PacSci was forced to "rig" the display models in the booth so that they would function as marketed (Complaint ¶ 72);

(s) The statement on July 20, 1995 that the Company "extended [beyond the compact fluorescent market to] its technology to ballasts for linear fluorescent lamps" was materially false and misleading because no such "product" existed for the linear ballast market. Only crude hand-made prototypes; no single design had been determined and no necessary safety and/or performance testing of the prototypes had been performed (Complaint ¶ 72);

(t) Brower's statements on July 20, 1995 that PacSci "was the technological leader in [the] electronic ballast [market], with a strategic objective" to be a "low-cost high-volume producer, offering fully-featured ballast at competitive prices" and that "the first deliveries of Solium products [were] expected to be made [in screw-in] third quarter to OEMs in the lighting industry and other customers," was materially false and misleading because PacSci had still not developed a continuous dimming product. Defendants knew that any shipments to OEMs would be samples, such shipments were made without product safety or performing this testing; that such samples would not pass the OEM's own rigorous tests and this would not generate any significant revenue (Complaint ¶ 72);

(u) The statements on October 25, 1995 that PacSci "continues to receive new orders for its Solium line of dimmable and 3-way electronic ballasts" and that "[s]everal leading fixture manufacturers" had "expressed an intention to convert up to 100 percent of their electronic business to Solium in 1996" were materially false and misleading because the Company had no functioning continuous dimmable ballast to sell to anyone (only the 3-way screw-in product for which there was an extremely limited market). Further, the purported OEM "interest" and "orders" were nothing more than orders for samples to be tested by the OEMs which defendants knew would not yield revenue since PacSci had not been tested its "products" for safety or functionality. The prototypes sent did not perform as marketed and were not consistently designed or even the same design for the model for which the Company filed for UL safety approval (Complaint ¶ 75);

(v) The statements on October 25, 1995 that the Company had "received notifications from major national retailers concerning their plans to stock these products" was materially false and misleading because, as noted above, no continuous dimmable product existed so no such "notification" could have been given. The plans to stock Solium Products were from Pergament and Home Depot but this was nothing more than orders in hundreds of units of the 3-way product -- a non-continuous dimming product -- which PacSci was loathe to accept because the pricing was so low that it undercut much more profitable sales to hotels and resorts. PacSci accepted these orders because it was desperate to claim it shipped Solium Products in the third quarter of 1995 (Complaint ¶ 75);

(w) The statements on October 25, 1995 announcing the introduction of its Sense-a-Volt compact fluorescent and T-8 linear fluorescent ballasts capable of "automatically adjust[ing] to any line voltage between 122 and 277" allowing manufacturers to globalize their business without increasing manufacturing or distribution costs . . . "only a single Solium ballast [would be] needed for any fixture installation anywhere in the world within these line voltages;" and that, as a result with Sense-a-Volt Solium had "been brought very rapidly into the billion-dollar linear fluorescent ballast marketplace with a very strong competitive position" were materially false and misleading because no such products had been developed and tested. There was not even a prototype for the T-8 linear Sense-a-Volt ballast and even the compact fluorescent Sense-a-Volt prototype was unable to adjust to any voltage between 120 and 277 and thus could not "globalize" fixture manufacturer's business (Complaint ¶ 76-77);

(x) Brower's statement on November 10, 1995 that "we are pleased with our Solium technology for fluorescent lighting . . . we believe that Solium could become an important product for the Company and for the entire lighting industry" was materially false and misleading because the defendants knew that no continuous dimmable product had been developed and the Sense-a-Volt was unable to function as claimed in either the compact fluorescent or linear ballast markets (Complaint ¶ 79);

(y) Brower's statements on February 5, 1996 that Solium's "new generation ballasts . . . continue to receive praise from both lamp and fixture manufacturers;" that both lamp and fixture manufacturers have extensively tested Solium Products and have stated that their features added "value" and were "reliable"; that sizable orders were "being discussed" were materially false and misleading because a continuous dimming Screw-in or Wired-in product still had not been developed so no "sizable orders" could have been realistically discussed. The Sense-a-Volt was not capable of automatically adjusting to any voltage between 120 and 277. A majority of the OEMs or lighting companies allowed to test a "prototype" found that it did not function as marketed and, in any event, because no design had been solidified for any continuous dimming products, the prototype sent out to be "tested" differed from each other and from the version approved by UL such that any favorable testing was of no commercial value (Complaint ¶ 84);

(z) Brower's statements on February 9, 1996 reassuring investors that the recent stock price decline was due to "misplaced anxiety among some investors about Solium"; that Solium was shipping "initial orders" of $1 to $2 million in the March 31, 1995 quarter to "customers whose potential can be measured in millions of units and tens of millions of dollars in sales"; that "all the trends and tests are strong and our enthusiasm and expectations are very high"; that Solium is "the technology leader in fluorescent ballasts. . . . our confidence in Solium is undiminished;" . . . "our confidence of succeeding in the ballast market is higher than ever"; and that "Sense-a-Volt remains not just a "first" but an "only" in its field"; concluding that "if I could start a business like that once every fifty years, I'd be a happy man;" were materially false and misleading because a continuous dimming product had not yet been developed, orders were limited OEM and lighting companies wanting samples to test and Sense-a-Volt ballasts still did not function as marketed (Complaint ¶ 85-86);

(aa) The statements on March 29, 1996 that PacSci "was negotiating orders for several million dollars of Solium Products from manufacturers of lighting fixtures"; that "1996 sales [would] be between $25-$30 million [not $50 million]"; that "the receipt of significant orders for Solium Products and the start of high volume production of Solium products is about one-quarter later than initially expected;" that this "slip" was caused by "slower than expected approvals from the Underwriters Laboratories and extensive testing by our customers of Solium technology"; and "Solium is fast becoming a player in the billion-dollar-per year electronic lighting and ballast market"; were materially false and misleading because defendants knew that no $25-$35 million in orders existed or were reasonably anticipated. Solium still had no continuous dimming products, nor did it have a product in T-8 linear ballast "billion dollar market." Any delay in obtaining UL approval was due to inability of the Company to provide a product to be tested and Sense-a-Volt did not work as marketed (Complaint ¶ 90).

• Defendants Knowingly And Recklessly Made Outrageous Forecasts Which They Knew Had No Basis In Fact

112. The statutory safe harbor provisions applicable to forward-looking statements under certain circumstances do not apply to any of the false forward-looking statements alleged in this complaint since each contained an implicit representation of the current salable marketable state of Solium technology and Products, and thus are not true "forward-looking" statements.

113. In any event, none of the forward-looking statement were identified as "forward-looking statements" when made. Nor were any forward-looking statements accompanied by meaningful cautionary statements identifying important factors which could cause actual results to differ materially from the statements made.

114. Alternatively, to the extent that the statutory safe harbor provisions do apply to any statements pleaded herein, defendants are liable for those statements because, at the time those statements were made, the speaker knew that the statement was false, and the statement was authorized and/or approved by an executive officer of PacSci, who knew that such statement was false when made. Specifically, defendants knew during the Class Period that no reliable and marketable continuous dimming Wired-In, Screwed-In, or Sense-a-Volt products existed or were being produced and distributed. Thus, the claims regarding impending "orders," "shipments," "revenue," and "manufacture" of these products were (as defendant Brower admitted in July 1996) recklessly and/or fraudulently made.

E. The Defendants Acted With The Required State Of Mind

115. The Defendants' interest in acquiring Met One was an incentive to artificially inflate the stock price. Defendants' scienter is also underscored by their actual knowledge of the true status of Solium Products as detailed above. For example, PacSci employees and colleagues regularly advised the defendants that the Solium technology was not sufficiently developed to make the representations made. See ¶¶ 5(iv), 40, 67-68 above. Further, Plat and Brower knowingly "rigged" the Company's prototypes at the January 1995 Fair and the June 1995 fair. See ¶¶ 5(vii), 63, 70 above. Defendants' revenue projections were also directly contradicted by the Company's own internal financial projections. See ¶¶ 5(v), 111(f) above.

116. Moreover, the Individual Defendants had a direct and extraordinary financial, business and personal interest in inflating the prices of PacSci's securities throughout the Class Period:

(a) Defendant Brower's reputation as an executive capable of transforming PacSci from a company with declining product lines to a successful company with new high technology products was in peril if the Company's Solium technology did not result in increased revenues.

(b) The Individual Defendants' income was dependent on PacSci's performance in the following ways:

(i) The "AICP" is an annual bonus program for PacSci executive officers and key managers. The plan's purpose is to provide a direct financial incentive in the form of an annual cash flow bonus to executives and key employees to achieve the goals of their respective business units or the Company's annual goals. Target goals for the Company's and the business units' performances are set at the beginning of each year. The measures of the Company's performance include, inter alia, pre-tax income, management of receivables and inventory turns. No bonus is paid unless a 75% performance threshold is exceeded. A full target bonus is paid only if the target goals are fully met. Exceeding goals can result in a bonus equal to 150% of the target bonus; and

(ii) The LTCP is PacSci's long-term incentive program for executive officers and key employees. The objective of the program is to align executives' and stockholders' long-term interests by creating a strong and direct link between executive pay and stockholder return and to enable the executives to develop and maintain a significant long-term stock ownership position in the Company's common stock. The proportion of stock options awarded is a function of salary and position in the Company.

(c) Defendant Brower received over $100,000 in bonuses in 1993, 1994 and 1995. He also received stock options for 200,000 shares of PacSci common stock during that time period. The value of those options is dependent on the market price of PacSci common stock.

(d) Defendant Plat received over $262,000 in bonuses in 1993, 1994 and 1995. He also received stock options for 84,000 shares of PacSci common stock during that time period. The value of those options is dependent on the market price of PacSci common stock.

(e) Defendant Ossenmacher received over $79,450 in bonuses in 1993 and 1994. He also received stock options for 22,260 shares of PacSci common stock during that time period. The value of those options is dependent on the market price of PacSci common stock.

(f) The Individual Defendants' net worth was materially affected by the price movement of PacSci's common stock due to their equity positions in the Company.

117. Moreover, as set forth above, during the Class Period, certain of the officers of PacSci, while in possession of material adverse information concerning PacSci's Solium Products and their impact on PacSci's financial conditions, sold PacSci common stock at artificially inflated prices, thereby reaping profits.

118. Plaintiffs repeat and reallege paragraphs 1 through 115 above as if fully set forth herein.

119. By falsely and misleadingly making positive and optimistic statements regarding the effectiveness of its Solium Products and, thereby, PacSci's operating condition, defendants artificially inflated the market price of PacSci's stock and the Debentures during the Class Period, resulting in a fraud on the market for PacSci's stock and the Debentures.

120. During the Class Period, as alleged herein, the Individual Defendants directly and indirectly engaged and participated in a plan, scheme and unlawful conspiracy and course of conduct, pursuant to which they knowingly and recklessly engaged in acts, transactions, practices, and courses of business which operated as a fraud upon plaintiffs and other members of the Classes, and made various untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading to plaintiffs and other members of the Classes. The purpose and effect of said scheme was to induce plaintiffs and the Classes to purchase and retain PacSci common stock and Debentures during the Class Period at artificially inflated prices.

121. Plaintiffs and other shareholders and Debenture holders similarly situated, at the time of said misrepresentations and omissions, were ignorant of, and could not have known of, the falsity of these statements and believed them to be true. In reliance upon said misrepresentations, the integrity of the market, and the fidelity, integrity and superior knowledge of defendants, and in ignorance of the truth, plaintiffs and the other class members were induced to and did purchase or otherwise obtain and hold PacSci stock and the Debentures at artificially inflated prices and were damaged thereby.

122. By reasons of the foregoing, defendants have violated § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

123. Plaintiffs reallege paragraphs 1 through 120 as though fully set forth herein.

124. The Individual Defendants, by reason of their management and/or directorial positions, and their stock ownership of PacSci, and by reason of their acts as described herein, controlled PacSci within the meaning of § 20 of the Exchange Act.

125. The Individual Defendants thus violated § 20 of the Exchange Act and is liable for the acts of PacSci which caused damages to plaintiffs and the Classes.

WHEREFORE, plaintiffs, on their own behalf and on behalf of the Classes, pray for judgment as follows:

A. Declaring plaintiffs to be proper class representatives and this action to be a proper class action;

B. Awarding plaintiffs and all other members of the Classes damages against all defendants jointly and severally in an amount which may be proven at trial, together with prejudgment interest thereon;

C. Awarding plaintiffs legal fees and expert fees, together with interest, costs and disbursements; and

D. For such other relief as to this Court appears just and proper.

Plaintiffs hereby demand a jury trial.

¹In the lighting industry, the term "lamp" is synonymous with "bulbs."

²All prices reflect a 2 for 1 stock split which occurred on December 8, 1994. The number of shares outstanding increased from 5.5 million to 11 million after this split.