##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, DC 20549
  Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended July
    31, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to          .   Commission file number 0-17521
  Zila, Inc.
 (Exact Name of Registrant as
    Specified in its Charter)
  Delaware(State or Other Jurisdiction
    of
    Incorporation or Organization)

86-0619668(I.R.S. Employer
    Identification No.)5227 North 7th Street,
    Phoenix, Arizona(Address of Principal
    Executive Offices)

85014-2800(Zip
    Code)   Registrants telephone number, including area code
 (602) 266-6700
 Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $.001 par value

The NASDAQ Stock Market, LLC
    (NASDAQ Global Market)   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  12b-2
 Large
    Accelerated
    Filer o
    Accelerated
    Filer þ
    Non-Accelerated
    Filer o
    Smaller
    Reporting
    Company o   Rule 12b-2 o þ
  Rule 12b-2
  DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 





TABLE OF
    CONTENTS
   
 PAGEPART IItem 1.


Business


3Item 1A.


Risk Factors


13Item 1B.


Unresolved Staff Comments


19Item 2.


Properties


19Item 3.


Legal Proceedings


19Item 4.


Submission of Matters to a Vote of Security
    Holders


20PART IIItem 5.


Market for the Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


20Item 6.


Selected Financial Data


25Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


25Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


44Item 8.


Financial Statements and Supplementary Data


44Item 9.


Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure


44Item 9A.


Controls and Procedures


44Item 9B.


Other Information


45PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


46Item 11.


Executive Compensation


46Item 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


46Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


46Item 14.


Principal Accounting Fees and Services


46PART IVItem 15.


Exhibits, Financial Statement Schedules


46Signatures


51EX-21EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2   2




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##### Table of Contents



PART I  Item 1.
    Business  Introduction
    ® ® ® ® ® ®
  Recent
    Developments
  Senior
    Debt Restructured and Fourth Quarter Defined EBITDA Covenant
    Satisfied
               3




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##### Table of Contents



International
    Expansion
  ® ® ® ® ® ® ®
  Insurance
    Reimbursement
  ® ® ®
  Reverse
    Stock Split
   4




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##### Table of Contents



Our
    Products
    ViziLite®

    Plus
  ® ® ® ® ® ® ®
  ® follow-up. ® ® ® follow-up.
  ® ® ® ® ® ® tm ®
  Rotadent
    One
    Step®

    With MicroAccess Flossing
    Actiontm
  ® tm ® ® ®
  ® ® ®
 5




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##### Table of Contents



® ® ®
  Pro-Select
    Platinum®

    Piezo-Ultrasonic Scaler System
  ® ® tm ®
  Dental
    Fluoride Products
  and/or
  Other
    Oral Pharmaceutical Products
    Oral
    Cancer Diagnostic Product
  ® ® ® ® follow-up ® ® ® ®
 6




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##### Table of Contents



Sales
    and Marketing
    ® ®
  
    the expansion of our national sales force based on achievement
    of success metrics in existing focus markets;
    continuing education programs that emphasize the importance of
    oral cancer screening;
    a comprehensive program targeting insurers designed to secure a
    meaningful level of insurance reimbursement for use of the
    ViziLite®

    Plus device built upon the established American Dental
    Association procedural code; and
    effective communication of information about current clinical
    efficacy trials that can provide thought-leader support,
    involvement and commitment to
    ViziLite®

    Plus.        ® ® ® ® ® ® ®
 7




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##### Table of Contents



Manufacturing
    and Supply
  ®
  ® ® ®
  ® ®
  Competition
    ViziLite®

    Plus
  ® ® ® ®
  Rotadent®
  ®
 8




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##### Table of Contents



Pro-Select
    Platinum®
  ® ®
  Dental
    Fluorides and Other Oral Pharmaceutical Products
    Distribution
    Agreements
  ViziLite®

    Plus
  ® ® ® ®
  Rotadent®
  ®
  Governmental
    Regulation
  General
     9




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##### Table of Contents



® ® ® ® and/or ® ®
    ViziLite®

    Plus
  ® ® ® ® ® ® ® ® ®
  ® ®
  ® ®
 10




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##### Table of Contents



Patents
    and Trademarks
  ViziLite®

    Plus
  ®
  ® ® tm ® ®
  ®
  ®
    ® ® ® ®
  Rotadent®

    Professional Powered Brush
  ® Pro-Dentec ® ®
  ®
  Pro-Select
    Platinum®

    Dental Scaler and Other Dental Products
  ®
  ®
  Oral
    Cancer Diagnostic Products
  ®
 11




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##### Table of Contents



and/or ®
    ® ®
  Employees
    Available
    Information
  1-800-SEC-0330.
  Form 10-K, Form 10-Q, Form 8-K
  Forward-looking
    Statements
  Form 10-K
 12




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##### Table of Contents



Item 1A.
    Risk
    Factors    Trends,
    Risks and Uncertainties Related to Our Business
  Our
    lack of earnings history could adversely affect our financial
    health and prevent us from fulfilling our payment obligations,
    and if we are unable to generate funds or obtain funds on
    acceptable terms, we may not be able to develop and market our
    present and potential products.
  ®
        
    making it more difficult for us to satisfy our obligations with
    respect to our senior secured debt;
    increasing our vulnerability to general adverse economic and
    industry conditions; 13




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
    limiting our flexibility in planning for, or reacting to,
    changes in our business and our industry;
    restricting us from making strategic acquisitions, introducing
    new products or exploiting business opportunities;
    requiring us to dedicate a substantial portion of our cash flow
    from operations to payments of our indebtedness, which will
    reduce the amount of our cash flow available for other purposes,
    including capital expenditures and other general corporate
    purposes;
    requiring us to sell equity or debt securities or to sell some
    of our core assets, possibly on unfavorable terms;
    limiting our ability to obtain additional financing; and
    placing us at a possible competitive disadvantage compared to
    our competitors, who may have greater financial resources.  We may
    not be able to maintain compliance with our debt covenants in
    the future or repay our Second Amended and Restated Secured
    Notes at maturity.
        The
    restrictive covenants contained in our senior debt could
    adversely affect our business by limiting our
    flexibility.
   14




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##### Table of Contents



Historically
    we have been dependent on a few key products and our future
    growth is dependent on the growth of
    ViziLite®

    Plus and on the development and/or acquisition of new
    products.
  ® ® ® ® ® ®
  ®
  ® and/or
    
    difficulties in the production process, controlling the costs to
    produce, market and distribute the product on a commercial
    scale, and our ability to do so with favorable gross margins and
    otherwise on a profitable basis;
    the inherent difficulty of gaining market acceptance for a new
    product;
    competition from larger, more established companies with greater
    resources;
    changes in raw material supplies that could result in production
    delays and higher raw material costs;
    difficulties in promoting consumer awareness for the new product;
    adverse publicity regarding the industries in which we market
    our products; and
    the cost, timing and ultimate results of regulatory program
    studies that we undertake.  Our
    proprietary rights may prove difficult to enforce.
  and/or and/or
 15




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We are
    dependent on our senior management and other key
    personnel.
    We and
    our products are subject to regulatory oversight that could
    substantially interfere with our ability to do
    business.
    We are
    at risk with respect to product liability claims.
    We
    face significant competition that could adversely affect our
    results of operation and financial condition.
    If the
    use of our technology is determined to infringe on the
    intellectual property rights of others, our business could be
    harmed.
     16




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##### Table of Contents



We
    require certain raw materials for our manufacturing processes
    that may only be acquired through limited sources.
    We
    have, in the past, received minor deficiencies from regulatory
    agencies related to our manufacturing facilities.
    Trends,
    Risks and Uncertainties Related to Our Capital
    Stock
  The
    Private Placements and other financing arrangements or corporate
    events could significantly dilute existing
    ownership.
     17




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##### Table of Contents



In the
    past, we have experienced volatility in the market price of our
    common stock and we may experience such volatility in the
    future.
      We may
    take actions which could dilute current equity ownership or
    prevent or delay a change in our control.
    Failure
    to maintain NASDAQ Marketplace Rules could materially and
    adversely affect our business.
   18




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##### Table of Contents



Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties  Corporate
    Headquarters
  85014-2800.
  Manufacturing
    Facilities
  ® ®
  ® ®
      Item 3.
    Legal
    Proceedings     19




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##### Table of Contents



Item 4.
    Submission
    of Matters to a Vote of Security Holders    For

Against

Abstain

Non Votes50,969,617

3,571,761

269,770

14,983,939    PART II  Item 5.
    Market
    for the Registrants Common Equity, Related Stockholder
    Matters and Issuer Purchases of Equity Securities    High


LowFiscal Year Ended July 31, 2008First quarter

$
10.85


$
6.16Second quarter


8.40



5.46Third quarter


7.49



1.12Fourth quarter


3.29



1.47Fiscal Year Ended July 31, 2007First quarter

$
22.89


$
14.14Second quarter


20.30



13.02Third quarter


16.80



13.65Fourth quarter


14.21



7.00      20




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##### Table of Contents



Preferred
    Stock
    Private
    Placements
                     21




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##### Table of Contents



Warrants
    
    On July 27, 2006, we issued an aggregate of
    1,605 shares of common stock to Dr. Lawrence
    Michaelis, who is a member of our Medical Advisory Board,
    pursuant to the cashless exercise of a warrant, dated
    March 23, 2003. The warrant was exercisable for a total of
    2,286 shares of common stock and had an exercise price of
    $6.86 per share. Pursuant to the cashless exercise provisions of
    the warrant, the number of shares issuable for the warrant was
    reduced by 681 shares. The issuance of the shares pursuant
    to this warrant was exempt from 22




---



##### Table of Contents



registration under the Securities Act of 1933 in reliance on
    Section 4(2) promulgated thereunder as a transaction not
    involving any public offering.  
    On March 24, 2006, in connection with the credit facility
    with Black Diamond Commercial Finance, we issued a warrant to
    purchase 171,429 shares of our common stock at $26.53 per
    share. In connection with the First Amendment and the Fifth
    Amendment to the Credit Agreement (described and defined in the
    notes to the Consolidated Financial Statements included
    elsewhere herein), the exercise price of such warrant was
    reduced to $21.98 per share and $15.54 per share, respectively.
    The warrant has a term of five years and expires March 24,
    2011. The warrant is exercisable at any time during its
    five-year contract term.
    On March 14, 2003, we issued warrants to purchase
    14,857 shares of our common stock to members of our Medical
    Advisory Board. The exercise price is $6.86 per share and the
    warrants had a term of five years. As of July 31, 2008,
    these warrants had expired. The warrants were issued pursuant to
    the exemption set forth in Section 4(2) of the Securities
    Act.  Issuer
    Purchase of Equity Securities
    Unregistered
    Sales of Equity Securities
   23




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##### Table of Contents



Comparative
    Stock Performance
    COMPARISON
    OF 5 YEAR CUMULATIVE TOTAL RETURN* Among
    ZILA, Inc., The NASDAQ Composite Index
    And The RDG MicroCap Pharmaceutical Index
  
  *
    
    $100 invested on
    7/31/03 in
    stock & index-including reinvestment of dividends.  As of July 31,2003

2004

2005

2006

2007

2008Zila, Inc

$
100.00


$
131.09


$
119.32


$
107.55


$
42.50


$
8.83Nasdaq Composite


100.00



110.63



128.07



125.91



153.98



139.25RDG MicroCap Pharmaceutical


100.00



87.20



78.79



62.45



50.01



29.68  24




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##### Table of Contents



Item 6.
    Selected
    Financial Data  Form 10-K.
  For the Years Ended July 31,2008


2007


2006


2005


2004Net revenues

$
45,061


$
28,801


$
2,822


$
1,199


$
162Loss from continuing operations


(16,124
)


(19,105
)


(26,046
)


(17,678
)


(14,350
)Basic and diluted net income (loss) per common share from
    continuing operations

$
(1.80
)

$
(2.37
)

$
(3.99
)

$
(2.72
)

$
(2.22
)   As of July 31,2008


2007


2006


2005


2004Current assets

$
14,675


$
24,854


$
22,970


$
32,639


$
30,123Total assets


50,370



63,881



56,364



65,418



62,108Current liabilities


8,117



10,568



29,824



9,815



7,581Long-term debt and capital lease obligations(1)


8,974



7,259



3,060



3,328



3,650Total liabilities


17,090



17,902



33,113



13,696



11,880Series B convertible preferred stock


463



463



463



463



463Total shareholders equity


33,280



45,979



23,251



51,722



50,228     (1)
    
    Long-term debt and capital lease obligations are presented net
    of a discount of $3.6 million and $5.3 million as of
    July 31, 2008 and 2007, respectively.  ® ®
  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Overview
    Business
  ® ® ® ® ® ®
 25




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##### Table of Contents



Strategic
    Transition
    Senior
    Debt Restructured and Fourth Quarter Defined EBITDA Covenant
    Satisfied
                     26




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Results
    of Operations
  Fiscal
    Year Ended July 31, 2008 Compared to Fiscal Year Ended
    July 31, 2007
    ®
    ® ® ®
  ® ®
  ® ®
  ®
 27




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##### Table of Contents



For the Years Ended July 31,% of





%of


%2008


Revenue


2007


Revenue


ChangeNet revenues

$
45,061



100.0
%

$
28,801



100.0
%


56.5
%Cost of products sold


17,363



38.5



11,857



41.2



46.4Gross profit


27,698



61.5



16,944



58.8



63.5Operating costs and expenses:Marketing and selling


21,082



46.8



14,412



50.0



46.3General and administrative


13,281



29.5



15,141



52.6



(12.3
)Research and development


2,424



5.4



7,482



26.0



(67.6
)Depreciation and amortization


4,017



8.9



2,921



10.1



37.5Loss from operations


(13,106
)


(29.1
)


(23,012
)


(79.9
)


(43.0
)Other income (expense)  net


(3,027
)


(6.7
)


(5,761
)


(20.0
)


(47.5
)Loss from continuing operations before income taxes


(16,133
)


(35.8
)


(28,773
)


(99.9
)


(43.9
)Income tax benefit (expense)


9







9,668



33.6



(99.9
)Loss from continuing operations

$
(16,124
)


(35.8
)%

$
(19,105
)


(66.3
)%


(15.6
)   Net
    Revenues
  ® ® ®
  Gross
    Profit
  ® ® ® ® ®
 28




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##### Table of Contents



Marketing
    and Selling Expense
  ® ®
  General
    and Administrative Expense
    Research
    and Development Expense
    Depreciation
    and Amortization Expense
   29




---



##### Table of Contents



Other
    Expense
    2008


2007Senior secured convertible notes

$
946


$
490BDCF secured term loan






520Amortization of financing costs


477



2,643Amortization of debt discounts


1,785



3,625Capital leases


15



3Other


12



105Total interest expense

$
3,235


$
7,386     No. EITF 00-19-2, Accounting for Registration Payment
    Arrangements
  Income
    Taxes
  ®
  Fiscal
    Year Ended July 31, 2007 Compared to Fiscal Year Ended
    July 31, 2006
        ®
   30




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##### Table of Contents



For the Years Ended July 31,% of





% of


%2007


Revenue


2006


Revenue


ChangeNet revenues

$
28,801



100.0
%

$
2,822



100.0
%


920.6
%Cost of products sold


11,857



41.2



1,925



68.2



515.9Gross profit


16,944



58.8



897



31.8



1,789.0Operating costs and expenses:Marketing and selling


14,412



50.0



5,595



198.3



157.6General and administrative


15,141



52.6



10,467



371.0



44.7Research and development


7,482



26.0



7,158



253.6



4.5Depreciation and amortization


2,921



10.1



1,415



50.1



106.4Loss from operations


(23,012
)


(79.9
)


(23,738
)


(841.2
)


(3.1
)Other income (expense)  net


(5,761
)


(20.0
)


(2,305
)


(81.7
)


149.9Loss from continuing operations before income taxes


(28,773
)


(99.9
)


(26,043
)


(922.9
)


10.5Income tax benefit (expense)


9,668



33.6



(3
)


(0.1
)


(322,366.7
)Loss from continuing operations

$
(19,105
)


(66.3
)%

$
(26,046
)


(923.0
)%


(26.6
)   Net
    Revenues
  ® ® ®
  Gross
    Profit
  ®
  Marketing
    and Selling Expense
  ® ®
  General
    and Administrative Expense
   31




---



##### Table of Contents



®
  Research
    and Development Expense
    Depreciation
    and Amortization Expense
    Other
    Expense
    2007


2006Senior secured convertible notes

$
490


$
BDCF secured term loan


520



1,034Amortization of financing costs


2,643



467Amortization of debt discounts


3,625



393Capital leases


3



4Other


105



22Total interest expense

$
7,386


$
1,920     Income
    Taxes
  ®
  Inflation
    and Seasonality
   32




---



##### Table of Contents



Liquidity
    and Capital Resources
  Overview
  ®
  ® ®
  ®
             33




---



##### Table of Contents



Selected
    Cash Flow and Working Capital Information
    For the Years Ended July 31,2008


2007


2006Net cash used in operating activities

$
(7,632
)

$
(14,967
)

$
(20,809
)Net cash provided by (used in) investing activities


(1,055
)


12,395



(5,290
)Net cash provided by financing activities


(1,710
)


13,473



17,119   As of July 31,2008


2007Cash and cash equivalents

$
4,462


$
14,859Working capital


6,558



14,286Current ratio


1.8



2.4     Cash
    Flows from Operating Activities
  ®
 34




---



##### Table of Contents



®
    Cash
    Flows from Investing Activities
  ®
    Cash
    Flows from Financing Activities
     35




---



##### Table of Contents



Private
    Placements
                           36




---



##### Table of Contents



37




---



##### Table of Contents



Credit
    Facility
    Industrial
    Development Revenue Bonds
    PharmaBio
    Investment
    Convertible
    Preferred Stock
    EBITDA
    and Defined EBITDA
   38




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##### Table of Contents



Year Ended July 31,


Quarter Ended2008


2007


2006


July 31, 2008Net loss

$
(16,378
)

$
(13,164
)

$
(29,346
)

$
(2,342
)Interest expense


3,235



7,638



2,152



881Interest income


(231
)


(579
)


(344
)


(7
)Income taxes


(9
)


65



4



13Depreciation and amortization


4,479



3,420



3,036



1,325EBITDA


(8,904
)


(2,620
)


(24,498
)


(130
)Non-cash derivative (income) expense


24



(1,059
)


137



Loss (gain) from disposition of discontinued operations






(16,185
)


629



Non-cash stock-based compensation expense


2,055



1,774



631



674Other non-cash items  net


360



203



(167
)


320Debt related expenses


87











87Defined EBITDA


(6,378
)


(17,887
)


(23,268
)


951Debt related expenses


(87
)










(87
)Interest income


231



579



344



7Interest expense


(3,235
)


(7,638
)


(2,152
)


(881
)Income tax expense


9



(65
)


(4
)


(13
)Amortization of financing costs


477



2,513



488



183Amortization of debt discounts


1,785



3,625



393



449Non-cash interest


731



202



284



245Changes in operating assets and liabilities:Trade receivables


(979
)


902



7,499



231Inventories


968



(62
)


(3,921
)


1,007Prepaid expenses and other assets


61



496



(298
)


338Accounts payable and accrued liabilities


(1,215
)


2,368



(174
)


(1,300
)Net cash provided by (used in) operating activities

$
(7,632
)

$
(14,967
)

$
(20,809
)

$
1,130   Off-Balance
    Sheet Financing Arrangements
   39




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##### Table of Contents



Contractual
    Obligations
    Beyond2009


2010


2011


2012


2013


5 Years


TotalLong-term debt (1)

$
840


$
12,840


$



$



$



$
500


$
14,180Capital lease obligations


78



35



















113Operating leases


437



177



72















686Purchase obligations


342























342Total

$
1,697


$
13,052


$
72


$



$



$
500


$
15,321     (1)
    
    Includes interest on our Secured Notes of $0.8 million for
    fiscal 2009 and 2010, which reflects a 7.0% rate for our Second
    Amended and Restated Secured Notes. However, as discussed above,
    at our option, interest payments can be made at an 8.0% annual
    rate in shares of our common stock at a price equal to 90.0% of
    the average closing bid price of such common stock for the ten
    trading days immediately prior to the relevant interest payment
    date.      Critical
    Accounting Policies and Estimates
    Revenue Recognition 
   40




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##### Table of Contents



Use of Estimates 
      Goodwill, Intangibles and Other Long-Lived
    Assets and/or and/or
  Recently
    Issued Accounting Pronouncements and Adopted
    Accounting
  Accounting for Uncertainty in Income Taxes 
    an interpretation of FASB Statement No. 109
  
    an allocation or a shift of income between taxing jurisdictions;
    the characterization of income or a decision to exclude
    reporting taxable income in a tax return; or
    a decision to classify a transaction, entity or other position
    in a tax return as tax exempt.   41




---



##### Table of Contents



Fair Value Measures
  EITF 00-19-2, Accounting for Registration Payment Arrangements EITF 00-19-2), EITF 00-19-2 Accounting for
    Contingencies. EITF 00-19-2 EITF 00-19-2 FSP EITF 00-19-2 FSP EITF 00-19-2
   42




---



##### Table of Contents



EITF 00-19-2, EITF 00-19-2
  The Fair Value Option for Financial Assets and
    Financial Liabilities  Including an Amendment of FASB
    Statement No. 115, Accounting for Certain Investments in
    Debt and Equity Securities
  Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements  an amendment of ARB No. 51
  Disclosures about Derivative Instruments and Hedging
    Activities, an amendment of FASB Statement
    No. 133
 43




---



##### Table of Contents



No. SFAS 142-3, Determination of the Useful Life of Intangible
    Assets SFAS 142-3). SFAS 142-3 Goodwill and Other Intangible
    Assets SFAS 142-3 SFAS 142-3 SFAS 142-3
  No. 14-1 Accounting for Convertible Debt Instruments That May Be
    Settled in Cash upon Conversion (Including Partial Cash
    Settlement) 14-1). 14-1 14-1 14-1
  Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk    and/or
  Item 8.
    Financial
    Statements and Supplementary Data  Page F-1.
  Item 9.
    Changes
    in and Disagreements With Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
 44




---



##### Table of Contents



Rules 13a-15(e) 15d-15(e)
  Changes
    in Internal Control over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
  Managements
    Annual Report on Internal Control Over Financial
    Reporting
  Rules 13a-15(f) 15d-15(f)
        Form 10-K
  Report
    of Independent Registered Public Accounting Firm On Internal
    Control Over Financial Reporting
    Item 9B.
    Other
    Information    45




---



##### Table of Contents



PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Form 10-K,
  Form 8-K Form 8-K.
    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accounting Fees and Services   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Financial Statements. page F-1
  Financial Statement Schedule. page F-1
 46




---



##### Table of Contents



page F-1
  Exhibits.
    INDEX TO
    EXHIBITS
  Exhibit



MethodNumber

Description

of Filing3-A


Certificate of Incorporation, as amended

A3-B


Certificate of Amendment to Certificate of Incorporation

M3-C


Certificate of Amendment to Certificate of Incorporation

V3-D


Certificate of Amendment to Certificate of Incorporation

Ag3-E


Amended and Restated Bylaws of Zila, Inc., as amended and
    restated through April 2, 2008

Af4-A


Specimen Stock Certificate

A4-B


Form of 12% Unsecured Note due May 2007

W4-C


Form of 6% Senior Secured Note due November 2009

W4-D


Form of Initial Warrant

W4-E


Form of Additional Warrant

W4-F


Form of Secured Note Warrant

W4-G


Warrant, dated February 20, 2007, issued to Roth Capital
    Partners, LLC

X4-H


Form of Third Amended and Restated Senior Secured Convertible
    Note due July 2010

Am10-A


Employee Stock Purchase Plan(1)

E10-B


Investment Agreement between Zila, Inc. and PharmaBio
    Development, Inc. dated December 18, 2002

H10-C


Reimbursement Agreement between Oxycal Laboratories,
    Incorporated, an Arizona Corporation, and Wells Fargo Business
    Credit, Inc. relating to $3,900,000  The Industrial
    Development Authority Revenue Bonds (Oxycal Laboratories,
    Incorporated Project) Series 1999A, dated as of
    February 6, 2004

I10-D


Employment Agreement between Zila, Inc. and Douglas D.
    Burkett, Ph.D., dated as of October 21, 2003(1)

I10-E


Lease between Zila, Inc. and Phoenix 7 LLC, dated
    January 30, 2004

I10-F


Offer letter between Zila, Inc. and Andrew A. Stevens dated
    January 15, 2004(1)

J10-G


1997 Stock Award Plan, as amended, dated September 30,
    2004(1)

K10-H


Offer letter between Zila, Inc. and Gary V. Klinefelter dated
    November 16, 2004(1)

L10-I


Retention Agreement with Andrew A. Stevens effective
    March 7, 2005(1)

L10-J


Retention Agreement with Diane E. Klein effective March 7,
    2005(1)

L10-K


Agreement of Purchase and Sale of Assets dated June 27,
    2005 with Blairex Laboratories, Inc.

M10-L


Form of Option Agreement(1)

M10-M


Credit Agreement dated March 24, 2006 by and among Zila,
    Inc., Zila Technical, Inc., Zila Biotechnology, Inc., Zila
    Nutraceuticals, Inc., Zila Pharmaceuticals, Inc., and Zila Swab
    Technologies, Inc. and Black Diamond Commercial Finance,
    L.L.C.

N10-N


First Amendment to Credit Agreement dated June 6, 2006 by
    and among Zila, Inc., Zila Technical, Inc., Zila Biotechnology,
    Inc., Zila Nutraceuticals, Inc., Zila Pharmaceuticals, Inc., and
    Zila Swab Technologies, Inc. and Black Diamond Commercial
    Finance, L.L.C.

N10-O


Second Amendment to Credit Agreement dated June 6, 2006 by
    and among Zila, Inc., Zila Technical, Inc., Zila Biotechnology,
    Inc., Zila Nutraceuticals, Inc., Zila Pharmaceuticals, Inc., and
    Zila Swab Technologies, Inc. and Black Diamond Commercial
    Finance, L.L.C.

O 47




---



##### Table of Contents



Exhibit



MethodNumber

Description

of Filing10-P


Third Amendment to Credit Agreement dated August 18, 2006
    by and among Zila, Inc., Zila Technical, Inc., Zila
    Biotechnology, Inc., Zila Nutraceuticals, Inc., Zila
    Pharmaceuticals, Inc., and Zila Swab Technologies, Inc. and
    Black Diamond Commercial Finance, L.L.C.

P10-Q


Fourth Amendment to Credit Agreement dated August 31, 2006
    by and among Zila, Inc., Zila Technical, Inc., Zila
    Biotechnology, Inc., Zila Nutraceuticals, Inc., Zila
    Pharmaceuticals, Inc., and Zila Swab Technologies, Inc. and
    Black Diamond Commercial Finance, L.L.C.

Q10-R


Fifth Amendment to Credit Agreement dated September 25,
    2006 by and among Zila, Inc., Zila Technical, Inc., Zila
    Biotechnology, Inc., Zila Nutraceuticals, Inc., Zila
    Pharmaceuticals, Inc., and Zila Swab Technologies, Inc. and
    Black Diamond Commercial Finance, L.L.C.

R10-S


Registration Rights Agreement, dated as of March 24, 2006,
    by and between Black Diamond Commercial Finance, L.L.C. and
    Zila, Inc.

N10-T


Offer Letter between Zila, Inc. and Frank J. Bellizzi dated
    May 22, 2006

N10-U


Warrant for the purchase of shares of common stock, dated
    March 24, 2006, issued to Black Diamond Commercial Finance,
    L.L.C. by Zila, Inc.

N10-V


Amended and Restated Warrant to Purchase Shares of Common Stock,
    dated June 6, 2006, issued to BDC Finance, L.L.C. by Zila,
    Inc.

N10-W


Amended and Restated Warrant to Purchase Shares of Common Stock,
    dated September 25, 2006, issued to BDC Finance, L.L.C. by
    Zila, Inc.

R10-X


Stock Purchase Agreement by and between NBTY, Inc. and Zila,
    Inc. with respects to all of the outstanding capital stock of
    Zila Nutraceuticals, Inc. dated August 13, 2006

S10-Y


First Amendment to Stock Purchase Agreement, dated
    September 28, 2006, by and between Zila, Inc. and NBTY,
    Inc.

T10-Z


Purchase Agreement for the Shares, Unsecured Notes, Initial
    Warrants and Additional Warrants, dated November 13, 2006,
    by and among Zila, Inc. and the investors thereto

U10-Aa


Purchase Agreement for the Secured Notes and Secured Note
    Warrants, dated November 13, 2006, by and among Zila, Inc.
    and the investors thereto

U10-Ab


Agreement and Plan of Merger, dated November 13, 2006, by
    and among Zila, Inc., Zila Merger, Inc., Professional Dental
    Technologies, Inc. and certain stockholders thereto

U10-Ac


Pledge and Security Agreement, dated November 28, 2006, by
    and among Zila, Inc., Zila Biotechnology, Inc., Zila
    Pharmaceuticals, Inc., Zila Technical, Inc., Zila Limited,
    Balyasny Asset Management, L.P. and the investor parties thereto

W10-Ad


Engagement Letter, dated July 14, 2006, by and between
    Zila, Inc. and Roth Capital Partners, LLC

Ae10-Ae


Registration Rights Agreement for the Shares, Unsecured Notes,
    Initial Warrants and Additional Warrants, dated
    November 28, 2006, by and among Zila, Inc. and the investor
    parties thereto

W10-Af


Registration Rights Agreement for the Secured Notes and Secured
    Note Warrants, dated November 28, 2006, by and among Zila,
    Inc. and the investor parties thereto

W10-Ag


Offer letter between Zila, Inc. and Lawrence A. Gyenes(1)

Y10-Ah


Asset Purchase Agreement, dated September May 31, 2007, by
    and between Zila, Inc., Zila Pharmaceuticals, Inc., 3M and 3M
    Innovative Properties Company

Z10-Ai


Employment Agreement between Zila, Inc. and Gary V. Klinefelter,
    dated as of March 30, 2007(1)

Ab10-Aj


Employment Agreement between Zila, Inc. and Diane E. Klein,
    dated as of March 30, 2007(1)

Ab10-Ak


Form of Restricted Stock Award Agreement(1)

Ab10-Al


Severance Agreement and Release of Claims, dated June 13,
    2007, by and between Zila, Inc. and Douglas D. Burkett

Aa 48




---



##### Table of Contents



Exhibit



MethodNumber

Description

of Filing10-Am


Registration Rights Agreement, dated August 13, 2007, by
    and among Zila, Inc., Visium Balanced Offshore Fund, Ltd.,
    Visium Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd.,
    Visium Long Bias Fund, LP, and Atlas Master Fund, Ltd.

Ac10-An


Amendment Agreement, dated August 13, 2007, by and among
    Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium Balanced
    Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long Bias
    Fund, LP, and Atlas Master Fund, Ltd.

Ac10-Ao


Offer Letter, accepted August 16, 2007, by and between
    Zila, Inc. and David R. Bethune

Ad10-Ap


Severance Agreement and Release, dated July 30, 2007, by
    and between Zila, Inc. and Lawrence A. Gyenes

Al10-Aq


Amendment to Zila, Inc. 1997 Stock Award Plan

Ah10-Ar


Employment Letter with David R. Bethune dated May 9, 2008

Ai10-As


Registration Rights Agreement, dated June 3, 2008 by and
    among Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium
    Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium
    Long Bias Fund, LP, and Atlas Master Fund, Ltd.

Aj10-At


Second Amendment Agreement dated June 3, 2008 by and among
    Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium Balanced
    Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long Bias
    Fund, LP, and Atlas Master Fund, Ltd.

Aj10-Au


Severance Agreement and Release of Claims Agreement with Frank
    J. Bellizzi dated June 6, 2008

Ak10-Av


Third Amendment Agreement dated September 11, 2008 by and
    among Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium
    Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium
    Long Bias Fund, LP, and Atlas Master Fund, Ltd.

Am21


Subsidiaries of Registrant

*23


Consent of BDO Seidman, LLP, Independent Registered Public
    Accounting Firm

*24
.1

Power of Attorney (included on page 45 of this Annual
    Report on
    Form 10-K)

*31
.1

Sarbanes-Oxley Section 302 Certification of the Chief
    Executive Officer

*31
.2

Sarbanes-Oxley Section 302 Certification of the Chief
    Financial Officer

*32
.1

Sarbanes-Oxley Section 906 Certification of the Chief
    Executive Officer

**32
.2

Sarbanes-Oxley Section 906 Certification of the Chief
    Financial Officer

**     (1)
    
    Management contract or compensatory plan or arrangement*
    
    Filed herewith**
    
    Furnished herewithA
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    for fiscal year ended July 31, 1999B
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    for fiscal year ended July 31, 2002C
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed January 3, 2000D
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended April 30, 2001E
    
    Incorporated by reference to the Companys Proxy Statement
    on Schedule 14A filed November 7, 2000F
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended October 31, 2001G
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed July 3, 2002H
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended January 31, 2003I
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended January 31, 2004 49




---



##### Table of Contents



J
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    for fiscal year ended July 31, 2004K
    
    Incorporated by reference to the Companys Proxy Statement
    on Schedule 14A filed November 8, 2004L
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended January 31, 2005M
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    for fiscal year ended July 31, 2005N
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended April 30, 2006O
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed August 7, 2006P
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed August 24, 2006Q
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed September 7, 2006R
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed September 29, 2006S
    
    Incorporated by reference to the Companys Proxy Statement
    on Schedule 14A filed September 6, 2006T
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed October 4, 2006U
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed November 17, 2006V
    
    Incorporated by reference to the Companys Proxy Statement
    on Schedule 14A filed November 24, 2006W
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed December 4, 2006X
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed February 23, 2007Y
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed March 13, 2007Z
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed June 6, 2007Aa
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed June 14, 2007Ab
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended April 30, 2007Ac
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed August 14, 2007Ad
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed August 22, 2007Ae
    
    Incorporated by reference to the Companys Pre-Effective
    Amendment No. 1 to Registration Statement on
    Form S-3
    filed April 23, 2007Af
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed April 4, 2008Ag
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed September 17, 2008Ah
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed November 9, 2007Ai
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed May 12, 2008Aj
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed June 6, 2008Ak
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed June 12, 2008Al
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    filed October 15, 2007Am
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    filed September 16, 2008 50




---



##### Table of Contents



SIGNATURES  Form 10-K
    DAVID
    R. BETHUNE
   Chairman and Interim Chief Executive Officer
 (Principal Executive Officer)
  POWER OF
    ATTORNEY
  Form 10-K
  Form 10-K
  Signature

Title

Date/s/  DAVID
    R. BETHUNEDavid
    R. Bethune

Executive Chairman of the Board
    and Interim Chief Executive Officer

October 6, 2008/s/  J.
    STEVEN GARRETTJ.
    Steven Garrett

Director

October 6, 2008/s/  LESLIE
    H. GREENLeslie
    H. Green

Director

October 6, 2008/s/  O.
    B. PARRISHO.
    B. Parrish

Director

October 6, 2008/s/  GEORGE
    J. VUTUROGeorge
    J. Vuturo

Director

October 6, 2008/s/  DIANE
    E. KLEINDiane
    E. Klein

Vice President  Finance and Treasurer

October 6, 2008  51




---



##### 



APPENDIX F
  ZILA,
    INC. AND SUBSIDIARIES
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
    FINANCIAL STATEMENT SCHEDULE
   
 Page1 Financial StatementsReports of Independent Registered Public
    Accounting Firm


F-2Consolidated Balance Sheets as of July 31,
    2008 and 2007


F-4Consolidated Statements of Operations and
    Comprehensive Loss for the Years Ended July 31, 2008, 2007
    and 2006


F-5Consolidated Statements of Shareholders
    Equity for the Years Ended July 31, 2008, 2007 and 2006


F-6Consolidated Statements of Cash Flows for the
    Years Ended July 31, 2008, 2007 and 2006


F-7Notes to Consolidated Financial Statements


F-82 Financial Statement ScheduleSchedule II - Valuation and Qualifying Accounts


F-37   F-1




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm On Internal
    Control Over Financial Reporting      Internal Control  Integrated
    Framework
                F-2




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
  
          Internal
    Control  Integrated Framework
      F-3




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    BALANCE SHEETS
  As of July 31,2008


2007ASSETSCurrent assets:Cash and cash equivalents

$
4,462,328


$
14,859,159Trade receivables  net of allowances of $229,000 and
    $173,000


5,252,215



4,273,580Inventories  net


3,107,152



4,074,733Prepaid expenses and other current assets


1,853,373



1,646,229Total current assets


14,675,068



24,853,701Property and equipment  net


5,317,061



6,219,436Goodwill


10,171,351



10,171,351Purchased technology  net


8,860,475



9,884,017Trademarks and other intangible assets  net


9,533,024



11,555,041Other assets


1,813,512



1,197,684Total assets

$
50,370,491


$
63,881,230LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
3,843,262


$
3,207,480Accrued liabilities


4,059,017



5,587,825Warrant and common stock repurchase liability






1,376,393Current portion of deferred gain on sale leaseback


75,659



152,976Current portion of capital lease obligations


71,252



77,472Current liabilities of discontinued operations


67,532



165,368Total current liabilities


8,116,722



10,567,514Deferred gain on sale leaseback






75,659Long-term debt  net of current portion


8,974,048



7,258,569Total liabilities


17,090,770



17,901,742Commitments and Contingencies (Notes 14 and 15)Shareholders equity:Preferred stock  Series B, $.001 par
    value  2,500,000 shares authorized,
    100,000 shares issued and outstanding, liquidation
    preference of $650,000


462,500



462,500Common stock, $.001 par value 
    30,000,000 shares authorized, 9,953,818 and
    8,923,762 shares issued and outstanding


69,677



62,466Additional paid-in capital


125,901,682



123,436,957Accumulated deficit


(92,471,235
)


(76,054,251
)Accumulated other comprehensive loss


(131,832
)


(127,118
)Treasury stock, at cost (31,202 and 164,464 common shares)


(551,071
)


(1,801,066
)Total shareholders equity


33,279,721



45,979,488Total liabilities and shareholders equity

$
50,370,491


$
63,881,230    F-4




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##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
  For the Years Ended July 31,2007Restated2008


(Note 1)


2006Net revenues

$
45,060,801


$
28,800,840


$
2,821,548Cost of products sold


17,362,666



11,856,957



1,924,857Gross profit


27,698,135



16,943,883



896,691Operating costs and expenses:Marketing and selling


21,082,252



14,411,711



5,594,879General and administrative


13,280,246



15,140,696



10,466,919Research and development


2,424,457



7,482,374



7,158,034Depreciation and amortization


4,017,375



2,921,045



1,415,075Loss from operations


(13,106,195
)


(23,011,943
)


(23,738,216
)Other income (expense):Interest income


230,715



550,035



270,638Interest expense


(3,234,502
)


(7,385,539
)


(1,920,428
)Derivative income (expense)


(23,600
)


1,058,873



(136,722
)Other income (expense)


181



15,489



(517,895
)Total other income (expense)


(3,027,206
)


(5,761,142
)


(2,304,407
)Loss from continuing operations before income taxes


(16,133,401
)


(28,773,085
)


(26,042,623
)Income tax benefit (expense)


9,381



9,667,626



(3,600
)Loss from continuing operations


(16,124,020
)


(19,105,459
)


(26,046,223
)Loss from discontinued operations


(253,964
)


(510,625
)


(2,671,246
)Gain (loss) on disposal of discontinued operations






16,185,058



(628,862
)Income tax expense






(9,733,067
)


Total income (loss) from discontinued operations


(253,964
)


5,941,366



(3,300,108
)Net loss


(16,377,984
)


(13,164,093
)


(29,346,331
)Preferred stock dividends


39,000



39,000



39,000Net loss attributable to common shareholders

$
(16,416,984
)

$
(13,203,093
)

$
(29,385,331
)Basic and diluted net income (loss) per common share:Loss from continuing operations

$
(1.80
)

$
(2.37
)

$
(3.99
)Income (loss) from discontinued operations


(0.02
)


0.73



(0.51
)Net loss attributable to common shareholders

$
(1.82
)

$
(1.64
)

$
(4.50
)Weighted average common shares outstanding  basic and
    diluted


8,956,475



8,053,905



6,528,950Consolidated Statements of Comprehensive LossNet loss

$
(16,377,984
)

$
(13,164,093
)

$
(29,346,331
)Foreign currency translation adjustment


(4,714
)


(44,440
)


(18,754
)Comprehensive loss

$
(16,382,698
)

$
(13,208,533
)

$
(29,365,085
)    F-5




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##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY
  AccumulatedAdditional





Other





TotalPreferred Stock


Common Stock


Paid-in


Accumulated


Comprehensive


Treasury


ShareholdersShares


Amount


Shares


Amount


Capital


Deficit


Income (Loss)


Stock


EquityBalance, July 31, 2005


100,000


$
462,500



6,552,007


$
45,864


$
84,372,257


$
(32,543,676
)

$
(63,924
)

$
(551,071
)

$
51,721,950Preferred stock dividends






















(39,000
)










(39,000
)Issuance of common stock under employee stock purchase plan










7,130



50



153,874















153,924Exercise of common stock options and warrants










13,376



94



171,850















171,944Stock-based compensation expense


















607,350















607,350Foreign currency translation


























(18,754
)






(18,754
)Net loss






















(29,346,331
)










(29,346,331
)Balance, July 31, 2006


100,000



462,500



6,572,513



46,008



85,305,331



(61,929,007
)


(82,678
)


(551,071
)


23,251,083Cumulative-effect adjustment of adopting
    FSP No. EITF 00-19-2


















2,460,489



(922,151
)










1,538,338Preferred stock dividends






















(39,000
)










(39,000
)Issuance of common stock










1,300,000



9,100



7,611,781















7,620,881Issuance of common stock purchase warrants


















16,888,348















16,888,348Conversion of unsecured debt










985,714



6,900



4,445,448















4,452,348Beneficial conversion feature of secured debt


















4,397,050















4,397,050Issuance of shares in settlement of liability










41,390



290



659,710















660,000Issuance of common stock under employee stock purchase plan










1,529



10



16,893















16,903Exercise of common stock options and warrants










4,286



30



42,645















42,675Stock-based compensation expense










20,238



141



1,769,563















1,769,704Common shares withheld for income taxes










(1,908
)


(13
)


(33,903
)














(33,916
)Accrued repurchase of common shares and warrants


















(126,398
)










(1,249,995
)


(1,376,393
)Foreign currency translation


























(44,440
)






(44,440
)Net loss






















(13,164,093
)










(13,164,093
)Balance, July 31, 2007


100,000



462,500



8,923,762



62,466



123,436,957



(76,054,251
)


(127,118
)


(1,801,066
)


45,979,488Preferred stock dividends






















(39,000
)










(39,000
)Issuance of common stock under employee stock purchase plan










9,061



63



97,894















97,957Exercise of common stock options and warrants










1,429



10



11,190















11,200Stock-based compensation expense










201,466



1,411



2,024,422















2,025,833Common shares withheld for income taxes










(63,150
)


(442
)


(229,471
)














(229,913
)Shares issued for payment of interest










353,570



2,475



728,191















730,666Shares issued for the Second Amendment Agreement, net of
    warrants returned










660,942



4,627



1,081,561















1,086,188Retirement of treasury stock










(133,262
)


(933
)


(1,249,062
)










1,249,995



Foreign currency translation


























(4,714
)






(4,714
)Net loss






















(16,377,984
)










(16,377,984
)Balance, July 31, 2008


100,000


$
462,500



9,953,818


$
69,677


$
125,901,682


$
(92,471,235
)

$
(131,832
)

$
(551,071
)

$
33,279,721    F-6




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  For the Years Ended July 31,2008


2007


2006Cash flows from operating activities:Net loss

$
(16,377,984
)

$
(13,164,093
)

$
(29,346,331
)Adjustments to reconcile net loss to net cash used in operating
    activities:Depreciation and amortization


4,479,327



3,419,630



3,036,211Non-cash amortization of financing costs


476,854



2,512,724



487,556Non-cash amortization of debt discounts


1,784,929



3,624,602



393,219Non-cash interest


730,666



201,940



283,981Non-cash derivative (income) expense


23,600



(1,058,873
)


136,722Loss (gain) from disposition of discontinued operations






(16,185,058
)


628,862Non-cash stock-based compensation expense


2,055,485



1,774,339



630,508Other non-cash items  net


359,795



203,349



(166,599
)Changes in operating assets and liabilities (excluding the
    effect of the Pro-Dentec acquisition):Trade receivables


(978,635
)


901,657



7,498,718Inventories


967,581



(61,686
)


(3,920,543
)Prepaid expenses and other assets


60,768



495,792



(297,723
)Accounts payable and accrued liabilities


(1,214,703
)


2,368,408



(173,173
)Net cash used in operating activities


(7,632,317
)


(14,967,269
)


(20,808,592
)Cash flows from investing activities:Additions to property and equipment


(668,417
)


(969,228
)


(1,017,726
)Additions to intangible assets


(411,172
)


(498,954
)


(1,115,497
)Proceeds from sale of assets


24,639







8,289Restricted cash deposited to collateralize letter of credit






3,610,950



(3,083,167
)Proceeds from disposition of discontinued operations






44,311,249



641,750Acquisition of Pro-Dentec






(34,058,808
)


(723,826
)Net cash provided by (used in) investing activities


(1,054,950
)


12,395,209



(5,290,177
)Cash flows from financing activities:Proceeds from issuance of common stock


79,505



15,980,323



302,710Short-term borrowings (repayments)  net






(30,347
)


(123,988
)Proceeds from convertible notes payable






24,075,000



Proceeds from secured term loan










20,000,000Financing costs






(2,551,339
)


(2,285,237
)Principal payments on long-term debt


(350,076
)


(23,961,608
)


(735,043
)Payment of obligation to repurchase common stock and warrants


(1,399,993
)






Dividends paid to preferred stockholders


(39,000
)


(39,000
)


(39,000
)Net cash provided by financing activities


(1,709,564
)


13,473,029



17,119,442Net increase (decrease) in cash and cash equivalents


(10,396,831
)


10,900,969



(8,979,327
)Cash and cash equivalents  beginning of year


14,859,159



3,958,190



12,937,517Cash and cash equivalents  end of year

$
4,462,328


$
14,859,159


$
3,958,190    F-7




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Nature of
    Business Activities, Basis of Presentation and Summary of
    Significant Accounting Policies  Nature
    of Business Activities and Basis of Presentation
    ® ® ® ® ® ® ®
  ® Disclosures about Segments of an
    Enterprise and Related Information
      Liquidity
  ® ®
 F-8




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            Restatement
   F-9




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended July 31, 2007As Originally


AsReported


AdjustedLoss from continuing operations before income taxes


(28,773,085
)


(28,773,085
)Income tax benefit (expense)


5,790,964



9,667,626Loss from continuing operations


(22,982,121
)


(19,105,459
)Loss from discontinued operations


(510,625
)


(510,625
)Gain (loss) on disposal of discontinued operations


16,185,058



16,185,058Income tax expense


(5,856,405
)


(9,733,067
)Total income (loss) from discontinued operations


9,818,028



5,941,366Net loss


(13,164,093
)


(13,164,093
)Preferred stock dividends


39,000



39,000Net loss attributable to common shareholders

$
(13,203,093
)

$
(13,203,093
)Basic and diluted net income (loss) per common share:Loss from continuing operations

$
(2.85
)

$
(2.37
)Income (loss) from discontinued operations


1.21



0.73Net loss attributable to common shareholders

$
(1.64
)

$
(1.64
)Weighted average common shares outstanding  basic and
    diluted


8,053,905



8,053,905     Summary
    of Significant Accounting Policies
  Principles of Consolidation
  Use of Estimates and Risks and
    Uncertainties 
 F-10




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Business Concentrations
  ® ®
      Revenue Recognition 
  Cash and Cash Equivalents 
  Allowances for Doubtful Accounts and Sales
    Returns 
  Inventories  work-in-process (first-in,
  Property and Equipment 
    Buildings

40 yearsBuilding improvements

15 yearsLeasehold improvements

5  7 yearsFurniture and equipment

3  10 yearsProduction, laboratory and warehouse equipment

7  10 years  F-11




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Long-Lived Assets  Accounting for the Impairment or Disposal of Long-Lived
    Assets
  Goodwill and Other Intangible Assets  Goodwill and Other
    Intangible Assets
        Deferred Financing Costs  costs-net
  Share-Based Payments  Share-Based Payment
 F-12




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Accrued Warranty Costs 
  Derivative Warrant Liability and Debt Discount
    Amortization  No. 00-19, Accounting for Derivative Financial Instruments Indexed
    to, and Potentially Settled in, a Companys Own
    Stock (EITF 00-19),
  and/or EITF 98-5, Accounting for Convertible Securities with Beneficial
    Conversion Features or Contingently Adjustable Conversion
    Ratios (EITF 98-5) EITF 00-27, Application of Issue
    No. 98-5
    to Certain Convertible Instruments (EITF 00-27).
  Research and Development 
  Advertising 
  Shipping Costs 
  Income Taxes  Accounting
    for Income Taxes.
  Net Income (Loss) Per Common Share 
 F-13




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Comprehensive Income (Loss) 
  Financial Instruments 
      Foreign Currency Translation and Foreign Currency
    Transactions 
  Recently
    Issued Accounting Pronouncements and Adopted
    Accounting
  Accounting for Uncertainty in Income Taxes 
    an interpretation of FASB Statement No. 109
  
    an allocation or a shift of income between taxing jurisdictions;
    the characterization of income or a decision to exclude
    reporting taxable income in a tax return; or
    a decision to classify a transaction, entity or other position
    in a tax return as tax exempt.   F-14




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Pro-Dentec,
    Fair Value Measures
  EITF 00-19-2, Accounting for Registration Payment Arrangements EITF 00-19-2), EITF 00-19-2 Accounting for
    Contingencies. EITF 00-19-2 EITF 00-19-2 EITF 00-19-2 EITF 00-19-2
 F-15




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    EITF 00-19-2, EITF 00-19-2
  The Fair Value Option for Financial Assets and
    Financial Liabilities  Including an Amendment of FASB
    Statement No. 115, Accounting for Certain Investments in
    Debt and Equity Securities
  Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements  an amendment of ARB No. 51
 F-16




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Disclosures about Derivative Instruments and Hedging
    Activities, an amendment of FASB Statement
    No. 133
  No. SFAS 142-3, Determination of the Useful Life of Intangible
    Assets SFAS 142-3). SFAS 142-3 SFAS 142-3 SFAS 142-3 SFAS 142-3
  No. 14-1 Accounting for Convertible Debt Instruments That May Be
    Settled in Cash upon Conversion (Including Partial Cash
    Settlement) 14-1). 14-1 14-1 14-1
  2.
    Acquisition   F-17




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Assets acquired:Cash and cash equivalents

$
853Accounts receivable


3,135Inventories


2,385Prepaid expenses and other current assets


295Property and equipment


4,541Intangible assets subject to amortization:Purchased technology  proprietary know-how


8,173Covenants not to compete


2,305Customer lists and relationships


1,187Intangible assets not subject to amortization:Trademarks


5,449Goodwill


10,171Other assets


2Total assets acquired


38,496Liabilities assumed:Accounts payable


1,018Accrued liabilities


684Notes payable


1,158Total liabilities assumed


2,860Net assets acquired

$
35,636         2007


2006Net revenues

$
40,419


$
38,288Loss from continuing operations


(19,314
)


(24,224
)Basic and diluted net loss per common share from continuing
    operations


(2.19
)


(2.75
)    F-18




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  3.
    Dispositions    Nutraceuticals
    Disposition
    Pharmaceuticals
    Dispositions
  ®
    ® ®
 F-19




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2007


2006Nutraceuticals:Net revenues

$
1,629


$
21,473Loss from discontinued operations


(1,360
)


(3,046
)Gain on disposal of discontinued operations


11,024



Pharmaceuticals:Net revenues

$
3,694


$
6,176Income from discontinued operations


849



375Gain (loss) on disposal of discontinued operations


5,161



(629
)Total discontinued operations:Net revenues

$
5,323


$
27,649Loss from discontinued operations


(511
)


(2,671
)Gain (loss) on disposal of discontinued operations


16,185



(629
)     4.
    Inventories    2008


2007Finished goods

$
675


$
1,413Work-in-process


396



323Raw materials


2,470



2,659Inventory reserves


(434
)


(320
)Total inventories

$
3,107


$
4,075   5.
    Property
    and Equipment    2008


2007Land

$
529


$
529Buildings and improvements


2,132



2,181Furniture and equipment


3,408



2,360Leasehold improvements and other assets


823



1,360Production, laboratory and warehouse equipment


4,582



4,423Total property and equipment


11,474



10,853Less: Accumulated depreciation and amortization


(6,157
)


(4,634
)Property and equipment  net

$
5,317


$
6,219    F-20




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting for
    Leases
  6.
    Goodwill
    and Other Intangible Assets    2008


2007Gross





Net


Gross





NetCarrying


Accumulated


Carrying


Carrying


Accumulated


CarryingAmount


Amortization


Amount


Amount


Amortization


AmountAmortizable intangible assets:Purchased technology

$
15,592


$
(6,732
)

$
8,860


$
15,592


$
(5,708
)

$
9,884Trademarks


168



(18
)


150



132



(11
)


121Patents


2,019



(385
)


1,634



2,495



(350
)


2,145Licensing costs


2,674



(1,777
)


897



2,674



(1,514
)


1,160Covenants not to compete and other


3,556



(2,153
)


1,403



3,556



(876
)


2,680Total amortizable intangible assets


24,009



(11,065
)


12,944



24,449



(8,459
)


15,990Unamortizable trademarks


5,449







5,449



5,449







5,449Total other intangible assets


29,458



(11,065
)


18,393



29,898



(8,459
)


21,439Goodwill


10,171







10,171



10,171







10,171Total intangible assets

$
39,629


$
(11,065
)

$
28,564


$
40,069


$
(8,459
)

$
31,610     Range of


Weighted Average Remaining Useful LivesUseful Lives


July 31, 2008


July 31, 2007Purchased technology


15



11.5



12.2Trademarks


7-10



6.6



7.8Patents


4-17



7.4



7.9Licensing costs


7-10



3.4



4.4Covenants not to compete and other


2-15



6.0



4.7      F-21




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2009

$
1,9052010


1,5122011


1,4992012


9882013


679   7.
    Accrued
    Liabilities    2008


2007Accrued research and development

$
1,154


$
1,864Accrued employee compensation and related taxes


1,000



1,876Accrued professional and consulting fees


795



569Accrued fee due Investors for Restructuring (see Note 8)






600Other accrued expenses


1,110



679Total accrued liabilities

$
4,059


$
5,588   8.
    Debt    2008


2007Long-term debt:Senior Secured Convertible Notes

$
12,000


$
12,000Unamortized discount  Senior Secured Convertible Notes


(3,560
)


(5,345
)Senior Secured Convertible Notes  net


8,440



6,655PharmaBio


500



500Capital lease obligations


105



181Total long-term debt


9,045



7,336Less: Current portion of capital lease obligations


(71
)


(77
)Long-term debt  net of current portion

$
8,974


$
7,259   Private
    Placements
       F-22




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              EITF 98-5 EITF 00-27
   F-23




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                       F-24




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Secured
    Term Loan
           F-25




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                PharmaBio
    Development, Inc.
    Capital
    Leases
   F-26




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Debt
    Maturities
    Long-Term


CapitalDebt


Leases


Total2009

$



$
71


$
712010


12,000



34



12,0342013 and thereafter


500







500Total


12,500



105



12,605Less: Current portion






(71
)


(71
)Less: Discount on Senior Notes


(3,560
)






(3,560
)Long-term portion

$
8,940


$
34


$
8,974   9.
    Share
    Based Payments  Stock
    Options and Awards
    Accounting for Stock-Based
    Compensation Accounting
    for Stock Issued to Employees
     F-27




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2008


2007


2006Risk-free interest rate


3
%


5
%


4
%Expected volatility


60
%


61
%


67
%Expected term (in years)


5



6



5Dividend yield










         WeightedAverageNumber


Exerciseof Options


PriceOptions outstanding  beginning of year


417


$
21.77Granted


447



7.77Exercised


(1
)


7.84Expired


(206
)


22.68Forfeited


(142
)


13.72Options outstanding  end of year


515



11.55    F-28




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Vested orExpectedOutstanding


Vest


ExercisableNumber of options


515



467



237Aggregate intrinsic value of options

$



$



$
Weighted average remaining contractual term (in years)


6.7



6.4



4.1Weighted average exercise price

$
11.55


$
11.90


$
15.33     WeightedWeighted


AverageAverage


Remaining


AggregateNumber


Grant


Contractual


Intrinsicof Shares


Value


Term


ValueUnvested balance  beginning of year


19


$
17.00



1.4


$
173Granted


240



4.00Vested


(203
)


5.00Forfeited






Unvested balance  end of year


56



7.00



1.1


$
107       2008


2007


2006Marketing and selling

$
212


$
168


$
14General and administrative


1,782



1,583



550Research and development


3



8



17Inventory


29



11



4Discontinued operations










22Total stock-based compensation

$
2,026


$
1,770


$
607      F-29




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Warrants
    WeightedWeighted


AverageAverage


Remaining


AggregateNumber


Exercise


Contractual


Intrinsicof Shares


Price


Term


ValueWarrants outstanding  beginning of year


1,846


$
15.42



4.3


$
28Granted


68



14.63Returned or repurchased


(518
)


15.47Expired


(12
)


6.86Warrants outstanding  end of year


1,384


$
14.76



3.3


$
     Stock
    Purchase Plan
  and/or
  10.
    Income
    Taxes    2008


2007


2006Current:Federal

$



$



$
State


(9
)


65



4Total current


(9
)


65



4Deferred:Federal






(8,301
)


State






(1,432
)


Total deferred






(9,733
)


Total income tax benefit

$
(9
)

$
(9,668
)

$
4  F-30




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2008


2007


2006Federal statutory rate


(35
)%


(35
)%


(35
)%Adjustments:Non-deductible intangible asset amortization


1



1



1Non-deductible financing costs


4



1



Non-deductible stock-based compensation


2



1



Non-taxable fair value adjustments






(1
)


Increase in valuation allowance


28



(1
)


34Effective tax rate



%


(34
)%



%     2008


2007Deferred income tax assets:Net operating loss carry forwards

$
19,205


$
15,634Alternative minimum tax credit


230



230Other reserves and accruals


437



573Stock-based compensation


703



437Other


122



188Total deferred income tax assets


20,697



17,062Deferred income tax liabilities:Depreciation and amortization


(113
)


(495
)Book basis versus tax basis differences


(5,089
)


(5,861
)Federal income tax on state net operating loss carryforwards


(848
)


(673
)Beneficial conversion feature of Secured Notes


(893
)


(1,341
)Other


(279
)


(278
)Total deferred income tax liabilities


(7,222
)


(8,648
)Valuation allowance


(13,475
)


(8,414
)Net deferred income tax assets

$



$
    F-31




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      11.
    Supplemental
    Schedule of Cash flow Information    2008


2007


2006Interest paid

$
248


$
1,314


$
976Income taxes paid


14



172



102Fair value of 660,942 common shares issued for payment of the
    Second Amendment Agreement, net of 485,157 warrants returned


1,086







Insurance policy financed with short-term borrowings


275



299



296Capital lease obligation for new equipment






181



65Beneficial conversion feature of Secured Convertible Notes






4,397



Conversion of Unsecured Convertible Notes






4,452



   12.
    Convertible
    Preferred Stock   F-32




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  13.
    Treasury
    Stock      14.
    Leases        Capital


OperatingLeases


Leases


Total2009

$
78


$
437


$
5152010


35



177



2122011






72



72Total minimum lease payments


113


$
686


$
799Less: Amounts representing interest


(8
)Present value of future minimum lease payments


105Less: Current portion of capital lease obligations


(71
)Long-term portion of capital lease obligations

$
34  F-33




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  15.
    Commitments
    and Contingencies  Litigation
      Employment
    Agreements
    Indemnifications
  and/or
  Data
    Management Services Agreement
   F-34




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Registration
    Payment Arrangements
  30-day
  FDA
    Observation Letter
    16.
    Net Loss
    Per Share Information    2008


2007


2006Numerator:Net loss

$
(16,417
)

$
(13,203
)

$
(29,385
)Denominator:Basic and diluted weighted average number of common shares
    outstanding


8,956



8,054



6,529Antidilutive securities not included in the diluted earnings per
    share calculation:Options and warrants to purchase common shares






27



49Common share stock awards


14



6



Convertible preferred stock


100



100



100Total potentially dilutive securities


114



133



149    F-35




---



##### Table of Contents



ZILA,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  17.
    Employee
    Benefit Plan    18.
    Quarterly
    Financial Data (Unaudited)    Fiscal 2008 Quarterly DataFirst


Second


Third


FourthNet revenues

$
11,440


$
10,491



11,245


$
11,885Gross profit


6,859



6,246



6,807



7,786Loss from continuing operations


(4,683
)


(4,589
)


(4,443
)


(2,409
)Loss from discontinued operations


(172
)


(147
)


(2
)


67Net loss


(4,855
)


(4,736
)


(4,445
)


(2,342
)Basic and diluted net loss per share:Loss from continuing operations

$
(0.53
)

$
(0.52
)

$
(0.50
)

$
(0.26
)Loss from discontinued operations


(0.02
)


(0.02
)






0.01Net income (loss)

$
(0.55
)

$
(0.54
)

$
(0.50
)

$
(0.25
)   Fiscal 2007 Quarterly DataFirst


Second


Third


FourthNet revenues

$
339


$
7,149


$
10,894


$
10,419Gross profit


(161
)


4,123



6,663



6,319Loss from continuing operations


(2,495
)


(6,442
)


(4,401
)


(5,767
)Income from discontinued operations


2,237



291



93



3,320Net loss


(258
)


(6,151
)


(4,308
)


(2,447
)Basic and diluted net income (loss) per share:Loss from continuing operations

$
(0.38
)

$
(0.81
)

$
(0.50
)

$
(0.65
)Loss from discontinued operations


0.34



0.03



0.01



0.37Net income (loss)

$
(0.04
)

$
(0.78
)

$
(0.49
)

$
(0.28
)   19.
    Geographic
    Information   F-36




---



##### Table of Contents



SCHEDULE II
    VALUATION AND QUALIFYING ACCOUNTS
  Balance 


Charged to





Balance Beginning


Costs and





Endof Year


Expenses


Deductions


of YearAllowance for doubtful accounts receivable:July 31, 2006

$



$



$



$
July 31, 2007






118



(35
)


83July 31, 2008


83



80



(53
)


110Allowance for sales returns:July 31, 2006


19



10



(20
)


9July 31, 2007


9



105



(24
)


90July 31, 2008


90



29







119Inventory reserve:July 31, 2006


129



52



(126
)


55July 31, 2007


55



266



(1
)


320July 31, 2008


320



291



(177
)


434Deferred tax valuation allowance:July 31, 2006


5,606



10,799







16,405July 31, 2007


16,405







(7,991
)


8,414July 31, 2008


8,414



5,061







13,475  F-37




---



##### Table of Contents



INDEX TO
    EXHIBITS
  Exhibit



MethodNumber

Description

of Filing3-A


Certificate of Incorporation, as amended

A3-B


Certificate of Amendment to Certificate of Incorporation

M3-C


Certificate of Amendment to Certificate of Incorporation

V3-D


Certificate of Amendment to Certificate of Incorporation

Ag3-E


Amended and Restated Bylaws of Zila, Inc., as amended and
    restated through April 2, 2008

Af4-A


Specimen Stock Certificate

A4-B


Form of 12% Unsecured Note due May 2007

W4-C


Form of 6% Senior Secured Note due November 2009

W4-D


Form of Initial Warrant

W4-E


Form of Additional Warrant

W4-F


Form of Secured Note Warrant

W4-G


Warrant, dated February 20, 2007, issued to Roth Capital
    Partners, LLC

X4-H


Form of Third Amended and Restated Senior Secured Convertible
    Note due July 2010

Am10-A


Employee Stock Purchase Plan(1)

E10-B


Investment Agreement between Zila, Inc. and PharmaBio
    Development, Inc. dated December 18, 2002

H10-C


Reimbursement Agreement between Oxycal Laboratories,
    Incorporated, an Arizona Corporation, and Wells Fargo Business
    Credit, Inc. relating to $3,900,000  The Industrial
    Development Authority Revenue Bonds (Oxycal Laboratories,
    Incorporated Project) Series 1999A, dated as of
    February 6, 2004

I10-D


Employment Agreement between Zila, Inc. and Douglas D.
    Burkett, Ph.D., dated as of October 21, 2003(1)

I10-E


Lease between Zila, Inc. and Phoenix 7 LLC, dated
    January 30, 2004

I10-F


Offer letter between Zila, Inc. and Andrew A. Stevens dated
    January 15, 2004(1)

J10-G


1997 Stock Award Plan, as amended, dated September 30,
    2004(1)

K10-H


Offer letter between Zila, Inc. and Gary V. Klinefelter dated
    November 16, 2004(1)

L10-I


Retention Agreement with Andrew A. Stevens effective
    March 7, 2005(1)

L10-J


Retention Agreement with Diane E. Klein effective March 7,
    2005(1)

L10-K


Agreement of Purchase and Sale of Assets dated June 27,
    2005 with Blairex Laboratories, Inc.

M10-L


Form of Option Agreement(1)

M10-M


Credit Agreement dated March 24, 2006 by and among Zila,
    Inc., Zila Technical, Inc., Zila Biotechnology, Inc., Zila
    Nutraceuticals, Inc., Zila Pharmaceuticals, Inc., and Zila Swab
    Technologies, Inc. and Black Diamond Commercial Finance,
    L.L.C.

N10-N


First Amendment to Credit Agreement dated June 6, 2006 by
    and among Zila, Inc., Zila Technical, Inc., Zila Biotechnology,
    Inc., Zila Nutraceuticals, Inc., Zila Pharmaceuticals, Inc., and
    Zila Swab Technologies, Inc. and Black Diamond Commercial
    Finance, L.L.C.

N10-O


Second Amendment to Credit Agreement dated June 6, 2006 by
    and among Zila, Inc., Zila Technical, Inc., Zila Biotechnology,
    Inc., Zila Nutraceuticals, Inc., Zila Pharmaceuticals, Inc., and
    Zila Swab Technologies, Inc. and Black Diamond Commercial
    Finance, L.L.C.

O10-P


Third Amendment to Credit Agreement dated August 18, 2006
    by and among Zila, Inc., Zila Technical, Inc., Zila
    Biotechnology, Inc., Zila Nutraceuticals, Inc., Zila
    Pharmaceuticals, Inc., and Zila Swab Technologies, Inc. and
    Black Diamond Commercial Finance, L.L.C.

P10-Q


Fourth Amendment to Credit Agreement dated August 31, 2006
    by and among Zila, Inc., Zila Technical, Inc., Zila
    Biotechnology, Inc., Zila Nutraceuticals, Inc., Zila
    Pharmaceuticals, Inc., and Zila Swab Technologies, Inc. and
    Black Diamond Commercial Finance, L.L.C.

Q10-R


Fifth Amendment to Credit Agreement dated September 25,
    2006 by and among Zila, Inc., Zila Technical, Inc., Zila
    Biotechnology, Inc., Zila Nutraceuticals, Inc., Zila
    Pharmaceuticals, Inc., and Zila Swab Technologies, Inc. and
    Black Diamond Commercial Finance, L.L.C.

R




---



##### Table of Contents



Exhibit



MethodNumber

Description

of Filing10-S


Registration Rights Agreement, dated as of March 24, 2006,
    by and between Black Diamond Commercial Finance, L.L.C. and
    Zila, Inc.

N10-T


Offer Letter between Zila, Inc. and Frank J. Bellizzi dated
    May 22, 2006

N10-U


Warrant for the purchase of shares of common stock, dated
    March 24, 2006, issued to Black Diamond Commercial Finance,
    L.L.C. by Zila, Inc.

N10-V


Amended and Restated Warrant to Purchase Shares of Common Stock,
    dated June 6, 2006, issued to BDC Finance, L.L.C. by Zila,
    Inc.

N10-W


Amended and Restated Warrant to Purchase Shares of Common Stock,
    dated September 25, 2006, issued to BDC Finance, L.L.C. by
    Zila, Inc.

R10-X


Stock Purchase Agreement by and between NBTY, Inc. and Zila,
    Inc. with respects to all of the outstanding capital stock of
    Zila Nutraceuticals, Inc. dated August 13, 2006

S10-Y


First Amendment to Stock Purchase Agreement, dated
    September 28, 2006, by and between Zila, Inc. and NBTY,
    Inc.

T10-Z


Purchase Agreement for the Shares, Unsecured Notes, Initial
    Warrants and Additional Warrants, dated November 13, 2006,
    by and among Zila, Inc. and the investors thereto

U10-Aa


Purchase Agreement for the Secured Notes and Secured Note
    Warrants, dated November 13, 2006, by and among Zila, Inc.
    and the investors thereto

U10-Ab


Agreement and Plan of Merger, dated November 13, 2006, by
    and among Zila, Inc., Zila Merger, Inc., Professional Dental
    Technologies, Inc. and certain stockholders thereto

U10-Ac


Pledge and Security Agreement, dated November 28, 2006, by
    and among Zila, Inc., Zila Biotechnology, Inc., Zila
    Pharmaceuticals, Inc., Zila Technical, Inc., Zila Limited,
    Balyasny Asset Management, L.P. and the investor parties thereto

W10-Ad


Engagement Letter, dated July 14, 2006, by and between
    Zila, Inc. and Roth Capital Partners, LLC

Ae10-Ae


Registration Rights Agreement for the Shares, Unsecured Notes,
    Initial Warrants and Additional Warrants, dated
    November 28, 2006, by and among Zila, Inc. and the investor
    parties thereto

W10-Af


Registration Rights Agreement for the Secured Notes and Secured
    Note Warrants, dated November 28, 2006, by and among Zila,
    Inc. and the investor parties thereto

W10-Ag


Offer letter between Zila, Inc. and Lawrence A. Gyenes(1)

Y10-Ah


Asset Purchase Agreement, dated September May 31, 2007, by
    and between Zila, Inc., Zila Pharmaceuticals, Inc., 3M and 3M
    Innovative Properties Company

Z10-Ai


Employment Agreement between Zila, Inc. and Gary V. Klinefelter,
    dated as of March 30, 2007(1)

Ab10-Aj


Employment Agreement between Zila, Inc. and Diane E. Klein,
    dated as of March 30, 2007(1)

Ab10-Ak


Form of Restricted Stock Award Agreement(1)

Ab10-Al


Severance Agreement and Release of Claims, dated June 13,
    2007, by and between Zila, Inc. and Douglas D. Burkett

Aa10-Am


Registration Rights Agreement, dated August 13, 2007, by
    and among Zila, Inc., Visium Balanced Offshore Fund, Ltd.,
    Visium Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd.,
    Visium Long Bias Fund, LP, and Atlas Master Fund, Ltd.

Ac10-An


Amendment Agreement, dated August 13, 2007, by and among
    Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium Balanced
    Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long Bias
    Fund, LP, and Atlas Master Fund, Ltd.

Ac10-Ao


Offer Letter, accepted August 16, 2007, by and between
    Zila, Inc. and David R. Bethune

Ad10-Ap


Severance Agreement and Release, dated July 30, 2007, by
    and between Zila, Inc. and Lawrence A. Gyenes

Al10-Aq


Amendment to Zila, Inc. 1997 Stock Award Plan

Ah10-Ar


Employment Letter with David R. Bethune dated May 9, 2008

Ai




---



##### Table of Contents



Exhibit



MethodNumber

Description

of Filing10-As


Registration Rights Agreement, dated June 3, 2008 by and
    among Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium
    Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium
    Long Bias Fund, LP, and Atlas Master Fund, Ltd.

Aj10-At


Second Amendment Agreement dated June 3, 2008 by and among
    Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium Balanced
    Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long Bias
    Fund, LP, and Atlas Master Fund, Ltd.

Aj10-Au


Severance Agreement and Release of Claims Agreement with Frank
    J. Bellizzi dated June 6, 2008

Ak10-Av


Third Amendment Agreement dated September 11, 2008 by and
    among Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium
    Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium
    Long Bias Fund, LP, and Atlas Master Fund, Ltd.

Am21


Subsidiaries of Registrant

*23


Consent of BDO Seidman, LLP, Independent Registered Public
    Accounting Firm

*24
.1

Power of Attorney (included on page 45 of this Annual
    Report on
    Form 10-K)

*31
.1

Sarbanes-Oxley Section 302 Certification of the Chief
    Executive Officer

*31
.2

Sarbanes-Oxley Section 302 Certification of the Chief
    Financial Officer

*32
.1

Sarbanes-Oxley Section 906 Certification of the Chief
    Executive Officer

**32
.2

Sarbanes-Oxley Section 906 Certification of the Chief
    Financial Officer

**     (1)
    
    Management contract or compensatory plan or arrangement*
    
    Filed herewith**
    
    Furnished herewithA
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    for fiscal year ended July 31, 1999B
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    for fiscal year ended July 31, 2002C
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed January 3, 2000D
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended April 30, 2001E
    
    Incorporated by reference to the Companys Proxy Statement
    on Schedule 14A filed November 7, 2000F
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended October 31, 2001G
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed July 3, 2002H
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended January 31, 2003I
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended January 31, 2004J
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    for fiscal year ended July 31, 2004K
    
    Incorporated by reference to the Companys Proxy Statement
    on Schedule 14A filed November 8, 2004L
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended January 31, 2005M
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    for fiscal year ended July 31, 2005N
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended April 30, 2006O
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed August 7, 2006P
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed August 24, 2006Q
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed September 7, 2006R
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed September 29, 2006




---



##### Table of Contents



S
    
    Incorporated by reference to the Companys Proxy Statement
    on Schedule 14A filed September 6, 2006T
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed October 4, 2006U
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed November 17, 2006V
    
    Incorporated by reference to the Companys Proxy Statement
    on Schedule 14A filed November 24, 2006W
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed December 4, 2006X
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed February 23, 2007Y
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed March 13, 2007Z
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed June 6, 2007Aa
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed June 14, 2007Ab
    
    Incorporated by reference to the Companys Quarterly Report
    on
    Form 10-Q
    for the quarterly period ended April 30, 2007Ac
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed August 14, 2007Ad
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed August 22, 2007Ae
    
    Incorporated by reference to the Companys Pre-Effective
    Amendment No. 1 to Registration Statement on
    Form S-3
    filed April 23, 2007Af
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed April 4, 2008Ag
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed September 17, 2008Ah
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed November 9, 2007Ai
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed May 12, 2008Aj
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed June 6, 2008Ak
    
    Incorporated by reference to the Companys Current Report
    on
    Form 8-K
    filed June 12, 2008Al
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    filed October 15, 2007Am
    
    Incorporated by reference to the Companys Annual Report on
    Form 10-K
    filed September 16, 2008