Exhibit 10.1

November 16, 2004

VIA HAND DELIVERY
Gary V. Klinefelter, Esq.

Dear Gary:

     We are pleased to extend this offer to you to become the Vice President and
General Counsel of Zila, Inc. (the “Company”) and the Zila family of companies.
If you accept the offer contained in this letter agreement (“Agreement”), you
will be reporting directly to me. Specifically, we offer you the following:

     1. Title. Your title will be Vice President and General Counsel.

     2. Start date. Your start date will be December 15, 2004 (“Start Date”).

     3. Responsibilities. Your responsibilities will be those consistent with
the position of Vice President and General Counsel and/or as may be assigned to
you by the Company.

     4. Base salary. Your initial base salary will be $200,000.00 per year, paid
in accordance with the Company’s regular payroll practices (currently
bi-weekly).

     5. Bonus. On your Start Date, you will receive a one-time “signing” bonus
of $25,000.00.

     6. Auto allowance. You will receive an auto allowance of $800 per month,
paid in accordance with the Company’s regular payroll practices.

     7. Incentive plans. Beginning in fiscal year 2005, you will be eligible to
participate at the corporate officer level in such incentive bonus plans as may
be maintained by the Company and as may apply to similarly-situated employees in
the Zila group of companies. Currently, this consists of (i) the Zila, Inc. FY05
Employee Incentive Bonus Award Plan and Employee Stock Option Award Plan, and
(ii) the Zila, Inc. FY05 Executive Incentive Bonus Award Plan. Your eligibility
will be governed in all respects by such incentive bonus plans as may then be in
effect.

     8. Stock options. The Company’s Board of Directors or its Compensation
Committee is scheduled on or before December 31, 2004 to consider providing you
with stock option grants, as specified below, to purchase the Company’s common
stock under the Zila, Inc. 1997 Stock Option Award Plan, as amended and restated
December 5, 2002 (the “Stock Option

 

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Gary V. Klinefelter, Esq.
November 16, 2004
Page 2

Plan”), or such amended or restated stock option plan as may then be in effect.
No grant of stock options is effective without the requisite approvals and
signed documentation, and any such grant shall be governed in all respects by
the Stock Option Plan or such amended or restated stock option plan as may then
be in effect. The specific grants to be considered are (i) 100,000 options to
purchase Zila, Inc. common stock as of close of the NASDAQ Stock Exchange on
December 16, 2004 (“Grant Date”) and vesting in equal amounts on the second and
third anniversaries of the Grant Date, respectively, and (ii) 50,000 options to
purchase Zila, Inc. common stock, grant effective on the first anniversary of
the Start Date and vesting in equal amounts on the second, third and fourth
anniversaries of the Start Date, respectively.

     9. Insurance. You will receive insurance benefits as provided to other
Company employees. Currently, these consist of medical and dental coverage for
you and your dependents, and life, short-term disability and accidental death
coverage for you.

     10. Paid time off. You will receive (i) paid time off (“PTO”) of 23 days
per year during years 1- 4 with no PTO during the first 90 days of employment,
and (ii) paid holidays in accordance with the Company’s regular policies.

     11. Other benefits. You will receive other benefits as provided to other
Company employees. Currently, these consist of participation in a 401(k) plan,
an employee stock purchase plan, a flexible spending program/Section 125 and
employee recognition programs, and access to a credit union.

     12. Compensation and terms of employment subject to change. The
compensation package set forth above, including the description of benefits, is
intended to reflect your initial compensation. All terms and conditions of
employment, including all compensation terms, are subject to change at the
Company’s discretion.

     13. At-Will Employment. Your employment with the Company is at will,
meaning that it lawfully can be terminated at any time by either you or the
Company, with or without cause or notice. Nothing contained in paragraph 2 above
or elsewhere in this Agreement changes the at-will nature of your employment.

     14. Severance pay. If your employment with the Company terminates, you
shall be eligible to receive severance pay in accordance with the following:

          14.1 Change in control. If your employment is terminated because of a
change in control of the Company and you provide the Company with a written
release (in a form acceptable to the Company) from all legal liability arising
out of any events that occurred prior to execution of such release, you shall
receive severance pay equivalent to twelve (12) months of your then-current base
salary. For purposes of this agreement, “change in control”

 

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Gary V. Klinefelter, Esq.
November 16, 2004
Page 3

shall be defined and governed by the definition of “change in control” contained
in the Stock Option Plan or such amended or restated stock option plan as may
then be in effect.

          14.2 Other termination. If your employment is terminated for any
reason that is unrelated to (i) a change in control, (ii) your conduct or job
performance and (iii) your inability to perform your job (e.g., due to
incapacity or death), and you provide the Company with a written release (in a
form acceptable to the Company) from all legal liability arising out of any
events that occurred prior to execution of such release, you shall receive
severance pay equivalent to six (6) months of your then-current base salary.

          14.3 No other rights to severance pay. You shall not be entitled to
receive severance pay if you voluntarily resign from your employment or your
employment terminates for a reason related to your conduct or job performance or
your employment terminates for any other reason not specifically recited above
as qualifying you for severance benefits.

          14.4 Timing of severance pay. Any severance pay due you under this
Agreement shall be made over the applicable time period (e.g., six months of pay
over six months) in accordance with the Company’s regular payroll dates during
that time period.

          14.5 Cessation of severance payments. Your right to receive severance
pay shall immediately terminate if (i) you solicit an employee or employees of
the Company or any of its affiliated companies to leave and join any other
enterprise, or (ii) you breach any contractual obligation you owe the Company or
violate any other promise or commitment you have made to the Company or duty you
owe the Company.

          14.6 Determinations regarding qualification. Determinations regarding
whether you qualify for severance benefits under this Agreement including,
without limitation, determinations regarding whether you have been terminated
for reasons related to your conduct or job performance, will be made by the
Company in its reasonable discretion.

     15. Cooperation in Dispute Resolution. During your employment and
thereafter (including following termination of your employment for any reason),
you will make yourself reasonably available to consult with the Company or any
of its affiliated companies with regard to any potential or actual dispute the
Company or any of its affiliated companies may have with any third party, and to
testify about any such matter should such testimony be required, so long as
doing so does not materially interfere with your then-current professional
activities.

     16. Applicable Law. You hereby consent to application of Arizona law to
this Agreement without regard to choice-of-law or conflict-of-law rules.
However, we have specifically agreed that Arizona Revised Statute § 23-355
(which provides for the possibility of treble damages for unpaid wages following
termination of employment) shall not apply to this Agreement or any payments
potentially due under this Agreement.

 

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Gary V. Klinefelter, Esq.
November 16, 2004
Page 4

     17. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions of this Agreement shall remain in
full force and effect to the fullest extent permitted by law.

     18. Other agreements. As a condition of your employment with the Company,
you must also execute the enclosed Employee Confidentiality and Intellectual
Property Agreement. Like all Company employees, you may in the future be
required, in the Company’s reasonable discretion, to execute agreements relating
to other Company policies or substantive matters. Refusal to sign any such
agreement shall constitute a reason related to your conduct or job performance
under Paragraph 14.

     As with all of the Company’s offers to prospective executive-level
employees, this offer is contingent upon satisfactory completion of those
portions of the Company’s standard due diligence (including background and
reference checks and an executive assessment report) as may be applicable to
your prospective employment.

     We believe you will be a valuable addition to the Company and we hope you
will accept this offer. If you wish to do so, please sign where indicated below
and return this Agreement. Please let us know if you have any questions.

     

  Sincerely,
 
   

  Zila, Inc.
 
   

  /s/ Douglas D. Burkett, Ph.D.

  Douglas D. Burkett, Ph.D.

  Chairman, President and Chief Executive Officer

Statement of Acceptance:

     I have read the foregoing and agree to accept employment with Zila, Inc. on
the terms stated in this Agreement.

             
Dated:
       November 22, 2004   /s/ Gary V. Klinefelter    

           

      Gary V. Klinefelter