MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
ALAN SCHULMAN (128661)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
     - and -
REED R. KATHREIN (139304)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545

WOLF POPPER LLP
LESTER L. LEVY
MICHAEL A. SCHWARTZ
845 Third Avenue
New York, NY 10022
Telephone: 212/759-4600

Attorneys for Plaintiffs

Plaintiffs, individually and on behalf of all others similarly situated, by their attorneys, allege the following upon the investigation of counsel, except for those allegations pertaining to plaintiffs, which are based on personal knowledge:

1. Plaintiffs bring this action as a class action on behalf of a class consisting of plaintiffs and all other persons or entities who purchased the securities of defendant ADAC Laboratories ("ADAC" or the "Company") on the open market, during the period January 10, 1996 through December 28, 1998, inclusive (the "Class" and "Class Period," respectively), to recover damages caused to the Class by defendants' violations of the federal securities laws.

2. This action arises under §§10(b) and 20 of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. §§78j(b) and 78t, and the rules and regulations promulgated thereunder, including Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. §240.10b-5. Jurisdiction is based upon §27 of the 1934 Act, 15 U.S.C. §78aa, and 28 U.S.C. §1331.

3. (a) Venue is proper in this District because many of the acts complained of, including the dissemination of materially false and misleading statements and reports, prepared by or with the participation, acquiescence, encouragement, cooperation, or assistance of defendants, occurred, at least in part, in this District. Additionally, defendant ADAC maintains its principal executive offices within this District.

(b) Assignment of the action to the San Jose division is appropriate as a substantial part of the events or omissions identified herein occurred in Santa Clara County.

4. In connection with the acts and conduct complained of, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including the mails, interstate telephone communications, and the facilities of the national securities exchanges.

5. Plaintiffs E&L Ballan, Trustees for the benefit of E&L Ballan, purchased shares of ADAC common stock during the Class Period as described in the attached certification and were damaged thereby.

6. Defendant ADAC is a California corporation with its principal offices located at 540 Alder Drive, Milpitas, California 95035. The Company purports to design, develop, manufacture, sell and service medical imaging and healthcare information systems used in hospitals and clinics worldwide.

7. Defendant R. Andrew Eckert ("Eckert") was elected a Director of the Company in April 1996. In August 1997, defendant Eckert became the Chief Executive Officer of the Company. From March 1997 until August 1997, Eckert served as the President and Chief Operating Officer of the Company. From November 1994 to March 1997, he served as President and General Manager of ADAC Medical Systems, and from February 1992 to November 1994, he served as Executive Vice President and General Manager of the Company's nuclear medicine business. Eckert joined the Company in February 1990 and from that date until February 1992 held several other senior management positions with the Company.

8. Defendant David L. Lowe ("Lowe") was elected a director of the Company in August 1992. Defendant Lowe is currently serving as Chairman of the Board of Directors, a position he has held since March 1996. Lowe served as Chief Executive Officer of the Company from November 1994 until August 1997, as Co-Chief Executive Officer from March 1994 until November 1994, and as President of the Company from February 1992 until November 1994. He joined the Company in April 1988 and from that time until February 1992 served in a variety of senior management positions, including Chief Operating Officer.

9. Defendant P. Andre Simone ("Simone") was elected Chief Financial Officer of the Company in June 1996, and has served as Vice President-Finance of the Company since October 1995, and Treasurer since May 1994, when he joined the Company.

10. Defendants Eckert, Lowe and Simone are sometimes hereinafter referred to as the "Individual Defendants."

11. As senior officers of ADAC, defendants Eckert, Lowe and Simone were controlling persons of ADAC. As such, each of the Individual Defendants had a duty to disseminate accurate and truthful information regarding ADAC and to correct any previously issued statements that had become untrue so that the market price of ADAC common stock would be based upon truthful and accurate information.

12. Defendants Lowe, Eckert and Simone, by reason of their executive positions of ADAC, were controlling persons of ADAC and had the power and influence, and exercised the same, to cause ADAC to engage in the conduct complained of herein. The Individual Defendants controlled the contents of ADAC's SEC filings, corporate reports and press releases. Each of the Individual Defendants participated in writing or reviewing ADAC's corporate reports, press releases and SEC filings alleged to be misleading and thus had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions and access to material non-public information available to them, these defendants knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then materially false and misleading. Thus, each of the Individual Defendants is legally responsible for the falsifying of ADAC's public reports, financial statements and releases detailed herein as "group-published" information.

13. Plaintiffs bring this action on their own behalf and as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure, on behalf of the Class consisting of all persons (other than defendants and the members of their immediate families, their heirs, successors and assigns) who purchased ADAC securities (including common stock and options) on the open market during the period January 10, 1996 through December 28, 1998, inclusive.

14. Members of the Class are so numerous that joinder of all members is impracticable. As of September 21, 1998, there were in excess of 19 million outstanding shares of the Company's common stock. There are thousands of members of the Class, dispersed throughout the United States, thereby making joinder of all its members impracticable. The number of Class members and their addresses is currently unknown to plaintiffs but can be ascertained from the books and records of ADAC.

15. Plaintiffs' claims are typical of the claims of the members of the Class. Plaintiffs and the members of the Class have sustained damages because of defendants' unlawful activities alleged herein. Plaintiffs have retained counsel competent and experienced in class and securities litigation and intend to prosecute this action vigorously. The interests of the Class will be fairly and adequately protected by plaintiffs. Plaintiffs have no interests which are contrary to or conflict with those of the Class they seeks to represent.

16. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy. Plaintiffs know of no difficulty to be encountered in the management of this action that would preclude its maintenance as a class action.

17. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:

(a) Whether defendants violated the federal securities laws as alleged herein;

(b) Whether defendants participated in and pursued the common course of conduct complained of; and

(c) Whether plaintiffs and the other members of the Class have sustained damages and the appropriate measure thereof.

18. Plaintiffs will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that:

(a) Defendants made public misrepresentations and/or omitted material facts during the Class Period, as alleged herein;

(b) The misrepresentations and/or omissions were material;

(c) ADAC securities were traded on the NASDAQ National Market System, an efficient market;

(d) The misrepresentations and/or omissions alleged induced the securities markets and reasonable investors to misjudge the value of ADAC securities; and

(e) Plaintiffs and the other members of the Class acquired ADAC securities between the time defendants made the misrepresentations or omissions and the time the truth was revealed, during which time the price of ADAC securities were inflated by defendants' misrepresentations and omissions.

19. Based upon the foregoing, plaintiffs and the other members of the Class are entitled to a presumption of reliance upon the integrity of the market for purposes of class certification, as well as for ultimate proof of the claims on the merit. Similarly, plaintiffs and the other members of the Class are entitled to a presumption of reliance with respect to the omissions alleged herein.

20. ADAC designs, develops, manufactures, sells and services medical imaging and healthcare information systems used in hospitals and clinics worldwide. The Company conducts its business through two principal business units, Medical Systems and Healthcare Information Systems ("HCIS"). The Company's Medical Systems products include nuclear medicine systems used primarily in oncology and cardiology, and radiation therapy planning systems for oncology, as well as refurbished ADAC and third-party nuclear medicine systems. The Company's HCIS products include radiology, cardiology and laboratory information systems.

The False And Misleading Statements

21. On January 10, 1996, defendants caused the Company to announced that it would "achieve a record $71 million in bookings for the first quarter ending December 31, 1995." According to the Company's January 10, 1996 press release:

This bookings attainment represents a 61 percent increase over the $44 million for the prior year's first quarter. Nuclear medicine equipment bookings, anticipated to be $48 million, will be the highest in the Company's history and represent a 78 percent increase from the $27 million for this division in the previous first quarter.

First quarter revenues are expected to be in the range of $54 to $55 million -- approximately a 24 percent increase from the prior year's first quarter revenues of $44 million. Earnings per share are expected to be approximately 20 cents versus 15 cents in the first quarter of 1995. The Company expects to report complete financial information for the first quarter in mid January.

David L. Lowe, Chief Executive Officer, stated, "A major factor for the bookings increase is the continued strong interest in Molecular Coincidence Detection (MCD(TM)) which received FDA 510k clearance in November. This breakthrough technology is designed to enable ADAC's dual head nuclear imaging systems to perform both single photon emission computed tomography (SPECT) and coincidence imaging using the same nuclear gamma camera. In our HealthCare Information Systems business, we booked a record $9 million. We are particularly pleased to have received our first order for our new client/server laboratory information system, LabStat(TM). We are very excited about the growth prospects our new products will bring ADAC in fiscal 1996.

22. On January 18, 1996, defendants caused the Company to announce the results of its operations for its first fiscal quarter ended December 31, 1995. The Company reported record revenues of $55.0 million, a 24% increase over the $44.2 million reported for the first quarter of fiscal 1995. Operating income of $6.3 million increased 63% over the $3.8 million reported for the first quarter of fiscal 1995. The Company achieved net income of $3.5 million or $.20 per share, as compared to $2.4 million or $.15 per share in the first quarter of fiscal 1995. The Company also reported record bookings of $71 million in the first quarter, a 61% increase compared to the $44 million in the prior year's first quarter. On January 18, 1996, defendant Lowe, then Chief Executive Officer, stated:

"We are pleased to report our sixth consecutive quarter of increasing revenues and operating profits. In addition, ADAC's nuclear medicine business achieved $48 million in bookings, a 78 percent increase from the $27 million in the previous first quarter. We believe that the strong market interest in Molecular Coincidence Detection (MCD(TM)) has significantly contributed to the large bookings increase. . . ."

Lowe continued, "Our HealthCare Information Systems business posted record bookings of $9 million which include our first order for LabStat(TM). ADAC's entry into the $400 million laboratory information systems market remains on target with the anticipated product release of LabStat in midcalendar 1996. LabStat will be among the industry's first laboratory clinical information systems designed to operate within an open-system client/server architecture."

23. On February 14, 1996, defendants caused the Company to file with the SEC its Form 10-Q for the Company's first fiscal 1996 quarter, signed by defendant Simone, which republished the Company's financial results reported on January 18, 1996.

24. Defendants' statements regarding the Company's first fiscal 1996 quarter were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of generally accepted accounting principles ("GAAP") (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

25. On April 22, 1996, defendants caused the Company to announce the results of operations for the Company's second fiscal quarter ended March 31, 1996. The Company reported record revenues of $58.4 million, a 31% increase over the $44.7 million reported for the second quarter of fiscal 1995. Operating income of $7.0 million increased 53% over the $4.5 million reported for the prior year's second quarter. The Company achieved net income of $3.9 million or $.22 per share, as compared to $2.8 million or $.17 per share in the second quarter of fiscal 1995. The Company also reported bookings of $61 million in the second quarter, a 36% increase compared to the $45 million in the prior year's second quarter. On April 22, 1996, defendant Lowe, then Chairman and Chief Executive Officer, stated:

"We are pleased that bookings were again higher than revenue, which adds to our backlog. Total nuclear medicine product bookings were $40 million in this second quarter, compared to $31 million in the comparable period a year ago and $48 million in the first quarter of fiscal 1996. We believe the reduction in bookings compared to the previous quarter may be due in part to a seasonal softening of the U.S. nuclear medicine market, as well as the usual reduction in service contract renewals experienced historically in the second quarter."

Lowe continued, "We are proud to report our seventh consecutive quarter of increasing revenues and operating profits. In addition, there were several other important accomplishments. In March, ADAC announced an agreement with Hewlett-Packard to develop and market an integrated cardiology information-management system. This agreement provides ADAC the opportunity to further expand its addressable markets by gaining entry into the cardiology information systems market. We believe this emerging market will grow significantly in the future. We also released LabStat(TM) with Windows 95. This laboratory clinical information system is currently undergoing implementation at three sites. In nuclear medicine, we expect to begin our clinical trials of our breakthrough MCD(TM) product at five luminary sites on schedule this quarter."

26. On May 14, 1996, defendants caused the Company to file with the SEC its Form 10-Q for the Company's second fiscal 1996 quarter, signed by defendant Simone, which republished the Company's financial results reported on April 22, 1996.

27. Defendants' statements regarding the Company's second fiscal 1996 quarter were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

28. On July 22, 1996, defendants caused the Company to announce the results of operations for the Company's third fiscal quarter ended June 30, 1996. For the quarter ended June 30, 1996, the Company reported revenues of $62.4 million, a 37% increase over the $45.6 million reported for the third quarter of fiscal 1995. Operating income of $7.6 million increased 59% over the $4.8 million reported for the prior year's third quarter. The Company achieved net income of $4.4 million or $.24 per share, as compared to $3.1 million or $.18 per share in the third quarter of fiscal 1995. The Company reported bookings of $69 million in the third quarter, compared to $48 million in the prior year's third quarter. For the nine-month period ended June 30, 1996, revenues were $175.9 million, a 31% increase compared to $134.6 million for the comparable period of prior year. Net income for the nine months ended June 30, 1996 was $11.8 million or $.65 per share, compared to the prior year's net income of $8.2 million or $.49 per share. On July 22, 1996, defendant Lowe, then Chairman and Chief Executive Officer, stated,

"We are very pleased to report our eighth consecutive quarter of increased revenues and operating profits. Strong market response to ADAC's innovative technology and products has resulted in market share growth. . . ."

Lowe continued: "ADAC's HealthCare Information Systems business continues on target with steady increases in revenues for both our radiology and laboratory products. ADAC's QuadRIS and LabStat products, based on client/server architecture, provide the flexibility and expandability that health care providers need to serve not only a single hospital, but also hospital groups."

29. On August 13, 1996, defendants caused the Company to file with the SEC its Form 10-Q for the Company's third fiscal 1996 quarter, signed by defendant Simone, which republished the Company's financial results reported on July 22, 1996.

30. Defendants' statements regarding the Company's third fiscal 1996 quarter were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

31. On November 4, 1996, defendants caused the Company to announce record results for its fourth quarter and fiscal year ended September 29, 1996. For the fourth quarter ended September 29, 1996, ADAC reported its ninth consecutive quarter of increased revenues. The Company generated a record $64.9 million of revenues in the fourth quarter, a 29% increase over the $50.2 million reported for the fourth quarter of fiscal 1995. This increase was attributed to a 9% increase in service revenue and a 38% increase in product revenue. Gross profit margin increased to 39.4% in the fourth quarter of fiscal 1996 from 38.7% in the third quarter, with product gross margins up 2% to 40.9% over that time period. Operating income rose to $8.5 million, a 67% increase over the $5.1 million reported for the fourth quarter of fiscal 1995. ADAC achieved net income of $4.8 million, or $.26 per share, a 69% increase over the $2.8 million, or $.16 per share, reported in the fourth quarter of fiscal 1995. ADAC also reported record bookings of $74 million in the fourth quarter, adding an additional $9 million of backlog. For the fiscal year ended September 29, 1996, ADAC reported revenues of $240.8 million, a 30% increase over the $184.8 million reported for the previous fiscal year. For fiscal 1996, ADAC achieved net income of $16.6 million, or $.90 per share, reflecting a slight increase in total calculated shares. Earnings per share increased approximately 38% from fiscal 1995, when the Company achieved net income of $11.1 million, or $.65 per share. On November 4, 1996, defendant Lowe, then Chairman and Chief Executive Officer, stated:

"We are very pleased with our strong results in fiscal 1996. In addition, we are delighted to have won the Malcolm Baldrige National Quality Award this past October."

ADAC also reported strong demand for its Molecular Coincidence Detection (MCD) technology and new laboratory and radiology information systems in fiscal 1996. MCD is designed to provide significant improvements in clinical imaging of the most frequently diagnosed cancers by enabling both single photon emission computed tomography (SPECT) and coincidence imaging using the same nuclear gamma camera.

"MCD bookings increased from 5 units in the third quarter to 22 units in the fourth quarter," said Lowe. "Additionally," stated Lowe, "the continued momentum of ADAC's radiology information system, QuadRIS/RS(R), and the recent introduction of our laboratory information system, LabStat, are opening new markets and providing new sources of revenue for the company."

32. On December 27, 1996, defendants caused the Company to file with the SEC its Form 10-K for the Company's 1996 fiscal year, signed by defendants Lowe, Simone and Eckert, which republished the Company's financial results reported on November 4, 1996.

33. Defendants' statements regarding the Company's fourth fiscal 1996 quarter and fiscal year 1996 were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

34. On January 27, 1997, defendants caused the Company to announce record results for its first fiscal quarter of 1997 ended December 29, 1996. For the first fiscal quarter ended December 29, 1996, ADAC reported a 33% increase in earnings per share and its tenth consecutive quarterly revenue increase. The Company generated record revenue of $68.4 million in the first quarter, a 24% increase over the $55.0 million reported for the first quarter of fiscal 1996. This increase was attributed to a 10% increase in service revenue and a 30% increase in product revenue. Gross profit margin increased to 40.3% in the first quarter of fiscal 1997 from 38.4% in the previous year's first quarter with product gross margins up 3.7% to 41.8% over that time period. ADAC achieved net income of $5.1 million, a 44% increase over the $3.5 million reported in the first quarter of fiscal 1996. Earnings per share increased 33% from $.20 in the first quarter of fiscal 1996 to $.27 in the first quarter of fiscal 1997. ADAC also reported record bookings of $82 million in the first quarter, adding approximately $13 million of additional backlog. On January 27, 1997, defendant Lowe, then Chairman and Chief Executive Officer, stated:

"We are very pleased to report our tenth consecutive quarterly revenue increase. In the first quarter, we began volume shipments of our Molecular Coincidence Detection (MCD(TM)) product. . . ."

Lowe continued, "We also made two key strategic investments to further enhance our capabilities. We acquired Geometrics Corporation, the architect of ADAC's successful Pinnacle3(TM) three-dimensional radiation therapy planning system. Pinnacle3 significantly improves physicians ability to develop optimal radiation treatment alternatives. We believe that Geometrics' core technology will benefit ADAC's other product lines, particularly nuclear medicine. In addition, our newly-formed ADAC Radiology Services (ARS) division acquired an interest in Medical Transition Strategies (MTS), a management service organization (MSO) for physician-driven radiology networks. . . ."

35. On February 12, 1997, defendants caused the Company to file with the SEC its Form 10-Q for the Company's first fiscal 1997 quarter, signed by defendant Simone, which republished the Company's financial results reported on January 27, 1997.

36. Defendants' statements regarding the Company's first fiscal 1997 quarter were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

37. On April 24, 1997, defendants caused the Company to announce record results for its second fiscal quarter of 1997 ended March 30, 1997. The Company reported a 32% increase in earnings per share and its tenth consecutive quarterly revenue and operating profit increase. "ADAC generated record revenues of $70.0 million in the second quarter, a 20 percent increase over the $58.4 million reported for the second quarter of fiscal 1996. This increase was attributed to a 23 percent increase in product revenue and a 10 percent increase in service revenue." Gross profit margin increased to 41.4% in the second quarter of fiscal 1997 from 38.2% in the previous year's second quarter, with product gross margins up 4.4 percentage points to 42.9% over that time period. ADAC achieved net income of $5.6 million in the second quarter of fiscal 1997, a $1.7 million increase over the $3.9 million reported in the second quarter of fiscal 1996. Earnings per share increased 32% from $.22 in the second quarter of fiscal 1996 to $.29 in the second quarter of fiscal 1997. On April 24, 1997, defendant Lowe, then Chairman and Chief Executive Officer, stated:

"In the second quarter, we booked orders of $80 million, which represents an approximate $20 million increase over the same quarter in the prior fiscal year. Our bookings attainment in the second quarter is particularly exciting for us, as our second quarter is a seasonally slow period for incoming orders in the nuclear medicine industry. We are also very pleased to report our tenth consecutive quarterly revenue and operating profit increase."

38. On May 14, 1997, defendants caused the Company to file with the SEC its Form 10-Q for the Company's second fiscal 1997 quarter, signed by defendant Simone, which republished the Company's financial results reported on April 24, 1997.

39. Defendants' statements regarding the Company's second fiscal 1997 quarter were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

40. On July 23, 1997, defendants caused the Company to announce record results for its third fiscal quarter of 1997 ended June 29, 1997. The Company reported a 25% increase in earnings per share and its eleventh consecutive quarterly revenue and operating income increase. ADAC generated record revenues of $71.5 million in the third quarter, a 15% increase over the $62.4 million reported for the third quarter of fiscal 1996. This increase was attributed to a 16% increase in product revenue and a 12% increase in service revenue. Gross profit margin increased to 41.5% in the third quarter of fiscal 1997 from 38.7% in the previous year's third quarter, with product gross margins up 3.9 percentage points to 42.6% over that time period. ADAC achieved net income of $5.8 million in the third quarter of fiscal 1997, a $1.5 million increase over the $4.4 million reported in the third quarter of fiscal 1996, and earnings per share of $.30 in the third quarter of fiscal 1997, an increase of 25% from $.24 in the third quarter of fiscal 1996. Operating income, net income, and earnings per share were $4.8 million, $0.1 million and $0.01, respectively. On July 23, 1997, defendant Lowe, then Chairman and Chief Executive Officer, stated:

"We are very pleased to report our eleventh consecutive quarterly revenue and operating income increase. In the third quarter, we booked orders of $75 million, which represents an increase of approximately $6 million over the same quarter in the prior fiscal year."

41. On August 13, 1997, defendants caused the Company to file with the SEC its Form 10-Q for the Company's third fiscal 1997 quarter, signed by defendant Simone, which republished the Company's financial results reported on July 23, 1997.

42. Defendants' statements regarding the Company's third fiscal 1997 quarter were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

43. On November 5, 1997, defendants caused the Company to announce record results for its fourth fiscal quarter of 1997, ended September 28, 1997. The Company reported a 19% increase in earnings per share and its twelfth consecutive quarterly revenue and operating income increases. For the fourth quarter, ADAC generated record revenues of $72.5 million, a 12% increase over the $64.9 million reported for the fourth quarter of fiscal 1996. This increase was attributed to an 11% increase in product revenue and a 15% increase in service revenue. Gross profit margin increased to 41.6% in the fourth quarter of fiscal 1997 from 39.4% in the previous fiscal year's fourth quarter. ADAC achieved net income of $6.0 million in the fourth quarter of fiscal 1997, a $1.2 million increase over the $4.8 million reported in the fourth quarter of fiscal 1996, and earnings per share of $.31 in the fourth quarter of fiscal 1997, an increase of 19% from $.26 in the fourth quarter of fiscal 1996. For the fiscal year ended September 28, 1997, ADAC reported revenues of $282.3 million, a 17% increase over the $240.8 million reported for the previous fiscal year. Excluding the effect of a one-time charge for in-process research and development related to the purchase of Cortet, Inc., ADAC achieved net income of $22.5 million, or $1.16 per share, reflecting an increase in earnings per share of 29% over the $.90 per share recorded in fiscal 1996. In announcing the results on November 5, 1997, defendant Eckert, then ADAC's Chief Executive Officer, stated:

"We are quite pleased to report our twelfth consecutive quarterly revenue and operating income increase. Most importantly, we were pleased with our progress on Molecular Coincidence Detection (MCD(TM)) this past quarter as our sales momentum increased significantly. Given our favorable multi-center clinical trial results and the recent FDA 510(k) clearance of our product enhancement, MCD/AC(TM), the outlook is positive for this exciting product."

Eckert continued, "With respect to our multi-center clinical trials, positive preliminary results were announced by Dr. Henry Wagner at the European Association of Nuclear Medicine Congress in August. To date, the trial has confirmed that MCD produces high rates of sensitivity (96 percent) and specificity (80 percent), which represent a significant improvement in clinical accuracy over conventional imaging techniques for diagnosing certain diseases.

"In addition, the clearance from the U.S. Food and Drug Administration to market Molecular Coincidence Detection with Attenuation Correction in the United States clears the way for ADAC to begin receiving orders, manufacturing, and delivering this new technology to our customers.

"Additionally, in our Medical Systems division, we further expanded our multi-vendor service business by signing a national service agreement with COHR Inc., of Chatsworth, CA. The agreement added approximately 75 gamma cameras to our rapidly growing multi-vendor service business and will help COHR and its customers improve the quality and delivery of cost-effective healthcare.

"Most recently, on October 28th, ADAC entered the $500 million worldwide market for refurbished diagnostic imaging equipment by completing our acquisition of Southern Cats, Inc. (SCI), of Ontario, CA. SCI is one of the largest independent providers of Computed Tomography and X-ray equipment refurbishment and service.

"In our HealthCare Information Systems Business, we completed two significant contract signings for our radiology information systems product, QuadRIS(TM), the first at Children's Hospital in Boston, MA, and the second at Memorial Sloan Kettering Cancer Center in New York, NY. These important customer decisions illustrate the progress ADAC has made with its client/server radiology products and the position that ADAC holds because of its technological innovation and understanding of the dynamics of today's radiology environment.

44. On December 29, 1997, defendants caused the Company to file with the SEC its Form 10-K for the Company's 1997 fiscal year, signed by defendants Eckert, Lowe and Simone, which republished the Company's financial results reported on November 5, 1997.

45. Defendants' statements regarding the Company's fourth fiscal 1997 quarter and fiscal 1997 were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

46. On January 28, 1998, defendants caused the Company to announce record results for its first fiscal quarter of 1998 ended December 28, 1997. For the first quarter, ADAC generated record revenues of $75.5 million, a 10% increase over the $68.4 million reported for the first quarter of fiscal 1997. Gross margin increased to 42.3% in the first quarter of fiscal 1998 from 40.3% in the previous fiscal year's first quarter, primarily as a result of improved gross margins in the Company's nuclear medicine and radiation therapy products businesses. ADAC achieved net income of $6.3 million in the first quarter of fiscal 1998, a $1.2 million increase over the $5.1 million reported in the first quarter of fiscal 1997, and earnings per share of $.32 in the first quarter of fiscal 1998, a $.05 increase from the $.27 in the first quarter of fiscal 1997. On January 28, 1998, defendant Eckert, ADAC's Chief Executive Officer, stated:

"In addition to our record financial results, our first quarter had several notable accomplishments. Most significantly, the U.S. Health Care Financing Administration decision to expand Medicare coverage to include positron emission tomography (PET) scans for the diagnosis and initial staging of lung cancer was a major milestone. This coverage decision applies to both dedicated positron tomography scanners and nuclear medicine cameras with positron emission tomography capability such as Molecular Coincidence Detection (MCD(TM)). We believe this decision improves the economics of MCD purchases and clearly removes one of the major barriers to broader utilization of MCD by our customers."

The Company also noted three recent acquisitions in its Medical Systems business which are designed to further strengthen its refurbishing and service businesses. First, the Company entered the $500 million worldwide market for refurbished CT and X-Ray equipment this past quarter through the acquisition of Southern Cats, Inc. (SCI). SCI is one of the largest independent providers of CT and X-ray equipment refurbishment and service. Second, ADAC grew its presence in this market in January 1998 by acquiring CT Solutions, Inc., a leading provider of CT equipment refurbishment and service. Third, the Company recently expanded its existing leadership position in the nuclear multi-vendor refurbishment and service business through the acquisition of O.N.E.S. Medical Services, Inc., one of the largest independent providers of nuclear service and refurbished equipment in the United States. All three of these acquisitions are anticipated to be accretive in fiscal 1998.

47. On February 11, 1998, defendants caused the Company to file with the SEC its Form 10-Q for the Company's first fiscal 1998 quarter, signed by defendant Simone, which republished the Company's financial results reported on January 28, 1998.

48. Defendants' statements regarding the Company's first fiscal 1998 quarter were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

49. On April 23, 1998, defendants caused the Company to announce results for its second fiscal quarter ended March 29, 1998. The Company reported that earnings per share increased 21% from $.29 in the second quarter of fiscal 1997 to $.35 in the second quarter of fiscal 1998. The Company generated record revenue of $77.4 million in the second quarter, an 11% increase over the $70.0 million reported for the same period in fiscal 1997. This increase was attributed to a 22% increase in service revenue and a 7% increase in product revenue. Gross profit margin increased to 42.6% in the second quarter of fiscal 1998 from 41.4% in the previous year's second quarter with product gross margins up 2.2 percentage points to 45.1% over that time period. ADAC achieved net income of $7.0 million, a 25% increase over the $5.6 million reported in the second quarter of fiscal 1997. On April 23, 1998, defendant Eckert, ADAC's Chief Executive Officer, stated:

"We are pleased to report our fourteenth consecutive quarterly revenue increase and a 21% increase in earnings over the second quarter of fiscal 1997.

"In addition, we are particularly excited that revenue for our HealthCare Information Systems business (HCIS) grew 29 percent, from $8.0 million in the second quarter of fiscal 1997 to $10.3 million in the same quarter of fiscal 1998, generating operating income of $1.3 million.

"The second quarter was marked by several major accomplishments in HCIS, including receipt of the first three orders under the DIN-PACS contract with the U.S. government valued at approximately $1.8 million.

"Our Radiation Therapy Planning (RTP) business, which is a part of Medical Systems, demonstrated continued growth due to the success of our Pinnacle3 radiation therapy planning software system. Revenues grew 71 percent, from $4.2 million in the second quarter of fiscal 1997 to over $7.2 million in the same period of fiscal 1998, reflecting our growing leadership in this segment of the oncology software market."

Eckert continued, "We also saw a revenue increase in our newest business initiative, ADAC Multi-Modality Service (AMMS), largely due to the successful integration of CT Solutions Inc and Southern Cats Inc.

"AMMS revenue grew from $1 million in the first quarter of fiscal 1998 to $2.1 million in the second quarter. As we continue to strategically grow this business, we believe AMMS will become a meaningful contributor to the company's results."

50. On May 13, 1998, defendants caused the Company to file with the SEC its Form 10-Q for the Company's second fiscal 1998 quarter, signed by defendant Simone, which republished the Company's financial results reported on April 23, 1998.

51. Defendants' statements regarding the Company's second fiscal 1998 quarter were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

52. On July 23, 1998, defendants caused the Company to announce record results for its third fiscal 1998 quarter ended June 28, 1998. The Company reported that earnings per share increased 23% from $.30 in the third quarter of fiscal 1997 to $.37 in the third quarter of fiscal 1998. The Company generated record revenue of $83.5 million in the third quarter, a 17% increase over the $71.5 million reported for the same period in fiscal 1997. This increase was attributed to an 18% increase in service revenue and a 17% increase in product revenue. Gross profit margin increased to 43.4% in the third quarter of fiscal 1998 from 41.5% in the previous year's third quarter with product gross margins up 4.7 percentage points to 47.3% over that time period. ADAC achieved net income of $7.5 million, a 29% increase over the $5.8 million reported in the third quarter of fiscal 1997. On July 23, 1998, defendant Eckert, ADAC's Chief Executive Officer, stated:

"We are pleased to report our fifteenth consecutive quarterly revenue increase and a 23 percent increase in earnings per share over the third quarter of fiscal 1997.

"In addition, we are particularly excited that revenue for our HealthCare Information Systems business (HCIS) grew 36 percent, from $7.2 million in the third quarter of fiscal 1997 to $9.8 million in the same quarter of fiscal 1998 while operating income totaled $1.4 million. We now have 39 live QuadRIS(TM) sites with another 28 sites in implementation. We also recently marked the two-year anniversary of our first live QuadRIS site.

"Our Radiation Therapy Products (RTP) business continued its rapid growth in the quarter. Our recent agreement to partner with Siemens Medical Systems, Inc., enabling them to offer ADAC's Pinnacle3(TM) packaged with their radiation oncology products, will enhance our access to international markets. RTP revenue and operating income both increased approximately 100% from the third quarter of fiscal 1997."

Mr. Eckert continued, "In our nuclear medicine business, the third quarter was marked by several major accomplishments. First, the Health Care Financing Administration (HCFA)'s establishment of favorable reimbursement rates for positron emission tomography (PET) scans for the initial diagnosis and staging of lung cancer contributed to a sizable increase in MCD bookings to 24 units. We believe that HCFA's elimination of uncertainty over these rates will continue to have a positive impact on MCD orders over the next year as healthcare institutions enter their new budgeting cycles."

53. On August 12, 1998, defendants caused the Company to file with the SEC its Form 10-Q for the Company's third fiscal 1998 quarter, signed by defendant Simone, which republished the Company's financial results reported on July 23, 1998.

54. Defendants' statements regarding the Company's third fiscal 1998 quarter were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

55. On November 5, 1998, defendants caused the Company to announce record results for its fourth fiscal quarter of 1998 ended September 27, 1998. The Company reported that earnings per share increased 26% from $.31 in the fourth quarter of fiscal 1997 to $.39 in the fourth quarter of fiscal 1998, excluding the effect of the previously announced one-time charge described below. The Company generated record revenues of $86.9 million in the fourth quarter of fiscal 1998, a 20% increase over the $72.5 million reported for the same period in fiscal 1997. This increase was attributed to a 22% increase in product revenue and a 14% increase in service revenue. Gross profit margin increased from 41.6% in the previous year's fourth quarter to 43.6% with product gross margins up 4.8 percentage points over that time period. Much of the product margin increase was due to continued profitability and growth in the Company's two software businesses, HCIS and Radiation Therapy Products ("RTP"). ADAC achieved net income of $8.2 million for the fourth fiscal quarter of 1998, a 35% increase over the $6.0 million reported in the fourth fiscal quarter of 1997. For the fiscal year ended September 27, 1998, ADAC reported revenues of $323.4 million, a 15% increase over the $282.3 million reported for the previous fiscal year. Excluding the effect of one-time charges, ADAC achieved net income of $29 million, or $1.42 per share, reflecting a 23% increase over the $1.15 per share recorded for fiscal 1997. In announcing the results, defendant Eckert, ADAC's Chief Executive Officer, stated:

"We are pleased to report another record quarter for our Company. Our revenue and profit growth were very strong in the fourth quarter as all of our major businesses performed quite well. Each of our three major markets are healthy and ADAC's product differentiation across our product lines is being well received.

"In particular, our software businesses posted outstanding quarters. HCIS revenues increased to $10.6 million in the fourth quarter, an increase of 52 percent from the same period a year ago. A number of major customer contracts were completed in the quarter for our leading radiology information system, QuadRIS(tm), most notably the recently announced contract with the two largest healthcare authorities in Alberta, Canada.

"In RTP, revenues increased over 100 percent from the fourth quarter of fiscal 1997. The Pinnacle3(tm) treatment planning system is now the dominant product in the worldwide radiation treatment planning marketplace. Our momentum is quite strong, as we continue to establish important new customer relationships.

"We also continued to build on our leadership position in the growing positron imaging marketplace. We shipped 18 MCD units and two C-PET(tm) units in the quarter compared to 13 MCD units and one C-PET in the prior quarter. Positron imaging is an exciting emerging segment of diagnostic imaging and ADAC is well-positioned for success."

56. Defendants' statements regarding the Company's fourth fiscal 1998 quarter and fiscal 1998 were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

The True Facts Are Revealed

57. On December 29, 1998, prior to the commencement of trading, ADAC shocked financial market participants when the Company announced that it needed to restate its financial results for the previously reported 1996, 1997 and 1998 fiscal years. According to the Company:

ADAC Laboratories (Nasdaq:ADAC) announced today that its financial results for fiscal years 1996, 1997 and 1998 will be restated. This restatement is a result of an extensive ongoing review by the Company with the assistance of Pricewaterhouse Coopers (PwC) of its accounting principles and their historic application. The Company did not file its Annual Report on Form 10-K yesterday and has applied for an extension.

As part of this restatement, the Company will adjust the timing of certain revenues over the 1996-1998 period. The primary impact of these adjustments will be to move revenues forward into adjacent future periods. Substantially all of the transactions relating to these revenues have been completed and the associated revenues have been or will shortly be recognized. In addition, certain expenses will be adjusted and re-allocated throughout the period.

Based on the review to date, the Company believes that the net effect of these adjustments will have a material adverse impact on the Company's fiscal 1996 and 1997 financial results but are not expected to have a material impact on its previously released fiscal 1998 revenue, although the effect on revenue in individual quarters may be material. In addition, management believes that net income for 1998 may be somewhat lower or somewhat higher than previously reported, depending on the outcome of the ongoing review. Additionally, the Company believes these accounting changes will not have a material impact on the Company's future business prospects.

After the issuance of the Company's earnings release in early November, several issues concerning accounting policies and practices were raised. Thereafter, the Company, working with PwC, undertook an extensive review of these issues, particularly with respect to the accounting treatment of various one-time charges taken by the Company as well as the appropriateness of certain expense and revenue recognition practices that the Company had followed in recent years. Following the review, the Company will apply different revenue recognition guidelines than it has followed, change the accounting for certain transactions and adjust certain expense items.

58. The market's reaction to the shocking December 29, 1998 announcement demonstrated the extent to which the market prices of ADAC's securities had become and remained artificially inflated throughout the Class Period. By mid-morning, the market price of ADAC common stock had dropped to $19-5/8 from the previous day's close of $27.125, a drop of $7.50 or 28%.

Defendants Acted With Scienter

59. As alleged herein, defendants acted with scienter in that they knew or recklessly disregarded that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading; knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public; and knowingly or recklessly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. As set forth herein, defendants acted with a knowing or conscious disregard for the falsity of ADAC's financial statements. In addition, defendants had motives and opportunities to defraud plaintiffs and the Class and acted on those opportunities.

60. Defendants' statements regarding the Company's 1996, 1997 and 1998 financial results were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83) and ADAC's stated revenue recognition policy.

Defendants' Motives And Opportunities To Commit Fraud

61. Defendants had strong motives to disseminate false and misleading financial information, had opportunities to act on those motives, and did indeed act to take advantage of such opportunities.

62. During the Class Period defendant Eckert sold 190,935 shares of ADAC common stock at artificially inflated prices for proceeds in excess of $3.8 million.

63. During the Class Period defendant Lowe sold 230,000 shares of ADAC common stock at artificially inflated prices for proceeds in excess of $4.6 million.

64. Plaintiffs repeat and reallege each and every allegation contained in all the foregoing paragraphs as if fully set forth herein.

65. This Count is asserted against all defendants and is based upon §10(b) of the 1934 Act, 15 U.S.C. §78j(b), and Rule 10b-5 promulgated thereunder by the SEC.

66. During the Class Period, defendants, singly and in concert, directly or indirectly, engaged in a common plan, scheme, and unlawful course of conduct, pursuant to which they knowingly or recklessly engaged in acts, transactions, practices, and courses of business which operated as a fraud and deceit upon plaintiffs and the other members of the Class, and made various deceptive and 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 the other members of the Class. The purpose and effect of said scheme, plan, and unlawful course of conduct was to induce plaintiffs and the other members of the Class to purchase ADAC securities during the Class Period at artificially inflated prices.

67. During the Class Period, defendants, pursuant to said scheme, plan, and unlawful course of conduct, knowingly and recklessly issued, caused to be issued, and participated in the preparation and issuance of deceptive and materially false and misleading statements to the investing public which were contained in or omitted from various documents and other statements, as particularized above.

68. Defendants each knew and intended to deceive plaintiffs and the other members of the Class, or in the alternative, acted with reckless disregard for the truth when they failed to disclose or cause the disclosure of the true facts to plaintiffs and the other members of the Class.

69. As a result of the dissemination of the false and misleading statements set forth above, the market price of ADAC securities was artificially inflated during the Class Period. In ignorance of the false and misleading nature of the representations described above and the deceptive and manipulative devices and contrivances employed by said defendants, plaintiffs and the other members of the Class relied to their detriment on the integrity of the market price of the stock in purchasing ADAC securities. Had plaintiffs and the other members of the Class known of the materially adverse information misrepresented or not disclosed by defendants, they would not have purchased ADAC securities at the artificially inflated prices that they did.

70. As a result of the inflation of the price of ADAC securities during the Class Period caused by defendants' material misrepresentations and omissions, plaintiffs and the other members of the Class have suffered substantial damages as a result of the wrongs alleged.

71. By reason of the foregoing, defendants, directly or indirectly, violated the 1934 Act and Rule 10b-5 promulgated thereunder in that they:

(a) employed devices, schemes, and artifices to defraud;

(b) made untrue statements of material facts or 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; and/or

(c) engaged in acts, practices, and a course of business which operated as a fraud and deceit and a scheme to defraud upon plaintiffs and the other members of the Class in connection with their purchases of ADAC securities during the Class Period.

72. Plaintiffs repeat and reallege each and every allegation contained in all the foregoing paragraphs as if set forth fully herein.

73. The Individual Defendants, by virtue of their offices and specific acts described above, were, at the time of the wrongs alleged herein, controlling persons of ADAC within the meaning of §20(a) of the 1934 Act.

74. The Individual Defendants had the power and influence and exercised the same to cause ADAC to engage in the illegal conduct and practices complained of herein.

75. By reason of the conduct alleged in Count I of the Complaint, the Individual Defendants are liable for the aforesaid wrongful conduct, and are liable to plaintiffs and to the other members of the Class for the substantial damages which they suffered in connection with their purchases of ADAC securities during the Class Period.

WHEREFORE, plaintiffs, on behalf of themselves and the members of the Class, pray for judgment as follows:

1. Declaring this action to be a proper class action and certifying plaintiffs as the representatives of the Class under Rule 23 of the Federal Rules of Civil Procedure;

2. Awarding compensatory damages in favor of plaintiffs and the other members of the Class against all defendants, jointly and severally, for the damages sustained as a result of the wrongdoings of defendants, together with interest thereon;

3. Awarding plaintiffs and the Class their costs and expenses incurred in this action, including reasonable allowance of fees for plaintiffs' attorneys, accountants, and experts, and reimbursement of plaintiffs' expenses; and

4. Granting such other and further relief as the Court may deem just and proper.

Plaintiffs demand a trial by jury.

COMPLNTS\ADAC.CPT