1. Zila has been actively developing OraTest for many years, beginning in approximately 1991, and, in an effort to obtain FDA approval, has spent countless hours and millions of dollars on research, development, and testing. Specifically, the 1998 10-K stated, in pertinent part, that:

As of July 31, 1998, Zila has invested approximately $6.0 million in the development of OraTest® and has also made a significant financial investment to secure FDA approval of OraTest® and to prepare for the introduction of OraTest® to the United States market.

1. On November 30, 1998, Zila issued a press release entitled "Zila Broadening its OraTest Patent Protection," in which defendant Green, President of Zila Biomedical, stated:

There is no evidence that any metachromatic stain is as effective as toluidine blue in detecting squamous cell carcinoma, the common form of oral cancer.

1. Zila, prior to and during the Class Period, repeatedly promoted to the securities markets the potential market for OraTest. For example, Zila's Internet website (file:///A:/(www.zila.com) stated:

Oral cancer kills one American every hour. Only 53% of the 30,000 who will be diagnosed this year will survive five years. And most patients won't know there's something wrong until it is too late.

The key to beating oral cancer is early detection and early treatment. Zila Biomedical is presenting the world with the means to make that diagnosis. This OraTest® oral cancer detection system provides a quick, simple and accurate in-office test to define suspicious lesions in the mouth. OraTest stains altered cells a bright blue, clearly identifying trouble areas for biopsy. Pure pharmaceutical-grade Zila Tolonium Chloride (toluidine blue) stain, manufactured exclusively by Zila, delineates the area for biopsy and surgery, increasing the opportunity for accurate diagnosis and timely treatment. Detected early, oral cancer has a survival rate of 90%; detected late, the survival rate drops to 19%.

Rejections of Zila's Applications to the FDA

1. Notwithstanding Zila's purported intention to manufacture and market OraTest in the United States, the Company's clinical trials of OraTest were poorly conceived and executed, and so far have failed to generate the data necessary to support Zila's NDA for OraTest.
2. On August 7, 1996, Zila submitted its first NDA for OraTest to the FDA. That NDA was summarily rejected for filing because the data submitted was facially insufficient to support the application. On October 24, 1996, the FDA issued a Refuse to File letter to Zila.
3. Despite advice from the FDA that its current level of documentation was insufficient, a second NDA was filed on June 12, 1998, and in July 1998 was rejected for filing by the FDA. Although Zila had been advised by the FDA that pathology reports and photographs were required to support the NDA, no pathology reports or photographs were submitted.
4. It was not until September 3, 1998 that Zila filed an NDA for OraTest that was accepted for filing. But the mere acceptance of the application was no indication of the likelihood that the NDA would be approved, or when such approval, if any, would issue.
5. The Individual Defendants knew that if these facts were disclosed to the public, their own incompetence and gross mismanagement would be exposed, the likelihood of OraTest's eventual approval by the FDA would be called into question, and the price of Zila stock would plummet.
6. Instead of disclosing that the FDA was not satisfied with the data generated by the clinical trials, and that the FDA had twice refused to accept Zila's OraTest NDA, defendants decided to cover up these facts.
7. Defendants carried out a scheme to artificially inflate and maintain the price of Zila's publicly traded securities by flooding the market with statements stating or insinuating that (a) an NDA for OraTest was pending before the FDA; (b) any delay in the approval of OraTest was caused by FDA "foot dragging" rather than errors or inaction by Zila; and (c) OraTest would soon be approved for marketing by the FDA. In addition, the Company publicized its expenditures on Company resources for a full-scale United States marketing plan for the product in an effort to convince investors that FDA approval was imminent.
8. Defendants' fraud inflated the market price for Zila's publicly traded securities. From the beginning of the Class Period until the fraud was disclosed on January 13, 1999, when the FDA review Committee announced it recommended rejection of the OraTest NDA, the defendants artificially inflated the price of Zila stock. At times during the Class Period, Zila stock traded above $11 per share as a result of defendants' fraudulent scheme.
9. The FDA's Oncologic Drug Advisory Committee (the "Committee") did not meet to consider the OraTest NDA until January 13, 1999. At that meeting, both the Company and the FDA made presentations based on the data filed by the Company in support of its NDA. The Committee voted against a recommendation of approval, and Dr. D. Johnson of the Committee made the following observations:

[T]he study that was presented was not designed to address the question for which the sponsor [Zila] is seeking an indication.

Even if we were addressing that, the data that have been presented, such as they are, are wholly inadequate to support any indication in my view, and I think it is disappointing, frankly, that the company came forward with this information in this format.

I cannot think of a single credible scientific organization that would accept such data.

Tr. Of Oncologic Drugs Advisory Committee Meeting, January 13, 1999.

1. Other members of the Committee concurred, and one member added the following:

You have got to get your stuff together, folks. Listen to the FDA. I think the cooperation from what I read is there, in their behalf. Start over and do a good job. If you feel you have got something good, let's present it as you feel the product is.

Id.

1. Defendants' scheme was finally revealed on January 13, 1999, when news of the Committee's negative recommendation and the FDA's and the Committee's harsh criticism of the Company's clinical trials caused the price of Zila's common stock to plummet 44 percent in a single day, from a closing price of $9.625 per share on January 12, 1999 to $5.375 per share on January 13, 1999. On June 24, 1999, the stock closed at $3.44 per share.

Misrepresentations and Omissions

Before and During The Class Period

1. The defendants' misrepresentations began as early as April 22, 1996, when the Company stated in a press release that "FDA review is expected to be completed soon" with respect to OraTest. Zila had no reasonable basis for that statement, because, in fact, no NDA for OraTest had even been filed with the FDA as of that time. The statement was not only a baseless, knowingly false prediction on the timing of FDA action, it was a misrepresentation that an NDA for OraTest was then pending before the FDA, which it was not.

1. In a report to shareholders for the period ending April 30, 1996, Zila stated: "Expected U.S. Food & Drug Administration approval [of OraTest] is drawing nearer." That statement was false, and was made with no reasonable basis, because at that time the most recent OraTest NDA had been refused for filing and none was then pending with the FDA. Those facts were not disclosed by the Company in the report or elsewhere. The report contained no warnings concerning forward looking statements.
2. On August 12, 1996, Zila declared that its stock was now marginable OTC stock, having loan value under SEC Regulation T.
3. On September 12, 1996, Zila filed Registration Statement, Amendment No. 1, with respect to its proposed merger with Bio-Dental. In that filing, Zila stated: "If the FDA does not approve OraTest for sale in the United States, it may be difficult or impossible for Zila and Bio-Dental to realize many of the potential benefits of the merger." September 12, 1996, Form S-4/A, at 8. Zila also stated that "[o]ne of the primary factors considered by the Boards of Directors of Zila and Bio-Dental in connection with the Merger is the market potential for Zila's oral cancer diagnostic known as 'OraTest.'" The registration statement continued:

If the FDA does not approve OraTest for the United States market, it could have a material adverse effect on the business of Zila and, following the Merger, Bio-Dental, and the market price for Zila Common Stock would likely be materially adversely affected as well. In addition, Zila has made a significant financial investment to secure FDA approval of OraTest and to prepare for the introduction of OraTest to the United States market, and failure of the FDA to approve OraTest would make it impossible for Zila to recoup this investment through sales of OraTest in the United States.

Id. at 23.

1. Despite Zila's recognition of the materiality of FDA approval of OraTest, and its warning in the merger registration statement that FDA approval of OraTest was not assured and Zila did not know when or if it would occur, Zila and the individual defendants proceeded with a public relations campaign intended to deceive the market into believing that FDA approval of OraTest would be forthcoming.
2. On October 1, 1996, for example, Zila falsely stated in a press release that it anticipated "near-term FDA approval" of OraTest. The Company stated that it has retained a marketing company to "assist in the introduction of Zila's oral cancer detection system, OraTest(TM), in the United States." Zila also stated: "This major step toward OraTest introduction is taken in anticipation of near term FDA approval." The press release did not disclose that, in fact, Zila had only submitted its NDA on August 7, 1996, the NDA had not yet been accepted for filing, and there was no reasonable basis to believe that OraTest would be approved in the "near term."
3. The FDA formally refused filing of the NDA only 23 days later, on October 24, 1996. The fact of the FDA's refusal to accept filing of the NDA was never disclosed to the public.
4. On November 8, 1996, Zila issued a press release in which defendant Joseph Hines falsely claimed that "[l]ooking ahead, expenditures on regulatory affairs are rapidly trending downward as the regulatory process nears conclusion." That statement was false and misleading when made because, in fact, Zila's NDA for OraTest had been rejected for filing on October 24, 1996 and, at the time of the statement, no NDA for OraTest was pending before the FDA.
5. The Class Period alleged herein begins on November 14, 1996, when Zila and Joseph Hines initiated an aggressive effort to inflate the price of the Company's common stock through false and misleading representations concerning the status of the purported FDA application. On that day, Zila issued a press release to announce that its merger with Bio-Dental Technologies was proceeding, subject to approval from Bio-Dental shareholders. In explaining the proposed merger, the press release stated:

Zila Chairman Joseph Hines said the move to acquire Bio-Dental is one in a series of steps Zila is taking in expectation of new-term FDA approval of OraTest(TM), the first oral cancer detection system. OraTest is already being marketed to healthcare professionals in Canada, the United Kingdom and Australia. The potential market for OraTest has been estimated at roughly $500 million annually in the U.S. alone.

This statement was again false and misleading when made in light of the fact that Zila's NDA for OraTest had already been rejected for filing only three weeks before and there was no NDA for OraTest pending before the FDA, such that it was patently false to portray FDA approval as "near term."

1. At the same time, defendant Hines was speaking to the press in a continuing effort to persuade the market to increase the price of Zila's common stock. Bloomberg News, for example, published a story on November 14, 1999, following an interview with Hines. It stated, in part:

Zila Inc. expects to have Food and Drug Administration approval for its OraTest detection system for oral cancer in three to four months, said Joseph Hines, chairman, chief executive and president.

1. Hines' representations to the media, as reported in this story, was false and misleading when made. Zila clearly did not, in fact, "expect" FDA approval "in three to four months," given there was not even an NDA filed with the FDA at the time of this representation.
2. On November 25, 1996, Zila announced that Brad Anderson had joined the Company as Vice President-Treasurer. According to the release, Anderson was a CPA and had been employed by the Company's auditors, Deloitte & Touche, for the previous 11 years. In the press release, Hines stated that Anderson "will play an important role in the strategic planning and execution of Zila's growth objectives."
3. The November 25, 1996 press release also announced that "Zila is preparing for near-term introduction of its unique oral cancer detection system, OraTest(TM), in the United States." Another November 25 release stated that "U.S. FDA approval [of OraTest] is pending." Those statements were false and misleading when made, because, in fact, Zila's NDA for OraTest had been rejected for filing on October 24, 1996, and no NDA for OraTest was then pending before the FDA.
4. Also on November 25, 1996, Zila issued a special release directed to "Brokers, Market Makers & Fund Managers," with even more explicit misrepresentations. In that release, Zila stated: "Everything requested by the agency [the FDA] has been submitted. We are only awaiting word from them. We feel very positive about the situation and believe, based on the opinion of our regulatory legal counsel, that approval will be granted soon." This statement was knowingly false when made. The FDA had issued its Refusal to File letter for Zila's OraTest NDA on October 24, 1996. As of the date of this release, as was well known to defendant Hines and Zila, no OraTest NDA was even pending before the FDA. Thus, the statement is patently false and there was no reasonable basis upon which to state that "approval will be granted soon." Moreover, this release did not contain even boilerplate cautionary statements about forward-looking statements.
5. On December 17, 1996, Zila issued another special release to "Brokers, Market Makers & Fund Managers" regarding OraTest, containing the following false and misleading statements: "All indications, including FDA field inspections at our manufacturing sites last month, point to likely near term approval. . . . Zila Manufacturing is producing commercial-size batches of the OraTest active ingredient in full compliance with FDA GMP (Good Manufacturing Practice) standards." In fact, the FDA had in October 1996 refused to allow Zila to file its NDA for OraTest. That negative indication was not disclosed in this release or elsewhere. With respect to manufacturing standards, the FDA informed Zila only two months later, on February 18, 1997, that it was not in compliance with FDA standards. The release did not contain any warnings concerning forward looking statements.
6. A Zila quarterly report to shareholders for the period ending October 31, 1996 repeated the misrepresentations in the immediately preceding paragraph, and also contained no warnings concerning forward looking statements.
7. On January 8, 1997, Zila completed its merger with Bio-Dental. According to Zila's press release of January 3, 1997, Zila had only 20 employees and revenue of approximately $7 million per year. Bio Dental at that time had over 140 employees, and revenue of approximately $33 million. In the merger, Bio Dental shareholders received .825 shares of Zila common stock for every share of Bio Dental stock.
8. On February 18, 1997, Zila received a letter from the FDA Division of Chemistry and Manufacturing Controls stating that Zila's manufacturing process for the active ingredient in OraTest was deficient.
9. On March 4, 1997, Zila issued a release to "Brokers, Market Makers & Fund Managers" stating: "We are pushing as hard as we can for early word from the FDA." That statement was false. There was no basis at that time for the FDA to provide any "word" on approval of OraTest, since there was no application pending before it. Zila's most recent NDA for OraTest had been rejected for filing in October 1998 and no new NDA had been filed. Neither that release nor any other by Zila disclosed those facts.
10. On March 18, 1997, Zila announced that it had reached an agreement in principle to acquire Cygnus Imaging, Inc. According to the announcement, the transaction would involve the exchange of Zila stock for shares of Cygnus Imaging. This transaction was consummated on April 7, 1997.
11. On March 27, 1997, the Arizona Business Gazette published a newspaper article quoting Bill Sklar, a spokesman hired by Zila. Sklar was quoted as stating that "the company's lawyers feel the FDA has everything it needs to approve the project, but the agency is continuing its 'foot-dragging.'" That statement was false and misleading because, at the time the statement was made, no NDA for OraTest was pending before the FDA. Therefore, it was legally impossible for the FDA to take any action whatsoever with respect to OraTest at that time, and a claim that the agency had "everything it needs to approve the project" was utterly baseless. The statement, made on behalf of Zila, was false either because no lawyer gave such an opinion, or if such an opinion was given, the opinion was false and given in bad faith or with reckless disregard for the truth.
12. On April 4, 1997, Zila announced that its stock was approved for listing on the Nasdaq National Market. It was previously trading only on the Nasdaq small-cap market.
13. On April 7, 1997, Zila issued a release to "Brokers, Market Makers & Fund Managers" making the following false statement: "We are satisfied that our product [OraTest] is still on track for marketing approval and we are doing everything in our power to encourage the agency to hasten the conclusion of the review process." In fact, Zila had no NDA for OraTest pending before the FDA at that time, and its most recent NDA had been rejected for filing. Those facts were not disclosed in the release, nor in any other statement by Zila. The release contained no warning concerning forward-looking statements.
14. On April 10, 1997, Zila issued a press release quoting announcing the hiring of Ralph E. Green, DDS and MBA, to the new position of General Manager - OraTest. The release quoted Hines as stating: "In the expectation of near-term approval of OraTest, the first oral cancer detection system, Zila is moving aggressively to prepare for domestic marketing of this important product. Ralph Green is the ideal professional to assume management of OraTest at this critical juncture." That statement was false and misleading, because at the time of that statement no NDA was then pending before the FDA for the approval of OraTest and Zila's prior NDA had been summarily rejected for filing.
15. On April 25, 1997, Zila issued a press release quoting Dr. Green as stating: "With FDA marketing approval expected soon, Zila is moving rapidly to prepare an extensive U.S. marketing program." That statement was false and misleading, because at the time of that statement no NDA was then pending before the FDA for the approval of OraTest and Zila's prior NDA had been summarily rejected for filing.
16. On April 30, 1997, Zila entered into a Private Equity Line of Credit Agreement with Deere Park Capital Management. Pursuant to that agreement, Deere Park agreed to buy up to $25,000 in Zila stock, at prices to be determined by the market price of Zila stock. The number of shares issued to Deere Park pursuant to the agreement would be greater, for the same amount of capital, should Zila's stock price fall.
17. In a report to shareholders for the period ending April 30, 1997, Zila falsely stated: "During the third quarter of the current fiscal year [ending April 30, 1997], Zila's regulatory affairs counsel advised management that, in their opinion, the agency had all the data it needed to act on OraTest. Since then, the Company has been working with the FDA to determine and resolve any outstanding issues and obtain prompt agency action." That statement was false, because at no point during the quarter ending April 30, 1997 was there an NDA for OraTest pending before the FDA. Therefore, either no attorney gave the quoted opinion, or such an opinion was without any reasonable basis and was itself false. In that same report, Zila stated: "An FDA pre-approval inspection of Zila's primary U.S. contract manufacturer has been successfully completed." That statement was false, because, as the Company well knew, the FDA had informed Zila on February 18, 1997 that it found defects in the manufacturing process. The report contained no warnings concerning forward-looking statements.
18. To further emphasize to the market that approval of OraTest was imminent, Zila issued a press release on April 25, 1997 to announce that it had selected Lanmark Group Inc. "to provide advertising and marketing support for domestic sales of the company's oral cancer detection system, OraTest(TM)." The press release then added:

Ralph E. Green, DDS, MBA, who recently joined Zila as general manager-OraTest USA, said, "With FDA marketing approval expected soon, Zila is moving rapidly to prepare an extensive U.S. marketing program."

Shortly thereafter, Zila spokesperson Bill Sklar stated to the Arizona Business Gazette, which published it in an article on May 1, 1997, that "the hiring of the advertising firm and, recently, a general manger to oversee U.S. sales and manufacturing, should indicate that company officials are confident" of FDA approval. These statement was false and misleading, because at the time of the statements no NDA was then pending before the FDA for the approval of OraTest and Zila's prior NDA had been summarily rejected for filing.

1. On June 23, 1997, Zila issued a release to "Brokers, Market Makers and Fund Managers" falsely stating that "[d]uring the third quarter of the current fiscal year [ending April 30, 1997], Zila's regulatory affairs counsel advised management that in their opinion, the agency had all the data it needed to act on OraTest. Since then, the Company has been pressing the FDA to wrap up its review and approve OraTest for domestic marketing." These statements were false because no NDA was then pending before the FDA for OraTest, and therefore the FDA did not have the information that was required and the FDA could not be pressed for action on a nonexistent application. If any attorney gave the opinion quoted that opinion was false and without reasonable basis. The release contained no warning concerning forward-looking statements.
2. In a July 7, 1997 press release, Zila quoted defendant Hines as stating that "we believe the FDA will accelerate the completion of their review of OraTest." That statement was false and misleading because of the undisclosed fact that no NDA for OraTest was then pending before the FDA.
3. In October 1997, the Company began issuing shares of convertible preferred stock, in order to raise $30 million for the acquisition of Oxycal Laboratories. According to a proxy statements filed by Zila on February 20, 1998 and March 18, 1998, the preferred stock was convertible into a maximum number of common shares representing 14.9% of outstanding common shares, assuming a market price of common stock of $7.125 per share. The rate of conversion, and therefore the total number of common shares that could be obtained by the preferred shareholders, would increase if the market price of Zila stock declined. After ratification of the preferred issue by Zila stockholders, the number of Zila shares issued to Preferred Stockholders could exceed 20% of Zila's outstanding shares, if the price of Zila stock were to fall.
4. If the price of Zila stock fell, existing shareholders, including defendant Hines, would suffer additional dilution of the value of their shares. Defendant Hines, in particular, could have been adversely affected by dilution of the common stock, as he was the largest individual shareholder in Zila, with 3.9 percent of outstanding common stock as of September 30, 1997.
5. On November 12, 1997, Zila issued a press release stating that management had "renewed optimism for near-term marketing approval. We have a high degree of confidence that we are in the home stretch of this process." That statement was false, or, at best, misleading, in light of the undisclosed fact that Zila's prior NDA for OraTest had been rejected for filing and no NDA for OraTest was then pending before the FDA.
6. On January 8, 1998, Zila issued a press release quoting Hines as stating that "FDA as well as many more foreign government marketing approvals [are] pending." Similarly, Zila repeated its assurances that "FDA approval [of OraTest] is pending" in subsequent press releases dated March 20, 1998, April 13, 1998 and April 24, 1998, respectively. These statements were false and misleading because, at the time of the statements, no NDA was then pending before the FDA for the approval of OraTest and Zila's prior NDA had been summarily rejected for filing.
7. On June 12, 1998, Zila finally submitted a new NDA for OraTest to the FDA. That submission was also rejected for filing. One of the principal reasons for the rejection was Zila's failure to inclose pathology reports, although the FDA had specifically requested the inclusion of such reports in the NDA.
8. On June 15, 1998, the Company filed its report on Form 10-Q for the quarterly period ended April 30, 1998, which stated, in no uncertain terms, that the Company expected the FDA to approve OraTest®'s pending NDA. Specifically, the April 1998 10-Q, in pertinent part, stated:

The Company has a New Drug Application pending with the Food and Drug Administration ("FDA") for OraTest. The initiation of the marketing of ORATEST in the United States is dependent upon the approval of the New Drug Application by the FDA. The FDA approved the company's application for an Investigational New Drug for ORATEST, which allows the company to manufacture the product in the United States for clinical studies and export to certain foreign countries. The Company believes that the FDA will approve the New Drug Application and the production and marketing of ORATEST.

(Emphasis added.) The April 1998 10-Q was signed by defendant Hines.

1. The quoted statements contained in the April 1998 10-Q (filed with the SEC on June 15, 1998) were false and misleading for several reasons including, but not limited to, the following:
   1. The Company's representation that it "believes" the FDA would approve the NDA failed to disclose that FDA approval was questionable in light of OraTest's regulatory history. Accordingly to Dr. Ken Kobayashi, the FDA examiner who testified before the FDA's Oncological Advisory Committee on January 13, 1999, Zila's first NDA was rejected for filing in October 1996. Afterwards, Zila and the FDA met several times and Zila proposed to submit an interim analysis of data generated under Study ZP 44389-01 in support of a revised NDA. According to Dr. Kobayashi, the FDA discouraged this, but nevertheless, on June 12, 1998, Zila filed a new NDA relying on the interim data generated under Study ZP 44389-01. In addition, according to Dr. Kobayashi, Zila failed to include in their June 1998 submission the pathology reports that the FDA had specifically requested be included in any new NDA. Therefore, there was no reasonable basis for Zila's purported opinion that the FDA would approve its June 1998 NDA.
   2. the June 15, 1998, statements were false and misleading because, as disclosed by Dr. Kobayashi, who had discouraged its filing, Study ZP 44389-01 was fatally flawed and generated insufficient data to support the NDA. According to Dr. Kobayashi, Study ZP 44389-01 had the following flaws:
      1. the study population was different from the population for which Zila proposed the drug be used;
      2. the study population had a higher inherent risk of cancer than the proposed user population, thus leading to greater probability of positive (rather than false positive) findings than would occur in the intended patient population;
      3. for the above reasons, the study did not support the labeled indication of the proposed drug;
      4. the study included patients with cancers unrelated to the drug's diagnostic purpose;
      5. the study was incomplete;
      6. study enrollment was unbalanced among the treatment centers, with one center enrolling twice the number of patients as any other center;
      7. nineteen patients were entered twice and 2 patients were entered three times;
      8. safety data was only available for 2 patients, who were terminated from the study for undisclosed safety reasons;
      9. the official pathology reports differed from the information in the study's electronic database, which formed the basis for the study's conclusions;
      10. it was critical that each lesion have a unique number assigned to it for the database, but that protocol was not followed; the database contained numbers only for suspicious lesions and one lesion was identified three different times;
      11. the data showed that 107 lesions should have been biopsied, but only 44 were in fact biopsied;
      12. the study centers differed in their rates of visual cancer detection and rates of biopsy;
      13. the protocol did not clearly define what constituted a positive visual examination;
      14. clinicians were permitted to reverse their previous order of a biopsy upon observation at a second patient visit, even though the study protocol did not permit such reversal;
      15. the apparent sensitivity of OraTest would vary from 33 percent to 72 percent depending upon the biopsy decision rule applied in the study, and it was unclear what decision rule was in fact used;
      16. the study results under one assumption for the biopsy decision rule showed that OraTest's specificity was 31 percent (or had false positives of 69 percent) and its sensitivity rate was 72 percent (or 28 percent false negatives), while unaided visual detection had a demonstrated 74 percent sensitivity and 99 percent specificity;
      17. although the protocol called for all lesions to be biopsied, only 49 percent were; and positively stained
      18. no photographs were submitted, although the FDA had previously requested them.
2. In sum, the study's underlying protocol was ill conceived, not reduced to writing, and failed to generate the necessary empirical data required to support a NDA. All this information was known to the defendants, but remained undisclosed throughout the Class Period.
3. The FDA's summary of the gross defects in study ZP 44389-01 are as follows:
   1. the study was halted when only 10% of the intended patients were accrued in the study group;
   2. data for a large number of the patients enrolled in the study was not incorporated;
   3. investigators observed positive outcomes in too few patients;
   4. the FDA had reservations about some of the positive outcomes observed;
   5. multiple important protocol violations were observed;
   6. there were multiple discrepancies between case report forms, pathology reports, and the electronic patient data base used in the study;
   7. study outcomes were inconsistent across testing centers;
   8. the FDA was not told how certain sites were selected for biopsy;
   9. many required biopsies were not performed;
   10. the test criteria for the unaided visual examination were not clearly defined and may have been applied differently across study centers;
   11. 15% of the patients in the study were disqualified, discontinued, or terminated; and
   12. the test's statistic specificity was low (numerous false positives), leading to unnecessary biopsies with important negative consequences.
4. On June 29, 1998, the Company issued a press release entitled "Zila's OraTest® Reported Effective in Oral Cancer Detection and International Dental Research Conference in France," which quoted defendant Green as stating: "We look forward to introducing [OraTest] in the U.S. and the other world markets soon." This statement was false and misleading in light of Zila's undisclosed, negative regulatory history with respect to OraTest and the known defects in the studies submitted to the FDA.
5. In July 1998, the FDA refused to file Zila's NDA for OraTest, citing, among other deficiencies, missing pathology reports that had been previously requested.
6. Nevertheless, Zila continued to represent that OraTest® was becoming the most widely accepted screening test for oral cancer, and given its superior efficacy, inevitably would be approved by the FDA for marketing and distribution in the United States. On July 20, 1998, for example, Zila issued a press release what stated, in pertinent:

According to Douglas Burkett, Ph.D., Zila's Director of R&D and Manufacturing, Zila Tolonium Chloride is the world's only pharmaceutical grade toluidine blue produced in compliance with stringent FDA Good Manufacturing Practices (GMP) regulations.

This statement was misleading because Zila failed to disclose, in this release or at any time, that the FDA had found Zila's manufacturing process defective in February 1998.

1. Individual Defendant Green, as quoted in the August 1998 edition of Worldwide Biotech, stated again that "[w]look forward to introducing [OraTest] in the U.S. and other world markets soon." This statement was false and misleading in light of the undisclosed information detailed above. Indeed, Zila's June 1998 OraTest NDA was rejected for filing at some point during July 1998.
2. Zila continued to prime both the American markets for the supposed introduction of OraTest® to maintain and inflate the price of the Company's common stock.
3. On August 3, 1998, Zila issued a release to "Brokers, Market Makers & Fund Managers," falsely stating that,"[a]a result of our current dialogue with the agency [the FDA], we believe success is finally in sight." That statement was false, or at best, misleading, because of the undisclosed fact that Zila's recent NDA for OraTest had been rejected for filing by the FDA. The release contained no warning concerning forward looking statements.

1. On August 28, 1998, Zila issued a press release entitled "Zila Opens London office to Manage Expanding International OraTest® Sales," which stated, in part: "U.S. FDA approval [of OraTest] is pending." (Emphasis added.) That statement was false because, based on Zila's submission of a new NDA for OraTest on September 3, 1998, its previous NDA had already been rejected for filing by the FDA and no NDA was pending at that time.
2. Zila finally submitted a new NDA which was accepted by the FDA for filing in September 3, 1998, but even then, the new FDA continued to rely on the results of ZP 44389-01, despite the fact that the FDA had already indicated that it was highly critical of its results. In addition to this flawed study, the new NDA also contained the previously omitted pathology reports (although without photos that the FDA had requested), as well as an additional study by a single researcher at the British Columbia Cancer Agency.
3. The additional study submitted in September 1998, according to Dr. Kobayashi, was wholly inadequate to support the application, for the following reasons known to the defendants at the time it was submitted, or recklessly ignored by them:
   1. The method used for staining in this study differed markedly from the proposed method;
   2. It was unclear how the investigators training and experience was relevant to the context of general community practice where OraTest would be used;
   3. The stain was applied only to lesions determined to be suspicious by the investigator;
   4. The study was conducted in Sri Lanka and Pakistan, and the FDA felt that the test population differed markedly in disease rates and severity from the U.S. population;
   5. No index or key was provided for the investigator's spreadsheets;
   6. The FDA found a large amount of missing data, including absent pathology reports for a large number of the lesions examined; and
   7. The author of the paper disagreed with the pathology reports and upgraded several lesions to malignancies even though the pathology reports indicated otherwise.
4. The FDA concluded that the British Columbia study provided little support for the proposed use of OraTest.
5. On September 9, 1998, Zila issued a press release entitled "Zila Reports OraTest® Progress" (The "September 9 Press Release") that, in pertinent part, stated:

Zila, Inc. (Nasdaq: ZILA) international provider of healthcare products for dental/medical professionals and consumers, announced progress on several fronts associated with the worldwide introduction of the OraTest® oral cancer detection system. The Company also reported that Barrington Research Associates reiterated a Strong Buy recommendation on Zila's common stock.

. . . .

In the United States," Dr. Green said, "the Food & Drug Administration (FDA) appears to be making significant progress toward completing their review of OraTest. Last week the Company provided the FDA with histopathology data on patients enrolled in a 12-site clinical study. This data provides even stronger evidence of OraTest's value than interim study data that was publicly reported earlier. We are working very closely with the FDA and our expectations for prompt action on the OraTest New Drug Application are quite high."

(Emphasis added.)

1. The statements contained in the September 9 Press Release were false and misleading because Zila failed to disclose, among other things, that (1) its two prior NDA's for OraTest had been rejected for filing, (2) that the data provided to the FDA in the prior week was in the form of a new NDA, (3) that the data submitted had already been criticized by the FDA, which had recommended against its filing, (4) that no NDA for OraTest was pending at the time of the submission, (5) that it was not the FDA, but rather Zila, which had previously failed to make progress with respect to the OraTest application, and (6) the data submitted were insufficient to support the application for the reasons stated above.
2. Relying on the Company's numerous misrepresentations about the likelihood of FDA approval of OraTest, Wall Street analyst Sutro & Co., Inc. ("Sutro") issued a September 25, 1998, research report, which stated:

We are initiating coverage of Zila with a buy rating for aggressive growth investors for the following reasons:

OraTest, Zila's proprietary oral cancer diagnostic test is already approved in Australia, Canada and much of the European Union, and is awaiting FDA marketing approval in the United States. When U.S. approval is granted, OraTest's marketing potential will be large.

OraTest

This is the company's patented proprietary test for detecting oral cancer. it is a pharmaceutical-grade tolonium chloride (toluidine blue)-based stain that delineates areas for the detection, biopsy or surgery of oral cancer. It also detects secondary lesions, alerting doctors to their presence before patients complain of symptoms. It improves the efficacy of oral examinations and we believe could re-engineer the oral cancer detection process. Approved for marketing in Australia, Canada and much of the European union, the test is going through FDA review for marketing approval in the United States. We expect approval this fiscal year.

(Emphasis added.) The Sutro report demonstrates the extent to which defendants were successful in convincing the market that FDA approval was imminent.

1. On October 29, 1998, Zila filed its 1998 Form 10-K, signed by defendants Hines and Rocco. In this document, Zila made the following statements:

The Company has made extensive preparation for the U.S. introduction of the OraTest® product. One of the nation's leading dental advertising and marketing firms has already prepared professional advertising and training materials, and consumer education tools. A national detailing force is already in place, and Zila Dental supply is well equipped to handle national OraTest® distribution through direct mail promotion, sophisticated telemarketing, outside sales force, and Internet selling.

In order to ensure an available and stable supply of Tolonium Chloride, the world's only pharmaceutical grade toluidine blue, the active ingredient in the OraTest® product, the Company established its own manufacturing facility. The FDA has visited the facility and will return prior to final approval of the OraTest® product. Several test batches of toluidine blue have already been manufactured at the Company's facility and all have met the specifications given by the FDA with regard to the finished active ingredient. In preparation for the U.S. marketing of the OraTest® product and increasing global sales, the Company is expanding its Phoenix manufacturing facility with the addition of a second product line.

In 1994, the FDA approved an Investigational New Drug application ("IND") for the Company's OraTest® product. This approval is the first step in securing an NDA which will enable the Company to market OraTest® in the United States and allow the Company to manufacture the product domestically for use in clinical studies and to market it in 21 countries overseas. In response to the FDA's requests for more information, the New Drug Application ("NDA") has been resubmitted with updated chemistry and manufacturing information and subsequently more detailed clinical data. The Company is still awaiting final approval from the FDA." (Emphasis added)

1. The statements contained in the 1998 10-K were false and misleading because the Company knew, but failed to disclose, that:
   1. the FDA had rejected for filing two of Zila's previously submitted NDAs for OraTest;
   2. the FDA reject the submission of June 12, 1998 because the Company failed to provide pathology reports and pictures of examined lesions, even though the FDA had explicitly directed the Company to provide these materials with the NDA and this request was made prior to the submission; instead, the Company misleadingly stated that the NDA was resubmitted following the FDA's request for more information;
   3. the Company knew, but failed to disclose, that the FDA had examined Zila's manufacturing facilities for the production of toluidine blue and found the manufacturing process defective in a letter to Zila on February 18, 1997;
   4. the Company knew, but failed to disclose, that the "resubmitted" data was produced by underlying clinical trials that the FDA had previously recommended not be filed; and
   5. the studies submitted were replete with the obvious flaws detailed above and failed to support OraTest®'s efficacy.
2. On November 9, 1998, Zila issued a press release entitled "FDA Accepts, Assigns Priority Review to Zila's OraTest® New Drug Application," which quoted Defendant Hines as stating:

The effort to obtain marketing approval for our life- saving diagnostic adjunct has taken much longer than any of us imagined. It is gratifying, however, that the end of the process is near. We have said in the past that the FDA advised that OraTest would be fast-tracked once all the necessary data was filed and accepted. That day has finally come.

(Emphasis added.) In this same press release, Individual Defendant Green stated:

In 1997, Zila began manufacturing a form of tolonium chloride (OraTest's active ingredient, also referred to as toluidine blue) that is significantly purer than the material originally submitted as a standard to the agency. At the FDA's request, Zila's in-house experts worked with several research laboratories to validate a new purity standard. While this effort was expensive and time consuming, it enabled Zila to file additional OraTest patent applications, further distinguishing OraTest as a unique and important diagnostic adjunct.

(Emphasis added.)

1. The November 9 Press Release was false and misleading for the same reasons detailed above.
2. On November 9, 1998 Zila also issued a special release to "Brokers, Market Makers & Fund Managers," in a question and answer format, concerning the OraTest FDA review process. That release stated:

Why has the process taken so long? . . . . In July 1998, the FDA asked for histopathology data, which took more time to collect and prepare for submission. By September 3, 1998, with the inclusion of the additional medical data, the Company's NDA had grown to 22 volumes.

That statement was false, or at best, misleading, because it did not disclose that Zila's NDAs for OraTest had been twice refused for filing, and that the histopathology data required in July 1998 had been requested before Zila filed its second NDA in June 1998.

1. In that same release, Zila made the following statement:

Is there any chance the FDA will not approve OraTest in March?

Zila's management and regulatory counsel believe that FDA approval will be granted. . . . We believe the Company now has an excellent working relationship with the FDA and we look forward to a speedy, successful conclusion to our quest for marketing approval.

These statements were false, or, at best, misleading, in light of the undisclosed history of the Zila's rejected NDAs as well as the known defects in Zila's clinical data submitted in support of its NDA. Moreover, the release contained no warning concerning forward looking statements.

1. On November 12, 1998, Zila issued a press release announcing that Sutro had issued an extensive research report on Zila that targeted the Company's 12 month price at $9.00. Sutro had issued this research report on September 25, 1999, but the Company drew attention to it in November as a device to inflate its common stock price and repeat the false and misleading information contained in that report concerning FDA approval of OraTest.
2. On December 3, 1998, Zila issued a press release entitled "Zila's OraTest Scheduled For FDA Committee Review" (The "December 3 Press Release"), in which Individual Defendant Green stated:

We are pleased that the FDA's OraTest review process is moving this rapidly, and we can expect the committee will recommend approval of our inexpensive and potentially life-saving technology.

(Emphasis added.) The December 3 Press Release was false and misleading for the reasons detailed above.

1. On December 10, 1998, Zila issued a press release entitled "Zila Reports Profitable First Quarter" (The December 10 Press Release). In the December 10 Press Release, the Company stated that its profitable first quarter results were achieved despite the fact that "the Company continued to invest heavily in the OraTest® oral cancer detection product." In the December 10 Press Release, Individual Defendant Green stated:

We expect the committee will recommend approval of our inexpensive and potentially life-saving technology. Preparation for domestic marketing is fully underway.

1. On December 11, 1998, Zila filed its Form 10-Q for the period ending on October 31, 1998(The "October 1998 10-Q"). The October 1998 10-Q, filed with the SEC and signed by defendant Hines, made the following statements relating to the OraTest® oral cancer detection system:

The Company has a New Drug Application pending with the [FDA] for ORATEST. The initiation of the marketing of ORATEST in the United States is dependent upon the approval of the New Drug Application ("NDA") by the FDA. During 1994, the FDA approved the Company's application for an Investigational New Drug for ORATEST, which allows the Company to manufacture the product in the United States for clinical studies and export to certain foreign countries. In November, 1998, the FDA notified the Company that the NDA is being given "priority review," which targets completion of agency review within six months from September 3, 1998, when the Company provided newly requested histopathology data. The Company believes that the FDA will approve the New Drug Application and the production and marketing of ORATEST.

(Emphasis added.)

1. Individual Defendant Green continued to falsely tout OraTest®'s efficacy and that the FDA would approve the pending NDA even though he knew that the supporting data was deficient. For example, on December 4, 1998, securities analysts at Barrington Research Associates issued a research report premised on their discussion with Green. The research report, reflecting Green's misrepresentation regarding the potential for FDA approval, in pertinent part, stated;

Visibility of OraTest FDA Approval Increasing

We met yesterday with Dr. Ralph Green, president of Zila Biomedical, and discussed the meaning of the concurrent announcement that the U.S. Food and Drug Administrations' Oncologic Drugs Advisory Committee will hold a hearing to review the New Drug Approval of OraTest on January 13, 1999. This is a very important development, which we believe increases the visibility of the FDA's final approval determination that we still expect to occur before the first week of March. We are currently unaware of any negative sentiment toward OraTest. In fact, third party support for the product continues to expand rapidly, and we expect the announcement of several highly credible and valuable endorsements upon approval. The panel's recommendation will be announced publicly on the afternoon of January 13 along with any other remarks concerning issues such as the need for professional training or continuing research to be conducted to monitor detection rate statistics.

(emphasis added.)

1. As before, these statements of optimism that the FDA would approve Zila's NDA for OraTest were false, or, at best, reckless and without reasonable basis. Defendants decision to conceal from the market Zila's repeated failures to satisfy FDA requirements, even for the acceptance of an application for filing, caused Barrington to tell investors that "[w]e are currently unaware of any negative sentiment toward OraTest." In truth, Zila had no reason to believe that the FDA would approve its NDA, and had every reason to be concerned that it would not.

REVELATION OF THE FRAUD

1. On January 13, 1999, members of Zila's management, including Individual Defendant Green, testified before the FDA's Oncologic Drugs Advisory Committee (the previously defined "Committee") to defend NDA 20-765 OraTest®'s (tolonium chloride) in Gaithersburg, Maryland.
2. Following the Company's presentation and the presentation of an FDA investigator Dr. Kobayashi, the FDA panel unanimously voted (13-0) to reject Zila's NDA.
3. Specifically, on January 13, 1999, the FDA announced, in a press release entitled "FDA panel rejects Zila oral cancer test," that the FDA panel had refused to approve OraTest® because "the Company had done a poor job of conducting its studies and analyzing its data and had failed to prove that the test worked." The FDA further stated that "there was no way to know if the test worked, since Zila did not even follow its own rules in conducting its study. For instance, patients were supposed to visit a physician for staining at least twice, but only 35 percent did."
4. In fact, Zila's procedures were so deficient and its data so distorted that one FDA panelist on the Committee, Dr. David Johnson of Vanderbilt University, stated, "I cannot think of any credible scientific organization that would accept this data."
5. In summary, Dr. Kobayashi's findings, presented to the FDA panel at the approval hearing, severely criticized Study ZP 44389-01 as well as the British Columbia study, and fully disclosed for the first time the faults detailed above.
6. In addition to Dr. Kobayashi's criticism, Defendant Green made several material admissions that were in sharp contrast to his and the Company's earlier Class Period representations that the FDA would approve the pending NDA.
7. Among other things, Defendant Green admitted to the Committee that:
   1. He would prefer "not to be (before the FDA) with 17 patients" when the study was designed to accrue to 160 lesions;
   2. "At this point in time, [Zila] did not have any other data. Today, the only thing that we have to present to you is a subset of our initial clinical data to present. We wish we had more. We wish we had some studies that - - as you know, doing oral studies in oral cancer is not a very easy thing to do, number one, nor very economic thing to do. We just brought to you the best information that we could at this time"; and
   3. "Obviously, there is not enough data, but I certainly wouldn't say there is no data." (Emphasis added.)
8. These revelations and admissions, following years of misrepresentations and hype, resulted in a sharp decline in Zila's common stock, causing damage to the Lead Plaintiffs and the members of the Class.

Post Class Period Misrepresentations

And The FDA's January 28, 1999, Warning Letter.

126. On January 14, 1999, following the FDA's unequivocal rejection of OraTest®'s pending NDA, the Company issued a further misleading and false statement that was designed as damage control. The press release, entitled "FDA Advisory Panel Recommends Refinement of Data on Zila's OraTest Oral Cancer Detection Systems," stated:

Zila, Inc. (Nasdaq: ZILA), international provider of healthcare products for dental/medical professionals and consumers, announced that the U.S. Food & Drug Administration's Oncologic Drugs Advisory Committee recommended that the Company clarify and refine its clinical data in support of the oral cancer detection system OraTest®. Zila President Joseph Hines said, "A great deal of valuable information came out of today's session. Following the hearing, Zila executives and key FDA personnel immediately began a cooperative effort to map a course of action to gain timely approval of OraTest.

Hines said management were heartened by strong encouragement offered by committee members and FDA staff, who acknowledged that existing clinical research shows that OraTest is detecting more oral cancer than the traditional head and neck exam (consisting of visualization and manual palpation).

Zila Biomedical President Ralph Green, DDS, noted, "Over the many years that Zila has been developing research data in support of U.S. and International marketing of OraTest, a 12-site international clinical study was launched in support of a screening claim for high-risk patients (essentially tobacco users, heavy drinkers and oral cancer survivors). Today, discussion focused on this on-going study. The fact that the multi-site study was designed to support a broader claim than the one we are currently seeking contributed to confusion over some of the data."

"We remain strongly optimistic about OraTest's future in the U.S. and around the world," said Hines. "Zila produced record revenues of over $60 million in the last fiscal year, and despite a $3 million investment in OraTest, we still generated a profit from operations. Our Company is diversified, fast-growing and well-positioned for continuing robust performance. OraTest is still very much on track to make a major contribution to our corporate growth. (Emphasis added.)

127. Zila's January 14, 1999 press release, was not well received by the FDA. According to Michael A. Misockey, regulatory review officer for the FDA's Division of Drug Marketing, Advertising and Communication, it violated 21 C.F.R. 312.7, that forbids the promotion of "unapproved drug." Specifically, the FDA warned Zila in a subsequent letter to defendant Hines that the press release was:

in violation of the Federal Food, Drug and Cosmetic Act (the "Act") and its implementing regulations because it promotes an unapproved drug product (OraTest) by making implied claims of safety and effectiveness that have not been demonstrated by substantial evidence.

The letter went on to add:

Some examples of pre-approval promotional claims include the following statements from the press release:

OraTest can increase the probability that high-risk patients will be identified earlier, targeted education and treatment initiated more effectively, and most importantly, the quality of lives and lives themselves saved.

If OraTest is approved, the benefit will hopefully be the reduction of devastating mortality and morbidity associated with this disease.

By promoting early detection, OraTest should help reduce the severe side effects of the treatment that accompanies later-stage detection. It will also reduce government expenditures for health care. Perhaps most importantly, widespread use of OraTest will raise public awareness of oral cancer, its causes and its effects. This will reduce incidence of the disease and improve treatment of those who contact it.

With OraTest and appropriate professional support and education, dentists will be more likely to perform thorough oral cancer exams on appropriate at-risk patients.

When discussing the "major needs in terms of dealing with the impact of oral cancer" (i.e. a detection system that produces fast, accurate results), the press release states that the "OraTest system meets these needs.

The headline "FDA Panel Recommends Refinement of Data on Zila's OraTest Oral Cancer Detection System" is misleading because it does not accurately describe the findings of the FDA's Oncologic Drugs Advisory Committee. In fact, the committee recommended that Zila conduct a study with a different design to support approval.

Zila should immediately cease all activities that make the same or similar claims of safety or effectiveness for OraTest. Zila should submit a written response to DDMAC, on or before February 11, 1999, describing its intent and plans to comply with the above. In its letter to DDMAC, Zila should include a list of all promotional materials and activities that were discontinued, and the discontinuation date.

128. Since the truth came out about Zila's poorly prepared FDA application, and its prior rejections, the Company's common stock has continued to languish well below the artificially inflated levels created as a direct and proximate cause of defendants' false and misleading statements.

FIRST CLAIM

(For Violations Of Section 10(b) Of The Exchange Act

And Rule 10b-5 Promulgated Thereunder)

129. Plaintiffs repeat and reallege the allegations set forth above as though fully set forth herein. This claim is asserted against all defendants.

130. During the Class Period the defendants, and each of them, carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (a) deceive the investing public, including Plaintiffs and other Class members, as alleged herein; (b) artificially inflate and maintain the market price of Zila common stock; and (c) cause Plaintiffs and other members of the Class to purchase Zila common stock at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, each of the defendants took the actions set forth herein.

131. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company's common stock in an effort to maintain artificially high market prices for Zila's common stock in violation of Section 10(b) of the Exchange Act and Rule 10b-5. All defendants are sued as primary participants in the wrongful and illegal conduct charged herein. The Individual Defendants also are sued as controlling persons of Zila, as alleged below.

132. In addition to the duties of full disclosure imposed on defendants as a result of their making of affirmative statements and reports, or participation in the making of affirmative statements and reports to the investing public, the Individual Defendants had a duty to promptly disseminate truthful information that would be material to investors in compliance with the integrated disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. § 210.01 et seq.) and S-K (17 C.F.R. § 229.10 et seq.) and other SEC regulations, including accurate and truthful information with respect to the Company's operations and performance so that the market prices of the Company's publicly traded securities would be based on truthful, complete and accurate information.

133. Zila and the Individual Defendants, individually and in concert, directly and indirectly, by the use of means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, finances, performance, operations, value and future prospects of Zila as specified herein. Zila and the Individual Defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information, and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of Zila's value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about Zila and its business, operations and future prospects, in the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of Zila common stock during the Class Period.

134. Each of the Individual Defendants' primary liability, and controlling person liability, arises from the following facts: (a) each of the Individual Defendants was a high-level executive and/or director of the Company during the Class Period and was a member of the Company's senior management; (b) each of the Individual Defendants, by virtue of his/her responsibilities and activities as a senior executive officer and/or director of the Company, participated in the preparation of the Company's financial statements and reporting of the Company's financial condition, operations and performance; (c) each of the Individual Defendants enjoyed significant personal contact and familiarity with each other and were advised by other members of the Company's management team, internal reports, and other data and information about the Company's financial condition and performance at all relevant times; and (d) each of the Individual Defendants were aware of the Company's dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading.

135. The defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing Zila's operating condition, finances, value and future business prospects from the investing public and supporting the artificially inflated price of its stock. As demonstrated by defendants' misstatements of the Company's business and finances throughout the Class Period, defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false or misleading.

136. As a result of the dissemination of the materially false and misleading information, and of the failure to disclose material facts, as set forth above, the market prices of Zila common stock was artificially inflated at all relevant times. In ignorance of the fact that the market price of Zila common stock was artificially inflated, and relying directly or indirectly upon the false and misleading statements made by defendants, or upon the integrity of the market in which the securities trade, and the truth of any representations made to appropriate agencies as to the investing public, at the times at which any statements were made, and/or on the absence of material adverse information that was known to or recklessly disregarded by defendants but not disclosed in public statements by defendants during the Class Period, Plaintiffs and the other members of the Class acquired Zila securities during the Class Period at artificially high prices and were damaged thereby.

137. At the time of said misrepresentations and omissions, Plaintiffs and other members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiffs and the other members of the Class and the marketplace known of the true financial condition, finances and business prospects of Zila, which were not disclosed by defendants, Plaintiffs and other members of the Class would not have purchased or otherwise acquired their Zila common stock during the Class Period, or, if they had acquired such common stock during the Class Period, they would not have done so at the artificially inflated prices which they paid.

138. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder.

139. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of the Company's common stock during the Class Period.

SECOND CLAIM

(For Violation Of Section 20(a) Of The Exchange Act

Against The Individual Defendants)

140. Plaintiffs repeat and reallege the allegations set forth above as if set forth fully herein. This claim is asserted against the Individual Defendants.

141. Each of the Individual Defendants acted as controlling persons of Zila within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, participation in and/or awareness of the Company's operations and/or intimate knowledge of the Company's financial condition, finances and its business practices, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which Plaintiffs contend are false and misleading. Each of the Individual Defendants was provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by Plaintiffs to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected.

142. In particular, each of the Individual Defendants had direct involvement in the day-to-day operations of the Company and, therefore, is presumed to have had and exercised the power to control or influence the particular transactions giving rise to the securities violations as alleged herein.

143. Pursuant to Section 20(a) of the Exchange Act, by virtue of their positions as controlling persons, the Individual Defendants are liable jointly and severally with and to the same extent as the Company for the Company's aforesaid violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and other members of the Class suffered damages in connection with their purchases of the Company's common stock during the Class Period.

WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

A. Determining that this action is a proper class action, designating Plaintiffs as Lead Plaintiffs and certifying Plaintiffs as class representatives under Rule 23 of the Federal Rules of Civil Procedure;

B. Awarding compensatory damages in favor of Plaintiffs and the other Class members and against all defendants, jointly and severally, for all damages sustained as a result of defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding Plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and

D. Such other and further relief as the Court may deem just and proper.

Plaintiffs hereby demand a trial by jury.

DATED: _____________, 1999