According to the docket, on March 1, 2001, the Court entered the Order by U.S. District Judge Owen M. Panner preliminarily approving the settlement. On June 6, 2001, the Court entered the Order granting the Plaintiff’s motion for final approval of the settlement. Further, the Court granted the motion awarding plaintiffs’ attorneys $523,359.59 in expenses and $1,725,000 in attorney's fees. The 4 Class Representatives were awarded compensatory awards in amount of $10,000 each, paid from the Settlement Fund. The Court entered the Final Judgment of Dismissal with Prejudice and dismissed the consolidated action with prejudice.

As reported by the Company’s Form 10-Q for the quarterly period ended January 31, 2001, the Company and certain officers of the Company have been named as defendants in a consolidated First Amended Class Action Complaint filed July 6, 1999 in the United States District Court for the District of Arizona under the caption In re Zila Securities Litigation, No. CIV 99 0115 PHX EHC. The First Amended Class Action Complaint seeks damages in an unspecified amount on behalf of a class consisting of purchasers of the Company's securities from November 14, 1996 through January 13, 1999 for alleged violations of the federal securities laws. Specifically, the plaintiffs allege that in certain public statements and filings with the Securities and Exchange Commission the defendants made false or misleading statements and concealed material adverse information related to OraTest(R) that artificially inflated the price of the Company's common stock in violation of the federal securities laws. In February 2001, the parties entered into a settlement agreement. The settlement agreement is subject to court approval. If approved, Zila's insurers will pay the entire $5.75 million settlement amount and the litigation will be dismissed.

In an earlier Form 10-K filed for the fiscal year ended July 31, 2000, in September 2000, the Court denied the defendants' motion to dismiss the First Amended Class Action Complaint and ordered that the matter proceed to trial on the issue of liability commencing on February 26, 2001.

The original complaint charges Zila and certain of its senior officers and directors with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Specifically, the Complaint alleges that defendants misrepresented the status of the clinical trials and the Company's application to the FDA for approval of its OraTest(R) oral cancer detection device. During the Class Period, Zila represented that it had submitted strong and compelling evidence of the product's efficacy to the FDA and that it expected approval. On January 13, 1999, an FDA advisory panel unanimously voted against approval. One panel member said, "I cannot think of a single credible scientific organization that would accept the research offered by the company." Zila's stock plummeted 44% upon disclosure of the recommendation of non-approval.