ITIS Holdings Inc.

Securities Fraud Litigation

On January 26, 2001, in order to protect ITIS and its stockholders, ITIS filed a lawsuit in United States District Court for the Southern District of Texas, Houston Division, against Southridge Capital Management and several other defendants, including Cootes Drive LLC, an alleged "straw man," for damages resulting from alleged stock manipulation, federal securities law violations, civil RICO, fraud, violations of Texas securities laws and other Texas statutes, and conspiracy. The case also alleges misrepresentations by co-conspirators in connection with certain funding transactions by the defendants with ITIS. All defendants filed a joint motion to transfer this case to New York to be consolidated with the lawsuit filed against us, described below. The United States District Judge granted this motion and the case has been transferred to the Southern District of New York. The defendants filed motions to dismiss the case, and on July 17, 2002, the judge issued an opinion refusing dismissal. (To view Judge Carter's opinion, click here.) The case is ongoing, and discovery is underway. We intend to prosecute the case vigorously. Our litigation counsel has advised us that the case is not sufficiently advanced to evaluate the outcome, but that resolution of the suit is anticipated in accordance with the judge's July 17, 2002 ruling, which states, "the court is fully prepared to assist the parties in moving this case forward to trial without undue delay."

On February 5, 2001, Cootes Drive LLC filed a suit against ITIS in the Southern District of New York alleging breach of one of the financing agreements with us for our failure to honor a conversion of its preferred shares to common stock. The suit seeks monetary damages of $5,000 per day and seeks to compel ITIS to issue shares of common stock to Cootes Drive LLC. ITIS filed an answer to this lawsuit. Cootes Drive LLC amended its complaint in order to add allegations that ITIS is in default on a $500,000 promissory note in favor of Cootes Drive LLC (the alleged default occurring after the filing of ITIS's suit against Cootes Drive LLC and others); that ITIS has not honored a notice of redemption of preferred shares held by Cootes Drive LLC in the amount of $2,214,012 (allegedly occurring after the filing of ITIS's suit against Southridge Capital Management, Cootes Drive LLC, and others); and that ITIS defrauded Cootes Drive by failing to disclose material information with respect to the background of an officer and a director of ITIS. ITIS's answer was timely filed on July 20, 2001. The preferred shares and the associated funding transactions at issue are the subject matter of ITIS's suit against Southridge Capital Management and others. ITIS intends to defend this case vigorously. This case has been consolidated with the ITIS case (above) and the parties have been realigned so that ITIS is the plaintiff and Cootes Drive is the defendant. Litigation counsel has advised us that the case is not sufficiently advanced to evaluate the outcome, but that resolution of the suit is anticipated in accordance with the Judge's July 17, 2002 ruling which states, "the court is fully prepared to assist the parties in moving this case forward to trial without undue delay." John M. O'Quinn, our Texas based litigation counsel, represents ITIS and our directors, if necessary, in all of these lawsuits on a contingency fee basis.

On June 4, 2001, Cootes Drive LLC filed a suit in Delaware against certain directors of ITIS on behalf of itself as a holder of preferred stock and allegedly derivatively on behalf of ITIS, alleging that the directors breached their fiduciary duty to the stockholders by approving repayment in common stock of loans made to ITIS by its directors. This suit was filed in the Court of Chancery of Delaware in and for New Castle County. The suit was dismissed by Order of the Court entered February 15, 2002.

Internet Law Library, Inc., Hunter M. A. Carr, Jack Tompkins, and Kerwin Drouet, as plaintiffs, added additional defendants and proceeded to complete the discovery phase of the lawsuit, and began depositions in April 2003 against defendants Southridge Capital Management LLC, Stephen Hicks, Daniel Pickett, Christy Constabile, Thomson Kernaghan & Co., Ltd., TK Holdings, Inc., Mark Valentine, Cootes Drive LLC, David Sims, Lamberto Banchetti, Navigator Management Limited, Citco Trustees (Cayman) Ltd., and The Citco Group Limited.

The discovery cut-off date ordered by Judge Carter was June 30, 2003, and depositions were timely completed. In litigation generally, after depositions are completed, parties may be added or deleted based on information learned in depositions. The purpose of the “discovery” phase of a lawsuit is so that all parties may “discover” the facts that may be presented at trial. Sometimes the judge will allow parties to amend their pleadings after discovery in order to streamline the case for trial.

While depositions were being taken, Judge Carter conducted a hearing on June 9, 2003, with respect to a request by some parties to clarify a prior order in February concerning Judge Carter’s quashing of a subpoena issued by INL’s attorneys for records about another death-spiral victim company in another securities fraud lawsuit. Click here to view the transcript of that hearing.

On June 10, 2003, INL’s attorneys issued a broadly worded subpoena for NASD trading records. Again, the defendants requested that Judge Carter quash the subpoena.

On July 7, 2003, Judge Carter issued an opinion dismissing the complaint with prejudice because of discovery abuse by attorneys for ITIS. Click here to see the full text of the opinion. ITIS's attorneys believe the judge’s ruling is wrong and have assured the Company that they are pursuing all measures to correct this ruling.

On July 10, 2003, the Southern District of New York closed the file, but the Company’s attorneys have advised that the counterclaim of Cootes Drive LLC is still pending and that they have requested clarification from Judge Carter to make decisions on the best course of action for the Company and its shareholders.

Notices of Appeal were timely filed on August 8, 2003. To view notices, click here.

ITIS filed an appellate brief in the Second Circuit Court of Appeals on December 24, 2003, in an effort to correct what it believes was an error by Judge Carter. Click here to view the brief.

Our reply brief was filed on February 18, 2004, and you may view it here. The Second Circuit has proposed that oral argument be scheduled for April 12, 2004.

On April 22, 2004, the Second Circuit Court of Appeals in New York dismissed the appeal as not being timely , which resulted in the case being back in Judge Carter's court for further proceedings. Click here to read the text of that opinion.