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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





Form 10-Q

(Mark One)



| |  |  | [X] Quarterly Report pursuant to Section 13 or 15(d) of the 
Securities Exchange Act of 1934
| |  |  | --------------------------------------------------------------------------------------------

For the quarter ended June 30, 2003

or



| |  |  | [  ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
| |  |  | ---------------------------------------------------------------------------------------------

For the transition period from _______ to _______

Commission File number 0-27646

Matrixx Initiatives, Inc.

(Name of registrant as specified in its charter)


|                                  |  |                       
|--------------------------------- |  | ----------------------
|Delaware                          |  | 87-0482806            
|(State or other jurisdiction      |  | (I.R.S. Employer      
|of incorporation or organization) |  | Identification Number)

2375 East Camelback Road, Suite 500
Phoenix, AZ 85016
(Address of principal executive offices)

(602) 387-5353
(Issuers telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES
þ   NO o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES o   NO þ

There were 9,446,751 shares of the registrants common stock, $.001 par value,
outstanding as of August 10, 2003.





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MATRIXX INITIATIVES, INC.
FORM 10-Q
INDEX


TABLE OF CONTENTS



|                          |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|                          |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                          |                                                                                               | CONDENSED STATEMENTS OF CASH FLOWS                  
|                          |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                          | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                          | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                          | Item 4. Controls and Procedures                                                              
|PART II OTHER INFORMATION
|                          | Item 1. Legal Proceedings                                                                    
|                          | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                          | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES               
|EXHIBIT INDEX            
|EX-10.01                 
|EX-31.1                  
|EX-31.2                  
|EX-32.1                  
|EX-32.2                  



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|           |  |                       |  |                                                                                                   |      |   
|---------- |  | --------------------- |  | ------------------------------------------------------------------------------------------------- | ---- | --
|           |  |                       |  |                                                                                                   | Page
|PART I     |  | FINANCIAL INFORMATION |  |                                                                                                  
|           |  | Item 1.               |  | Condensed Consolidated Balance Sheet
as of June 30, 2003 and December 31, 2002                    |      | 1 
|           |  |                       |  | Condensed Consolidated Statements of
Operations for the three months ended
June 30, 2003 and 2002 |      | 3 
|           |  |                       |  | Condensed Consolidated Statements of
Operations for the six months ended
June 30, 2003 and 2002   |      | 4 
|           |  |                       |  | Condensed Consolidated Statements of
Cash Flows for the six months ended
June 30, 2003 and 2002   |      | 5 
|           |  |                       |  | Notes to Condensed Consolidated
Financial Statements                                              |      | 6 
|           |  | Item 2.               |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations             |      | 10
|           |  | Item 3.               |  | Quantitative and Qualitative Disclosures
About Market Risk                                        |      | 25
|           |  | Item 4.               |  | Controls and Procedures                                                                           |      | 25
|PART II    |  | OTHER INFORMATION     |  |                                                                                                  
|           |  | Item 1                |  | Legal Proceedings                                                                                 |      | 26
|           |  | Item 4                |  | Submission of Matters to a Vote of
Security Holders                                               |      | 26
|           |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                                  |      | 26
|SIGNATURES |  |                       |  | 28                                                                                               

Unless otherwise indicated in this quarterly report, Matrixx, us, we,
our, the Company and similar terms refer to Matrixx Initiatives, Inc. and
its subsidiaries. Zicam is a registered trademark of our subsidiary, Zicam,
LLC, and the Matrixx name and logo are trademarks of the Company.





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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

ASSETS

|                                 |                                                                             |                                                                     |                            |            |               |            |                   |            |           |            | 
|-------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------- | -------------------------- | ---------- | ------------- | ---------- | ----------------- | ---------- | --------- | ---------- | 
|                                 |                                                                             |                                                                     |                            |            | June 30, 2003 |            | December 31, 2002
|                                 |                                                                             |                                                                     |                            |            |               |            |                  
|Current Assets:                  |                                                                             |                                                                     |                            |            |               |            |                   |           
|                                 | Cash and cash equivalents                                                   |                                                                     | $                          | 8,755,174  |               |            | $                 | 12,010,091 |          
|                                 | Accounts receivable:                                                        |                                                                     |                            |            |               |            |                   |            |          
|                                 |                                                                             | Trade, net allowance for doubtful
accounts of $670,777 and $647,280 |                            |            | 865,865       |            |                   |            | 7,037,596 |           
|                                 | Inventories                                                                 |                                                                     |                            | 3,216,332  |               |            |                   | 1,573,034  |          
|                                 | Prepaid expenses and other                                                  |                                                                     |                            | 697,233    |               |            |                   | 523,829    |          
|                                 | Deferred tax asset                                                          |                                                                     |                            | 1,376,851  |               |            |                   | 1,073,765  |          
|                                 |                                                                             |                                                                     |                            |            |               |            |                   |            |          
|                                 |                                                                             |                                                                     | Total Current Assets       |            |               | 14,911,455 |                   |            |           | 22,218,315 | 
|                                 |                                                                             |                                                                     |                            |            |               |            |                   |            |          
|Property and Equipment, at cost: |                                                                             |                                                                     |                            |            |               |            |                   |           
|                                 | Office furniture and equipment                                              |                                                                     |                            | 640,073    |               |            |                   | 588,395    |          
|                                 | Leasehold improvements                                                      |                                                                     |                            | 37,202     |               |            |                   | 39,314     |          
|                                 |                                                                             |                                                                     |                            |            |               |            |                   |            |          
|                                 |                                                                             |                                                                     | 677,275                    |            |               |            | 627,709           |           
|                                 | Less accumulated depreciation                                               |                                                                     |                            | (165,692   | )             |            |                   | (89,795    | )        
|                                 |                                                                             |                                                                     |                            |            |               |            |                   |            |          
|                                 |                                                                             |                                                                     | Net Property and Equipment |            |               | 511,583    |                   |            |           | 537,914    | 
|                                 |                                                                             |                                                                     |                            |            |               |            |                   |            |          
|Other Assets:                    |                                                                             |                                                                     |                            |            |               |            |                   |           
|                                 | Deposits                                                                    |                                                                     |                            | 127,697    |               |            |                   | 37,697     |          
|                                 | Debt issuance costs, net of accumulated amortization
of $35,000 and $20,417 |                                                                     |                            |           |               |            |                   | 14,583     |          
|                                 | Deferred tax asset                                                          |                                                                     |                            | 8,280,589  |               |            |                   | 8,284,720  |          
|                                 | Patents, net of accumulated amortization of $105,240
and $71,700            |                                                                     |                            | 1,018,360  |               |            |                   | 1,051,900  |          
|                                 | Goodwill                                                                    |                                                                     |                            | 15,039,836 |               |            |                   | 15,039,836 |          
|                                 |                                                                             |                                                                     |                            |            |               |            |                   |            |          
|                                 |                                                                             |                                                                     | Total Other Assets         |            |               | 24,466,482 |                   |            |           | 24,428,736 | 
|                                 |                                                                             |                                                                     |                            |            |               |            |                   |            |          
|                                 |                                                                             |                                                                     | Total Assets               |            | $             | 39,889,520 |                   |            | $         | 47,184,965 | 
|                                 |                                                                             |                                                                     |                            |            |               |            |                   |            |          

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)

LIABILITIES AND STOCKHOLDERS EQUITY

|                                              |                                                                                                                    |                                            |            |               |            |                   |            |            |            | 
|--------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---------- | ------------- | ---------- | ----------------- | ---------- | ---------- | ---------- | 
|                                              |                                                                                                                    |                                            |            | June 30, 2003 |            | December 31, 2002
|                                              |                                                                                                                    |                                            |            |               |            |                  
|Current Liabilities:                          |                                                                                                                    |                                            |            |               |            |                   |            |           
|                                              | Accounts payable and accrued expenses                                                                              |                                            | $          | 1,668,021     |            |                   | $          | 5,771,407  |           
|                                              | Sales returns and allowances                                                                                       |                                            |            | 954,876       |            |                   |            | 1,004,713  |           
|                                              | Current portion of long-term debt                                                                                  |                                            |            | 2,676,715     |            |                   |            | 5,253,643  |           
|                                              |                                                                                                                    |                                            |            |               |            |                   |            |            |           
|                                              |                                                                                                                    | Total Current Liabilities                  |            |               | 5,299,612  |                   |            |            | 12,029,763 | 
|                                              |                                                                                                                    |                                            |            |               |            |                   |            |            |           
|Long-Term Debt, net of current portion above: |                                                                                                                    |                                            |            |               |            |                   |            |           
|                                              | Financial institutions and other                                                                                   |                                            |            | 2,676,715     |            |                   |            | 5,253,643  |           
|                                              | Less current portion above                                                                                         |                                            |            | (2,676,715    | )          |                   |            | (5,253,643 | )         
|                                              |                                                                                                                    |                                            |            |               |            |                   |            |            |           
|                                              |                                                                                                                    | Total Long-Term Debt                       |            |               |           |                   |            |            |           | 
|                                              |                                                                                                                    |                                            |            |               |            |                   |            |            |           
|Commitments and contingencies                 |                                                                                                                    |                                            |           |               |            |                   |           |           
|                                             
|Stockholders Equity:                         |                                                                                                                    |                                            |            |               |            |                   |            |           
|                                              | Preferred stock: $.001 par value, 2,000,000 shares
authorized, none issued or outstanding                          |                                            |            |              |            |                   |            |           |           
|                                              | Common stock: $.001 par value, 30,000,000 shares
authorized, 9,446,751 and 9,441,451 shares
issued and outstanding |                                            |            | 9,447         |            |                   |            | 9,442      |           
|                                              | Additional paid in capital                                                                                         |                                            |            | 41,563,317    |            |                   |            | 41,524,921 |           
|                                              | Accumulated deficit                                                                                                |                                            |            | (6,766,950    | )          |                   |            | (6,317,305 | )         
|                                              |                                                                                                                    |                                            |            |               |            |                   |            |            |           
|                                              |                                                                                                                    |                                            | 34,805,814 |               |            |                   | 35,217,058 |           
|                                              | Less common stock held in treasury, at cost
(32,400 and 9,600 shares)                                              |                                            |            | (215,906      | )          |                   |            | (61,856    | )         
|                                              |                                                                                                                    |                                            |            |               |            |                   |            |            |           
|                                              |                                                                                                                    | Total Stockholders Equity                 |            |               | 34,589,908 |                   |            |            | 35,155,202 | 
|                                              |                                                                                                                    |                                            |            |               |            |                   |            |            |           
|                                              |                                                                                                                    | Total Liabilities and Stockholders Equity |            | $             | 39,889,520 |                   |            | $          | 47,184,965 | 
|                                              |                                                                                                                    |                                            |            |               |            |                   |            |            |           

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                          |          |                            |                                                      |                               |         |                             |           |      |          |           |            |  
|--------------------------------------------------------- | -------- | -------------------------- | ---------------------------------------------------- | ----------------------------- | ------- | --------------------------- | --------- | ---- | -------- | --------- | ---------- | -
|                                                          |          |                            |                                                      |                               |         | Three months ended June 30,
|                                                          |          |                            |                                                      |                               |         |                            
|                                                          |          |                            |                                                      |                               |         | 2003                        |           | 2002
|                                                          |          |                            |                                                      |                               |         |                             |           |     
|Net sales                                                 |          | $                          | 2,994,419                                            |                               |         | $                           | 1,825,696 |     
|Cost of sales                                             |          |                            | 1,145,584                                            |                               |         |                             | 524,887   |     
|                                                          |          |                            |                                                      |                               |         |                             |           |     
|                                                          |          |                            |                                                      | Gross Profit                  |         |                             | 1,848,835 |      |          |           | 1,300,809  |  
|Operating expenses                                        |          |                            | 2,171,909                                            |                               |         |                             | 2,218,134 |     
|Research and development                                  |          |                            | 596,055                                              |                               |         |                             | 95,698    |     
|                                                          |          |                            |                                                      |                               |         |                             |           |     
|                                                          |          |                            |                                                      | Income (Loss) From Operations |         |                             | (919,129  | )    |          |           | (1,013,023 | )
|                                                          |          |                            |                                                      |                               |         |                             |           |     
|Other Income (Expense):                                   |          |                            |                                                      |                               |         |                             |           |     
|                                                          |          | Interest and other income  |                                                      |                               | 58,379  |                             |           |      | 310,635  |          
|                                                          |          | Interest and other expense |                                                      |                               | (87,359 | )                           |           |      | (169,006 | )        
|                                                          |          |                            |                                                      |                               |         |                             |           |     
|                                                          |          |                            |                                                      | Total Other Income (Expense)  |         |                             | (28,980   | )    |          |           | 141,629    |  
|                                                          |          |                            |                                                      |                               |         |                             |           |     
|Income (Loss) Before Provision (Benefit) For Income Taxes |          |                            | (948,109                                             | )                             |         |                             | (871,394  | )   
|Provision (benefit) for income taxes                      |          |                            | (381,110                                             | )                             |         |                             |          |     
|                                                          |          |                            |                                                      |                               |         |                             |           |     
|Net Income (Loss)                                         |          | $                          | (566,999                                             | )                             |         | $                           | (871,394  | )   
|                                                          |          |                            |                                                      |                               |         |                             |           |     
|Net Income (Loss) Per Share of Common Stock:              |          |                            |                                                      |                               |         |                             |           |     
|                                                          | Basic:   |                            |                                                      |                               |         |                             |           |      |         
|                                                          |          |                            | Weighted Average Number of Common Shares Outstanding |                               |         | 9,420,478                   |           |      |          | 9,422,659 |           
|                                                          |          |                            | Net Income (Loss) Per Share of Common Stock          |                               | $       | (0.06                       | )         |      | $        | (0.09     | )         
|                                                          | Diluted: |                            |                                                      |                               |         |                             |           |      |         
|                                                          |          |                            | Weighted Average Number of Common Shares Outstanding |                               |         | 9,420,478                   |           |      |          | 9,422,659 |           
|                                                          |          |                            | Net Income (Loss) Per Share of Common Stock          |                               | $       | (0.06                       | )         |      | $        | (0.09     | )         

The accompanying notes are an integral part of these condensed consolidated financial statements.

3



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                          |          |                            |                                                      |                               |          |                           |           |      |          |           |           |  
|--------------------------------------------------------- | -------- | -------------------------- | ---------------------------------------------------- | ----------------------------- | -------- | ------------------------- | --------- | ---- | -------- | --------- | --------- | -
|                                                          |          |                            |                                                      |                               |          | Six months ended June 30,
|                                                          |          |                            |                                                      |                               |          |                          
|                                                          |          |                            |                                                      |                               |          | 2003                      |           | 2002
|                                                          |          |                            |                                                      |                               |          |                           |           |     
|Net sales                                                 |          | $                          | 11,896,094                                           |                               |          | $                         | 6,893,207 |     
|Cost of sales                                             |          |                            | 3,794,629                                            |                               |          |                           | 1,772,123 |     
|                                                          |          |                            |                                                      |                               |          |                           |           |     
|                                                          |          |                            |                                                      | Gross Profit                  |          |                           | 8,101,465 |      |          |           | 5,121,084 |  
|Operating expenses                                        |          |                            | 7,864,440                                            |                               |          |                           | 5,099,183 |     
|Research and development                                  |          |                            | 906,817                                              |                               |          |                           | 122,243   |     
|                                                          |          |                            |                                                      |                               |          |                           |           |     
|                                                          |          |                            |                                                      | Income (Loss) From Operations |          |                           | (669,792  | )    |          |           | (100,342  | )
|                                                          |          |                            |                                                      |                               |          |                           |           |     
|Other Income (Expense):                                   |          |                            |                                                      |                               |          |                           |           |     
|                                                          |          | Interest and other income  |                                                      |                               | 95,338   |                           |           |      | 424,328  |          
|                                                          |          | Interest and other expense |                                                      |                               | (173,194 | )                         |           |      | (351,218 | )        
|                                                          |          |                            |                                                      |                               |          |                           |           |     
|                                                          |          |                            |                                                      | Total Other Income (Expense)  |          |                           | (77,856   | )    |          |           | 73,110    |  
|                                                          |          |                            |                                                      |                               |          |                           |           |     
|Income (Loss) Before Provision (Benefit) For Income Taxes |          |                            | (747,648                                             | )                             |          |                           | (27,232   | )   
|Provision (benefit) for income taxes                      |          |                            | (298,003                                             | )                             |          |                           | (84,702   | )   
|                                                          |          |                            |                                                      |                               |          |                           |           |     
|Net Income (Loss)                                         |          | $                          | (449,645                                             | )                             |          | $                         | 57,470    |     
|                                                          |          |                            |                                                      |                               |          |                           |           |     
|Net Income (Loss) Per Share of Common Stock:              |          |                            |                                                      |                               |          |                           |           |     
|                                                          | Basic:   |                            |                                                      |                               |          |                           |           |      |         
|                                                          |          |                            | Weighted Average Number of Common Shares Outstanding |                               |          | 9,424,913                 |           |      |          | 9,422,672 |          
|                                                          |          |                            | Net Income (Loss) Per Share of Common Stock          |                               | $        | (0.05                     | )         |      | $        | 0.01      |          
|                                                          | Diluted: |                            |                                                      |                               |          |                           |           |      |         
|                                                          |          |                            | Weighted Average Number of Common Shares Outstanding |                               |          | 9,424,913                 |           |      |          | 9,435,173 |          
|                                                          |          |                            | Net Income (Loss) Per Share of Common Stock          |                               | $        | (0.05                     | )         |      | $        | 0.01      |          

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                  |                                                                                                 |                                                      |                                       |              |            |                           |         |        |            |            |         | 
|------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------------- | ------------ | ---------- | ------------------------- | ------- | ------ | ---------- | ---------- | ------- | 
|                                                  |                                                                                                 |                                                      |                                       |              |            | Six months ended June 30,
|                                                  |                                                                                                 |                                                      |                                       |              |            |                          
|                                                  |                                                                                                 |                                                      |                                       |              |            | 2003                      |         | 2002  
|                                                  |                                                                                                 |                                                      |                                       |              |            |                           |         |       
|Cash Flows From Operating Activities:             |                                                                                                 |                                                      |                                       |              |            |                           |         |       
|                                                  | Net income (loss)                                                                               |                                                      | $                                     | (449,645     | )          |                           | $       | 57,470 |           
|                                                  | Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities: |                                                      |                                       |              |            |                           |         |        |           
|                                                  |                                                                                                 | Depreciation                                         |                                       |              | 75,897     |                           |         |        | 14,718     |           
|                                                  |                                                                                                 | Amortization                                         |                                       |              | 33,540     |                           |         |        | 33,540     |           
|                                                  |                                                                                                 | Amortization of imputed interest on notes payable    |                                       |              | 173,072    |                           |         |        | 335,281    |           
|                                                  |                                                                                                 | Amortization of debt issuance costs                  |                                       |              | 14,583     |                           |         |        |           |           
|                                                  |                                                                                                 | Deferred income taxes                                |                                       |              | (298,955   | )                         |         |        |           |           
|                                                  |                                                                                                 | Loss on disposal of property and equipment           |                                       |              |           |                           |         |        | 20,104     |           
|                                                  |                                                                                                 | Other                                                |                                       |              | 2,401      |                           |         |        | 929        |           
|                                                  |                                                                                                 | Changes in assets and liabilities:                   |                                       |              |            |                           |         |        |            |           
|                                                  |                                                                                                 |                                                      | Restricted cash                       |              |            |                          |         |        |            | 1,503,150  |        
|                                                  |                                                                                                 |                                                      | Accounts receivable                   |              |            | 6,171,731                 |         |        |            | 3,714,379  |        
|                                                  |                                                                                                 |                                                      | Interest receivable                   |              |            |                          |         |        |            | (16,370    | )      
|                                                  |                                                                                                 |                                                      | Inventories                           |              |            | (1,643,298                | )       |        |            | 398,844    |        
|                                                  |                                                                                                 |                                                      | Prepaid expenses and other            |              |            | (173,404                  | )       |        |            | 101,432    |        
|                                                  |                                                                                                 |                                                      | Accounts payable and accrued expenses |              |            | (4,304,762                | )       |        |            | (5,965,537 | )      
|                                                  |                                                                                                 |                                                      | Sales returns and allowances          |              |            | (49,837                   | )       |        |            | (865,295   | )      
|                                                  |                                                                                                 |                                                      |                                       |              |            |                           |         |        |           
|                                                  |                                                                                                 | Net Cash (Used) By Operating Activities              |                                       |              | (448,677   | )                         |         |        | (667,355   | )         
|                                                  |                                                                                                 |                                                      |                                       |              |            |                           |         |        |           
|Cash Flows From Investing Activities:             |                                                                                                 |                                                      |                                       |              |            |                           |         |       
|                                                  |                                                                                                 | Maturity of marketable securities                    |                                       |              |           |                           |         |        | 10,656,380 |           
|                                                  |                                                                                                 | Capital expenditures                                 |                                       |              | (49,566    | )                         |         |        | (388,703   | )         
|                                                  |                                                                                                 | Deposits and other                                   |                                       |              | (90,000    | )                         |         |        | (256,024   | )         
|                                                  |                                                                                                 |                                                      |                                       |              |            |                           |         |        |           
|                                                  |                                                                                                 | Net Cash Provided (Used) By Investing Activities     |                                       |              | (139,566   | )                         |         |        | 10,011,653 |           
|                                                  |                                                                                                 |                                                      |                                       |              |            |                           |         |        |           
|Cash Flows From Financing Activities:             |                                                                                                 |                                                      |                                       |              |            |                           |         |       
|                                                  |                                                                                                 | Purchase of treasury stock                           |                                       |              | (154,050   | )                         |         |        | (9,420     | )         
|                                                  |                                                                                                 | Debt issuance costs                                  |                                       |              |           |                           |         |        | (32,083    | )         
|                                                  |                                                                                                 | Principal payments on notes payable                  |                                       |              | (2,548,624 | )                         |         |        | (3,367,813 | )         
|                                                  |                                                                                                 | Issuance of common stock                             |                                       |              | 36,000     |                           |         |        |           |           
|                                                  |                                                                                                 |                                                      |                                       |              |            |                           |         |        |           
|                                                  |                                                                                                 | Net Cash (Used) By Financing Activities              |                                       |              | (2,666,674 | )                         |         |        | (3,409,316 | )         
|                                                  |                                                                                                 |                                                      |                                       |              |            |                           |         |        |           
|                                                  |                                                                                                 | Net Increase (Decrease) in Cash and Cash Equivalents |                                       |              | (3,254,917 | )                         |         |        | 5,934,982  |           
|                                                  |                                                                                                 | Cash and Cash Equivalents at Beginning of Period     |                                       |              | 12,010,091 |                           |         |        | 7,342,985  |           
|                                                  |                                                                                                 |                                                      |                                       |              |            |                           |         |        |           
|                                                  |                                                                                                 | Cash and Cash Equivalents at End of Period           |                                       | $            | 8,755,174  |                           |         | $      | 13,277,967 |           
|                                                  |                                                                                                 |                                                      |                                       |              |            |                           |         |        |           
|Supplemental Disclosure of Cash Flow Information: |                                                                                                 |                                                      |                                       |              |            |                           |         |       
|                                                  |                                                                                                 | Cash paid during the period for:                     |                                       |              |            |                           |         |        |            |           
|                                                  |                                                                                                 |                                                      |                                       | Interest     |            | $                         | 201,498 |        |            | $          | 412,371 | 
|                                                  |                                                                                                 |                                                      |                                       | Income taxes |            |                           | 950     |        |            |            |        | 

The accompanying notes are an
integral part of these condensed financial statements

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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



|1. |  | The accompanying financial information of Matrixx Initiatives, Inc. is
prepared in accordance with the rules prescribed for filing condensed
interim financial statements and, accordingly, does not include all
disclosures that may be necessary for complete financial statements
prepared in accordance with generally accepted accounting principles. The
disclosures presented are sufficient, in managements opinion, to make the
interim information presented not misleading. All adjustments, consisting
of normal recurring adjustments, which are necessary so as to make the
interim information not misleading, have been made. Results of operations
for the six months ended June 30, 2003 are not necessarily indicative of
results of operations that may be expected for the year ending December
31, 2003. It is recommended that this financial information be read with
the complete financial statements included in Matrixxs Annual Report on
Form 10-K for the year ended December 31, 2002 previously filed with the
Securities and Exchange Commission.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | As of December 31, 1997, Matrixx adopted Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, which specifies
the method of computation, presentation and disclosure of earnings per
share. SFAS No. 128 requires the presentation of two earnings per share
amounts, basic and diluted. Basic earnings per share is calculated using
the average number of common shares outstanding. Diluted earnings per
share is computed on the basis of the average number of common shares
outstanding plus the dilutive effect of outstanding stock options using
the treasury stock method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The schedule below summarizes the elements included in the calculation of
basic and diluted net income (loss) per common share for the three and six
months ended June 30, 2003 and 2002. Options, warrants and other
incremental shares to purchase 511,300 and 428,000 shares of common stock
for the six months ended June 30, 2003 and 2002, respectively, were not
included in the computation of diluted earnings per share because their
effect would be anti-dilutive. Options, warrants and other incremental
shares to purchase 511,300 and 563,000 shares of common stock for the three
months ended June 30, 2003 and 2002, respectively, were not included in the
computation of diluted earnings per share because their effect would be
anti-dilutive.                                                                                                                                                                                                                                                                                                               

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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

|                                            |  |   |                     |   |                    |           |                  |   |      |           |          |   |   |           |        |  |   |           | 
|------------------------------------------- |  | - | ------------------- | - | ------------------ | --------- | ---------------- | - | ---- | --------- | -------- | - | - | --------- | ------ |  | - | --------- | 
|                                            |  |   |                     |   | Three Months Ended |           | Six Months Ended
|                                            |  |   |                     |   | June 30,           |           | June 30,        
|                                            |  |   |                     |   |                    |           |                 
|                                            |  |   |                     |   | 2003               |           | 2002             |   | 2003 |           | 2002    
|                                            |  |   |                     |   |                    |           |                  |   |      |           |         
|Net income (loss)                           |  | $ | (566,999            | ) |                    | $         | (871,394         | ) |      | $         | (449,645 | ) |   | $         | 57,470 | 
|                                            |  |   |                     |   |                    |           |                  |   |      |           |          |   |   |           |        |  |  
|Weighted average common
shares outstanding: |  |   |                     |   |                    |           |                  |   |      |           |          |   |   |           |        | 
|                                            |  |   | Basic               |   |                    | 9,420,478 |                  |   |      | 9,422,659 |          |   |   | 9,424,913 |        |  |   | 9,422,672 | 
|                                            |  |   | Dilutive securities |   |                    |          |                  |   |      |          |          |   |   |          |        |  |   | 12,501    | 
|                                            |  |   |                     |   |                    |           |                  |   |      |           |          |   |   |           |        |  |  
|                                            |  |   | Diluted             |   |                    | 9,420,478 |                  |   |      | 9,422,659 |          |   |   | 9,424,913 |        |  |   | 9,435,173 | 
|                                            |  |   |                     |   |                    |           |                  |   |      |           |          |   |   |           |        |  |  
|Net income (loss)
per common share:         |  |   |                     |   |                    |           |                  |   |      |           |          |   |   |           |        | 
|                                            |  |   | Basic               |   | $                  | (.06      | )                |   | $    | (.09      | )        |   | $ | (.05      | )      |  | $ | .01       | 
|                                            |  |   | Diluted             |   | $                  | (.06      | )                |   | $    | (.09      | )        |   | $ | (.05      | )      |  | $ | .01       | 



|3. |  | Inventories consisted of the following at June 30, 2003:
|-- |  | --------------------------------------------------------

|                              |       |   |           |           | 
|----------------------------- | ----- | - | --------- | --------- | 
|Raw materials and packaging   |       | $ | 920,830   |          
|Finished goods                |       |   | 2,436,725 |          
|Less reserve for obsolescence |       |   | (141,223  | )        
|                              |       |   |           |          
|                              | Total |   | $         | 3,216,332 | 
|                              |       |   |           |          



|4. |  | Stock-Based Compensation
|-- |  | ------------------------

The Company adopted Statement of Financial Accounting Standard (SFAS) No.
123, Accounting for Stock-Based Compensation. The Company will continue to
measure compensation expense for its stock-based employee compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees and related interpretations in accounting for
its plans and does not recognize compensation expense for its stock-based
compensation plans other than for options granted to non-employees. If the
Company had elected to recognize compensation expense based upon the fair value
at the grant date for awards under its stock-based compensation plans
consistent with the methodology prescribed by SFAS No. 123, the Companys net
income and earnings per share would be reduced to the following pro forma
amounts:

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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

|                                                                                                                                    |          |             |          |                    |      |                  |            |      |      |      |          |   |      |   |          |   |      |  
|----------------------------------------------------------------------------------------------------------------------------------- | -------- | ----------- | -------- | ------------------ | ---- | ---------------- | ---------- | ---- | ---- | ---- | -------- | - | ---- | - | -------- | - | ---- | -
|                                                                                                                                    |          |             |          | Three Months Ended |      | Six Months Ended
|                                                                                                                                    |          |             |          | June 30,           |      | June 30,        
|                                                                                                                                    |          |             |          |                    |      |                 
|                                                                                                                                    |          |             |          | 2003               |      | 2002             |            | 2003 |      | 2002
|                                                                                                                                    |          |             |          |                    |      |                  |            |      |      |     
|Net income (loss) applicable to
common shareholders, as reported                                                                    |          | $           | (566,999 | )                  |      | $                | (871,394   | )    |      | $    | (449,645 | ) |      | $ | 57,470   |  
|Less stock based employee compensation
expense determined under fair value
based methods for all awards, net of
related tax effects |          |             | 84,906   |                    |      |                  | 148,589    |      |      |      | 242,921  |   |      |   | 262,188  |  
|                                                                                                                                    |          |             |          |                    |      |                  |            |      |      |      |          |   |      |   |          |  
|Pro forma net income (loss)                                                                                                         |          | $           | (651,905 | )                  |      | $                | (1,019,983 | )    |      | $    | (692,566 | ) |      | $ | (204,718 | )
|                                                                                                                                    |          |             |          |                    |      |                  |            |      |      |      |          |   |      |   |          |  
|Net income (loss) per share
of common stock:                                                                                        |          |             |          |                    |      |                  |            |      |      |      |          |   |      |   |          |  
|                                                                                                                                    | Basic:   |             |          |                    |      |                  |            |      |      |      |          |   |      |   |          |   |     
|                                                                                                                                    |          | As reported |          | $                  | (.06 | )                |            | $    | (.09 | )    |          | $ | (.05 | ) |          | $ | .01  |  
|                                                                                                                                    |          | Pro forma   |          | $                  | (.07 | )                |            | $    | (.11 | )    |          | $ | (.07 | ) |          | $ | (.02 | )
|                                                                                                                                    | Diluted: |             |          |                    |      |                  |            |      |      |      |          |   |      |   |          |   |     
|                                                                                                                                    |          | As reported |          | $                  | (.06 | )                |            | $    | (.09 | )    |          | $ | (.05 | ) |          | $ | .01  |  
|                                                                                                                                    |          | Pro forma   |          | $                  | (.07 | )                |            | $    | (.11 | )    |          | $ | (.07 | ) |          | $ | (.02 | )



|5. |  | Recent Developments
|-- |  | -------------------

On April 4, 2003, the Company commenced legal proceedings against Zila Swab
Technologies, Inc. (doing business as Innovative Swab Technologies) (IST),
the contract manufacturer of the dry handle swab applicator for Zicam® Cold
Remedy Swab products, and its parent, Zila, Inc. In its demand for
arbitration, the Company claimed that, among other things, IST materially
breached the manufacturing contract by repeatedly and consistently failing to
meet minimum swab production levels since the contracts inception in 2002 and
by attempting in March 2003 to unilaterally increase the contracts pricing
terms. The parties to the dispute have agreed to settle all claims. The
settlement agreement, among other things, extends the existing manufacturing
contract through the end of March 2004, requires IST to continue to provide
swab products to the Company at current levels and requires the Company to pay
ISTs increased pricing terms. The Company believes the settlement agreement
will help facilitate an orderly transition to a new swab product produced by a
different contract manufacturer, allowing the Company to provide appropriate
levels of service to its retail customers until the transition is complete. As
a result of the settlement, the Companys financial results for the quarter
ended June 30, 2003 reflect the higher prices for swab products demanded by IST
since March 2003 and the expensing of certain items that the Company had
previously anticipated recovering from IST through the arbitration process.

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MATRIXX INITIATIVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In August 2003, the Company announced plans to introduce in January 2004, a
new, improved swab design for Zicam Cold Remedy Swabs and Zicam Kids Size Cold
Remedy Swabs. The new swabs were designed by DEKA Research & Development, a
leading innovator in the design of advanced medical products and technologies.

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Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations

Overview

Through our 100%-owned subsidiary, Zicam LLC, we are engaged in the
development, production and sale of over-the-counter pharmaceutical products.
In 2002, we introduced five new Zicam nasal gel products, improved package
graphics for our entire Zicam product line and engaged a new sales team to
represent our products to retailers. At our annual meeting of shareholders
held on April 30, 2003, we introduced three new Zicam Cold Remedy products -
Oral Mist, Chewables and RapidMelts  that we intend to ship to retailers in
the third quarter of 2003.

We expect earnings in future periods will be significantly affected by the
level of sales, and the timing and amount of our advertising and research and
development expenses. Our expected growth in sales will depend on our success
in securing additional retail distribution of our products, and in particular
additional distribution of the five products that were introduced in 2002 and
the three new products that we plan to introduce in late 2003. In addition,
sales in future periods will be affected by expanding consumer awareness and
acceptance of our entire Zicam brand of products. Expenditures for advertising
and research and development will vary by quarter throughout the year and could
be significantly different from amounts in the same periods in prior years. We
expect advertising expenses to be heaviest in our first and fourth fiscal
quarters.

Results of Operations for the Three Months Ended June 30, 2003 Compared to the
Three Months Ended June 30, 2002

Certain information is set forth below for our Zicam operations expressed
in dollars and as a percentage of net sales for the periods indicated:

|                                     |                            |   |                             |           |      |  |     |     |    |   |           |            |   |  |     |     |   
|------------------------------------ | -------------------------- | - | --------------------------- | --------- | ---- |  | --- | --- | -- | - | --------- | ---------- | - |  | --- | --- | --
|                                     |                            |   | Three Months Ended June 30,
|                                     |                            |   |                            
|                                     |                            |   | 2003                        |           | 2002
|                                     |                            |   |                             |           |     
|Net sales                            |                            | $ | 2,994,419                   |           |      |  | 100 | %   |    | $ | 1,825,696 |            |   |  | 100 | %  
|Cost of sales                        |                            |   | 1,145,584                   |           |      |  | 38  |     |    |   | 524,887   |            |   |  | 29  |    
|                                     |                            |   |                             |           |      |  |     |     |    |   |           |            |   |  |     |    
|                                     | Gross profit               |   |                             | 1,848,835 |      |  |     | 62  |    |   |           | 1,300,809  |   |  |     | 71  |   
|Operating expenses                   |                            |   | 2,171,909                   |           |      |  | 73  |     |    |   | 2,218,134 |            |   |  | 121 |    
|Research and development             |                            |   | 596,055                     |           |      |  | 20  |     |    |   | 95,698    |            |   |  | 5   |    
|                                     |                            |   |                             |           |      |  |     |     |    |   |           |            |   |  |     |    
|                                     | Income from operations     |   |                             | (919,129  | )    |  |     | (31 | )  |   |           | (1,013,023 | ) |  |     | (55 | ) 
|Interest and other income            |                            |   | 58,379                      |           |      |  | 2   |     |    |   | 310,635   |            |   |  | 17  |    
|Interest expense                     |                            |   | 87,359                      |           |      |  | 3   |     |    |   | 169,006   |            |   |  | 9   |    
|                                     |                            |   |                             |           |      |  |     |     |    |   |           |            |   |  |     |    
|                                     | Income before income taxes |   |                             | (948,109  | )    |  |     | (32 | )  |   |           | (871,394   | ) |  |     | (47 | ) 
|Provision (benefit) for income taxes |                            |   | (381,110                    | )         |      |  | (13 | )   |    |   |          |            |   |  |    |    
|                                     |                            |   |                             |           |      |  |     |     |    |   |           |            |   |  |     |    
|                                     | Net Income (Loss)          |   | $                           | (566,999  | )    |  |     | (19 | )% |   | $         | (871,394   | ) |  |     | (47 | )%
|                                     |                            |   |                             |           |      |  |     |     |    |   |           |            |   |  |     |    

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Net sales.Net Zicam sales for the three months ended June 30, 2003
increased to approximately $3.0 million, or approximately 64% above net sales
in the second quarter of the prior year. Most of the increase in net sales was
attributable to sales of the five new products that we introduced in late 2002,
in particular, sales of Zicam Cold Remedy Swabs  Adult Size and Zicam Extreme
Congestion Relief. Offsetting the increase was approximately $100,000 in fines
incurred in previous periods from retailers that were expensed in the second
quarter of 2003 due to the settlement of our contract dispute with IST in
August 2003. (For further information on the dispute and settlement with IST,
see Note 5 to the Notes to Consolidated Financial Statements included in this
Form 10-Q.)

Demand for our products is highly seasonal which results in significant
fluctuations in our quarterly sales throughout the year. Generally, sales in
the second quarter are substantially less than sales in other quarters of the
year. We expect increases in sales in future periods from continued growth,
albeit at a lower rate than in past periods, for our Zicam Cold
Remedy  pump
and Zicam Allergy Relief products, and increased distribution and sales of the
five products we introduced in 2002 and the three new products that we plan to
begin shipping in the third quarter of 2003.

Prior to April 1, 2003, we experienced a backorder for Zicam Cold Remedy
Swabs  Adult Size and Kids Size due to the inability of our contract
manufacturer, IST, to meet production obligations under our manufacturing
contract. With the end of the 2002-2003 cold season, the backorder situation
has been eliminated. We have attempted to build inventory as much as possible
during the past three months and will continue to do so prior to the start of
the 2003-2004 cold season in order to meet expected demand for the swab
products. We cannot be certain that IST will be able to produce the amount of
inventory that we are seeking to acquire, particularly for Zicam Cold Remedy
Swabs  Kids Size. Even if we are able to acquire this inventory, it is
possible that another backlog could occur in the next cold season as a result
of higher product demand.

In August 2003, we announced plans to introduce in January 2004, a new,
improved swab design for Zicam Cold Remedy Swabs and Zicam Kids Size Cold
Remedy Swabs. The new swabs were designed by DEKA Research & Development, a
leading innovator in the design of advanced medical products and technologies.
The new swab is designed to appeal even more to customers, while allowing us to
maintain our gross margins for our swab products and to avoid the supply issues
we faced during 2002 and 2003. We cannot provide assurance that the new swab
will gain the acceptance by consumers achieved with our current swab or that
supplies of the new swab will be adequate, but we believe, based on initial
testing, that consumers will enthusiastically accept the new swabs and that it
will provide a meaningful solution to our swab backlog problems.

At our annual meeting of shareholders held in April 2003, we indicated
that we expected our net sales for 2003 would be at least 30% greater than net
sales for 2002 of $23.5 million.

Cost of sales.Our cost of sales increased to approximately $1,145,584,
or 118% above the second quarter of 2002 cost of sales of approximately
$525,000. Approximately half of the increase was due to the higher sales
volume and the remaining half was due to the mix of products sold, including
the higher cost of the swabs that we agreed to in our settlement with IST. Our
swab products cost more per unit than our other products. Consequently, the
increasing percentage of sales from swab products has

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resulted in a higher total unit cost. We expect that the unit cost of
goods sold will continue to be affected by the relative mix of products sold.
We announced in August 2003 the planned introduction in January 2004 of a new
swab which we expect will result in a decrease in the unit cost of our swab
products.

Gross profit.Gross profit for the second quarter of 2003 increased to
approximately $1.8 million, or 42% greater than the second quarter of 2002, due
to the substantial increase in units sold. However, the gross margin on
products sold declined from 71% to 62% for the periods due to the higher per
unit cost of the swab products sold in 2003.

Operating expenses.Operating expenses for the second quarter of 2003
decreased approximately $46,000, or 2%, from our operating expenses in the
second quarter of 2002. A decrease in advertising expenses between the two
periods of approximately $243,000 ($472,000 in 2003 versus $715,000 in 2002)
offset increases in non-advertising marketing expenses ($157,000), insurance
expense ($72,000) and sales commissions ($71,000). We expect that operating
expenses in future periods will vary largely in relation to the level of our
advertising expenditures.

Research and development.Research and development expenses increased
substantially from approximately $96,000 in the second quarter of 2002 to
approximately $596,000 in the second quarter of 2003. The increase reflects
our previously announced commitment to expand our research and development
efforts in 2003 to an amount equal to approximately 6% of annual net sales in
order to establish a continuous pipeline of new product offerings in future
periods. The amount spent in the second quarter of 2003 includes work on the
three products to be introduced in the third quarter of 2003, as well as work
on products that are projected to be introduced in subsequent years.

Interest and other income.Interest and other income for the second
quarter of 2003 decreased to $58,000, approximately 19% of the amount recorded
in the second quarter of 2002. The decrease is largely due to a decrease of
approximately $206,000 in royalty income between the two periods. The royalty
income in both periods is attributable to a dental gum product sold by the Wm.
Wrigley Company (Wrigley) that is subject to a royalty agreement between
Wrigley and us. The higher royalty amount received in the 2002 period reflects
higher level of shipments during the products introductory period. Interest
income also declined between the two periods due to a lower invested cash
position and a decline in investment interest rates.

Interest expense.Interest expense for the second quarter of 2003
decreased to approximately $87,000, nearly 52% below the level of the second
quarter of 2002. Interest expense for both periods is related to the imputed
interest associated with the note issued by us to Zensano, Inc. in connection
with our acquisition of Zensanos 40% interest in Zicam, LLC (then Gel Tech,
L.L.C.) in December 2001. The decrease in interest related to the note is due
to our repayment of one-half of the note in 2002. The third required
installment under the note was paid on June 30, 2003 and the final payment of
$2.75 million is due on November 30, 2003.

Net loss before income tax.The net loss before income taxes for the
second quarter of 2003 increased approximately $77,000, or 9%, from the second
quarter of 2002 due to an increase in research and development expenses which
was offset in part by higher net sales. We expect earnings in future periods
will continue to be significantly impacted by the seasonality of

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our sales, revenues and expenses associated with new products and the
timing and amount of advertising and research and development expenses.

Provision for income tax expense.In 2003, we recorded a provision for
income tax expense based on an estimate of our effective income tax rate for
the full year. This reflects the determination that we made at the end of
fiscal 2002, that we would more likely than not, be able to realize the benefit
of tax losses accumulated in prior years to offset taxable income in 2003 and
future years. In the second quarter of 2002, we were not able to make a
similar determination, and consequently, reflected a full valuation allowance
on the deferred tax assets.

Net income (loss).At the Annual Meeting of Shareholders in April 2003,
we announced that we expect net income for 2003 will increase at least 30%
above the level achieved in 2002, after adjusting for the one-time deferred tax
asset that was recorded in late 2002.

Results of Operations for the Six Months Ended June 30, 2003 Compared to the
Six Months Ended June 30, 2002

Certain information is set forth below for our Zicam operations expressed
in dollars and as a percentage of net sales for the periods indicated:

|                                   |                                   |   |                           |           |      |  |     |    |    |   |           |           |   |  |     |    |  
|---------------------------------- | --------------------------------- | - | ------------------------- | --------- | ---- |  | --- | -- | -- | - | --------- | --------- | - |  | --- | -- | -
|                                   |                                   |   | Six Months Ended June 30,
|                                   |                                   |   |                          
|                                   |                                   |   | 2003                      |           | 2002
|                                   |                                   |   |                           |           |     
|Net sales                          |                                   | $ | 11,896,094                |           |      |  | 100 | %  |    | $ | 6,893,207 |           |   |  | 100 | % 
|Cost of sales                      |                                   |   | 3,794,629                 |           |      |  | 32  |    |    |   | 1,772,123 |           |   |  | 26  |   
|                                   |                                   |   |                           |           |      |  |     |    |    |   |           |           |   |  |     |   
|                                   | Gross profit                      |   |                           | 8,101,465 |      |  |     | 68 |    |   |           | 5,121,084 |   |  |     | 74 |  
|Operating expenses                 |                                   |   | 7,864,440                 |           |      |  | 66  |    |    |   | 5,099,183 |           |   |  | 74  |   
|Research and development           |                                   |   | 906,817                   |           |      |  | 8   |    |    |   | 122,243   |           |   |  | 1   |   
|                                   |                                   |   |                           |           |      |  |     |    |    |   |           |           |   |  |     |   
|                                   | Income from operations            |   |                           | (669,792  | )    |  |     | (6 | )  |   |           | (100,342  | ) |  |     | (1 | )
|Interest and other income          |                                   |   | 95,338                    |           |      |  | 1   |    |    |   | 424,328   |           |   |  | 6   |   
|Interest expense                   |                                   |   | 173,194                   |           |      |  | 1   |    |    |   | 351,218   |           |   |  | 5   |   
|                                   |                                   |   |                           |           |      |  |     |    |    |   |           |           |   |  |     |   
|                                   | Income (loss) before income taxes |   |                           | (747,648  | )    |  |     | (6 | )  |   |           | (27,232   | ) |  |     | ( | )
|Provision (benefit) for income tax |                                   |   | (298,003                  | )         |      |  | (2  | )  |    |   | (84,702   | )         |   |  | (1  | ) 
|                                   |                                   |   |                           |           |      |  |     |    |    |   |           |           |   |  |     |   
|                                   | Net Income (Loss)                 |   | $                         | (449,645  | )    |  |     | (4 | )% |   | $         | 57,470    |   |  |     | 1  | %
|                                   |                                   |   |                           |           |      |  |     |    |    |   |           |           |   |  |     |   

Net sales.Net Zicam sales for the six months ended June 30, 2003
increased to approximately $11.9 million, or almost 73% above net sales in the
first half of 2002. Virtually all of the increase in net sales was
attributable to sales of the five new products that we introduced in late 2002,
in particular, sales of Zicam Cold Remedy Swabs  Adult Size and Zicam Extreme
Congestion Relief, and in the first quarter of 2003, to increased advertising
compared to the first quarter of 2002.

Demand for our products is highly seasonal which results in significant
fluctuations in our quarterly sales throughout the year. We expect increase in
sales in future periods from continues growth, albeit at a lower rate than in
past periods, for our Zicam Cold Remedy-pump

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and Zicam Allergy Relief products, and increased sales of the five
products we introduced in 2002, as well as the three new products that we plan
to begin shipping in the third quarter of 2003.

Prior to April 1, 2003, we experienced a backorder for Zicam Cold Remedy
Swabs  Adult Size and Kids Size due to the inability of our contract
manufacturer, IST, to meet production obligations under our manufacturing
contract. With the end of the 2002-2003 cold season, the backorder situation
has been eliminated. We have attempted to build inventory as much as possible
during the past three months and will continue to do so prior to the start of
the 2003-2004 cold season in order to meet expected demand for the swab
products. We cannot be certain that IST will be able to produce the amount of
inventory that we are seeking to acquire, particularly for Zicam Cold Remedy
Swabs  Kids Size. Even if we are able to acquire this inventory, it is
possible that another backlog could occur in the next cold season as a result
of higher product demand.

In August 2003, we announced plans to introduce in January 2004, a new,
improved swab design for Zicam Cold Remedy Swabs and Zicam Kids Size Cold
Remedy Swabs. The new swabs were designed by DEKA Research & Development, a
leading innovator in the design of advanced medical products and technologies.
The new swab is designed to appeal even more to customers, while allowing us to
maintain our gross margins for our swab products and to avoid the supply issues
we faced during 2002 and 2003. We cannot provide assurance that the new swab
will gain the acceptance by consumers achieved with our current swab or that
supplies of the new swab will be adequate, but we believe, based on initial
testing, that consumers will enthusiastically accept the new swabs and that it
will provide a meaningful solution to our swab backlog problems.

Cost of sales.Our cost of sales in the first six months of 2003
increased to approximately $3.8 million, or 114% greater than the approximately
$1.8 million cost of sales in the first six months of 2002. Approximately 70%
of the increase was due to the higher sales volume and the remaining 30% was
due to the mix of products sold, including the higher cost of the swabs that we
agreed to in our settlement with IST. Our swab products cost more per unit
than our other products. Consequently, the increasing percentage of sales from
swab products has resulted in a higher total unit cost. We expect that the
unit cost of goods sold will continue to be affected by the relative mix of
products sold. We announced in August 2003 the planned introduction in January
2004 of a new swab which we expect will result in a decrease in the unit cost
of our swab products.

Gross profit.Gross profit for the first half of 2003 increased to
approximately $8.1 million, or 58% greater than the first half of 2002, due to
the substantial increase in units sold. However, the gross margin on products
sold declined from 74% to 68% for the periods due to the higher per unit cost
of the swab products sold in 2003.

Operating expenses.Operating expenses for the first half of 2003
increased to $7.9 million, more than 54% above our operating expenses for the
first half of 2002. The increase was primarily due to an increase in
advertising expenses of $2.5 million during the first half of 2003 ($4.2
million in 2003 versus $1.7 million in 2002). Also contributing to the
increase in operating expenses was an increase in sales commission expense of
approximately $348,000 due

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to higher sales, increases in other marketing expenses of $191,000 and
higher insurance expense of $126,000. Offsetting these increases to an extent
was the absence of a royalty payment charge of approximately $296,000 which we
incurred in the first quarter of 2002. We expect that operating expenses in
future periods will vary largely in connection with the level of our
advertising expenditures.

Research and development.Research and development expenses increased
more than 641% from approximately $122,000 in the first half of 2002 to
approximately $906,000 in the first half of 2003. The increase reflects our
previously announced commitment to expand our research and development efforts
in 2003 to an amount equal to approximately 6% of annual net sales in order to
establish a continued pipeline of new product offerings in future periods.

Interest and other income.Interest and other income for the first half
of 2003 decreased to $95,000, or approximately $329,000 (or 78%) below the
level recorded in the first half of 2002. The decrease is largely due to a
decrease of approximately $206,000 in royalty income between the two periods.
The royalty income in both periods is attributable to a dental gum product sold
by Wrigley that is subject to a royalty agreement between Wrigley and us.
The higher royalty amount received in the 2002 period reflects higher level of
shipments during the products introductory period. Interest income also
declined between the two periods due to a lower invested cash position and a
decline in investment interest rates.

Interest expense.Interest expense for the first half of 2003 decreased
to approximately $173,000, or 49% below the level of the first half of 2002.
Interest expense for both periods is primarily related to the imputed interest
associated with the note issued by us to Zensano, Inc. in connection with our
acquisition of Zensanos 40% interest in Zicam, LLC (then Gel Tech, L.L.C.) in
December 2001. The interest related to the note decreased due to our repayment
of one-half of the note in 2002. The third required installment under the note
was paid on June 30, 2003 and the final payment of $2.75 million is due on
November 30, 2003.

Loss before income tax.The net loss before income taxes increased from
$27,000 in the first half of 2002 to $748,000 in the first half of 2003. The
higher level of advertising expenditures in the first quarter of 2003 and the
higher level of research and development expenses in the first half of 2003
offset the benefit of the higher net sales realized in the first half of 2003.
We expect that earnings in future periods will continue to be significantly
impacted by the seasonality of our sales, revenues and expenses associated with
new products and the timing and amount of advertising and research and
development expenses.

Provision for income tax expense.In 2003, we recorded a provision for
income tax expense based on an estimate of our effective income tax rate for
the full year. This reflects the determination that we made at the end of
fiscal 2002 that we would more likely than not be able to realize the benefit
of tax losses accumulated in prior years to offset taxable income in 2003 and
future years. In 2002, we were not able to make a similar determination and
consequently reflected a full valuation allowance on the deferred tax assets.
The reduction in income tax expense recorded in the first half of 2002 reflects
a refund of a tax payment made in connection with the sale of our gum assets in
late 2001.

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Liquidity and Capital Resources

Our working capital decreased from approximately $10.2 million at December
31, 2002 to approximately $9.6 million at June 30, 2003. During the six-month
period ended June 30, 2003, we experienced a decrease in cash from operating
activities of approximately $449,000. The decrease in cash from operations was
due primarily to a net loss of $450,000, decreases in accounts payable of
approximately $4.3 million and an increase in inventory of approximately $1.6
million. These cash decreases were offset in part by a decrease in accounts
receivable of $6.2 million.

Investing activities used approximately $140,000 of cash for deposits and
capital expenditures while $2.7 million was used for financing
activities to pay the third installment due on the note to Zensano ($2.75
million, including imputed interest) and an additional $154,000 of cash was
used to repurchase our common stock in the open market between January and June
2003.

We recently renewed our $2.5 million credit facility with Comerica
Bank for two years through July 2005. The interest rate on
borrowings under the renewed facility has decreased from Prime plus 1.5% (under
the prior credit facility) to Prime plus 0.75%. Additionally, unlike the prior
facility, borrowings under the new facility will not be limited to specified
percentages of accounts receivable and inventory. Due to our current cash
position, we do not expect to borrow under the credit facility in the immediate
future.

We believe that our existing capital resources and our credit line will be
sufficient to fund our operations and capital requirements for the next 12
months.

Critical Accounting Policies and Estimates

Our consolidated financial statements and accompanying notes have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis.The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods.

We regularly evaluate the accounting policies and estimates that we use to
prepare our consolidated financial statements. In general, managements
estimates are based on historical experience, on information from third party
professionals and on various other assumptions that are believed to be
reasonable under the facts and circumstances. Actual results could differ from
those estimates made by management.

We believe that our critical accounting policies and estimates include the
accounting for intangible assets and goodwill, accounting for income taxes, and
accounting for returns and allowances associated with our products.

Intangible assets and goodwill:We recorded approximately $15.0 million in
goodwill in connection with the 40% Zicam, LLC interest that we acquired from
Zensano, Inc. in December

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2001. Under SFAS 142, goodwill must be tested annually to identify a potential
impairment and the amount of any impairment loss. Factors that could affect
this analysis would be significant loss of market share, a general decline in
Zicam product sales, higher than expected increases in expenses and various
other matters. Any change in key assumptions about the business or prospects
of Zicam, LLC, or any change in market conditions or other externalities
affecting Zicam, LLC, could result in an impairment charge, and such a charge
could have a material adverse effect on our financial condition and results of
operations.

Accounting for income taxes:Due to our significant operating losses prior to
2001, we possess a sizeable tax loss carry-forward which can be used to reduce
our taxable income in future periods. Due to our history of operating losses,
we recorded a deferred tax valuation allowance in 2001 and prior years to
offset the entire deferred tax asset arising from our tax loss carry-forward.
However, due to the significant improvement in our net income in 2002, together
with our expectation of continuing profitability in future years, we have
determined that we are more likely than not to realize the tax benefit
associated with our tax loss carry-forward. Consequently, we reduced the
deferred tax valuation allowance and recorded a large portion of the deferred
tax asset in 2002. In subsequent periods, we will record income tax expense
based on our estimated effective income tax rate for each period. We will
continue to evaluate the deferred tax valuation allowance regularly and adjust
the amount to reflect our expectation of our ability to realize the tax benefit
arising from our tax loss carry-forward on a quarterly basis. Should there be
a significant change in our expectations of future income, the impact of
adjusting the deferred tax valuation allowance could be significant which would
negatively impact our earnings.

Accounting for customer returns and allowances.We recognize revenues on the
sale of our products when they are shipped from our warehouse facility, and at
that time record a provision for estimated product returns. The estimate for
product returns is based on our historical experience of sales to retailers and
is reviewed regularly to ensure that it reflects the liability associated with
product returns. To date, our sales returns experience has been consistent
with our estimate for returns, except for returns of outdated products arising
from excessive production during the introduction of Zicam Cold Remedy in the
1999-2000 cold season. Currently, we are recording a provision of 3% of gross
sales for our original Zicam Cold Remedy and Zicam Allergy Relief products for
potential returns and allowances. In establishing the appropriate reserve
level for the five new Zicam products introduced in the third quarter of 2002,
we reviewed the similarities and differences of the five products relative to
our original Zicam Cold Remedy and Zicam Allergy Relief products for which we
now have almost three years of product return experience. Based on that
review, effective July 1, 2003 we are now recording a 3% provision of gross
sales for these products. We will review the return provision regularly and
adjust these reserve amounts as actual product return experience continues to
develop. Should the actual level of product returns vary significantly from
our estimates, our operating and financial results would be materially
affected. In addition, we expect that a higher sales returns allowance will be
recorded in the future for any other new products that we introduce, including
the three new products that we intend to introduce in the third quarter of
2003, until such products achieve market acceptance.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS

Forward-Looking Statements

This Form 10-Q, including documents incorporated herein by reference,
contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The words believe, expect,
estimate, anticipate, intend, may, might, will, would, could,
project and predict, or similar words and phrases generally identify
forward-looking statements. Forward looking statements contained herein and in
documents incorporated by reference herein include, but are not limited to
statements regarding:



| |  |  | our expectation of shipping to retailers our three new Zicam
products in the third quarter of 2003 and our new, improved swab
product in January 2004;                                                                                                                                                                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our expectation that consumers will enthusiastically accept our new
swab product and that it will provide a meaningful solution to the
backlog problem;                                                                                                                                                                                                   
|
| |  |  | our expectation regarding increases in sales in future periods of
our current and new Zicam products;                                                                                                                                                                                                                                                     
|
| |  |  | our belief that sales, expense levels and earnings in future
periods will be primarily affected by timing and amounts of
advertising, research and development expenses, costs of introduction
of new products, our success in securing additional retail
distribution, expanding consumer awareness and acceptance of our entire
Zicam brand of products;
|
| |  |  | our plan to build our swab product inventory to meet product demand
in the forthcoming 2003-2004 cold season;                                                                                                                                                                                                                                             
|
| |  |  | our expectation regarding the seasonality of our quarterly sales,
with the second quarter generally being the weakest and our expectation
that future earnings will be impacted by the seasonality and timing of
certain expenditures;                                                                                                                    
|
| |  |  | our expectation regarding the growth rates for future sales of
products;                                                                                                                                                                                                                                                                                  
|
| |  |  | our expectation that expenditures for advertising and research and
development will vary by quarter throughout the year, with advertising
expenses being heaviest in the first and fourth fiscal quarters and our
expectation that future operating expenses will vary largely in
relation to the level of advertising expenditures;                      
|
| |  |  | our expectation that the cost of goods sold will continue to be
affected by the relative mix of products sold and the planned
introduction of a new swab product will result in a decrease in the
unit cost of our swab products;                                                                                                                         
|
| |  |  | our previously announced commitment to expand our research and
development efforts in 2003 to an amount equal to approximately 6% of
annual net sales;                                                                                                                                                                                                    

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| |  |  | our expectation that our net sales for 2003 would be at least 30%
greater than net sales for 2002;                                                                                                                               
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our expectation that net income for 2003 will increase at least 30%
above the level achieved in 2002, after adjusting for the one-time
recording of a deferred tax asset in 2002;                                                
|
| |  |  | our belief that the settlement with IST will help facilitate an
orderly transition to our new swab design, allowing us to provide
appropriate levels of service to our retail customers until the
transition is complete;        
|
| |  |  | our expectation that we will not borrow under our credit facility
with Comerica Bank in the immediate future;                                                                                                                    
|
| |  |  | our expectation of continuing profitability in future years;                                                                                                                                                                     
|
| |  |  | our intention to continue outsourcing all of our product
manufacturing and packaging for the foreseeable future;                                                                                                                 
|
| |  |  | our intention to evaluate our deferred tax valuation allowance
regularly and adjust the amount to reflect our expectation of our
ability to realize the tax benefit arising from our tax loss
carry-forward on a quarterly basis;
|
| |  |  | our belief that our current capital resources and credit line are
sufficient to fund the Company for the next 12 months; and                                                                                                     
|
| |  |  | our belief that moderate interest rate increases will not have a
material adverse impact on our results of operations or financial
position in the foreseeable future.                                                           

We may make additional written or oral forward-looking statements from
time to time in filings with the Securities and Exchange Commission or in
public news releases. Such additional statements may include, but not be
limited to, projections of revenues, income or loss, capital expenditures,
acquisitions, plans for future operations, financing needs or plans, the impact
of inflation and plans relating to our products or services, as well as
assumptions relating to the foregoing. Forward-looking statements are
inherently subject to risks and uncertainties, some of which cannot be
predicted or quantified. Future events and actual results could differ
materially from those set forth in, contemplated by, or underlying our
forward-looking statements.

Statements in this Form 10-Q, including those set forth in the sections
entitled Managements Discussion and Analysis of Financial Condition and
Results of Operations, and under the subheading below entitled Risk Factors,
describe factors that could contribute to or cause actual results to differ
materially from our expectations. Other such factors include (i) less than
anticipated demand for our current and future products or a weak cold season,
(ii) lack of market acceptance for or uncertainties concerning the efficacy of
our current and future products, including our new swab, (iii) difficulties in
increasing production or maintaining sufficient inventories to meet
unexpectedly high demand in the short term, including our inability

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to resolve product backlog and product pricing issues and difficulties in
establishing adequate manufacturing arrangements for our new swab products,
(iv) financial difficulties encountered by one or more of our principal
customers, (v) difficulties in obtaining additional capital for marketing,
research and development, and other expenses, (vi) oversupply of product
inventory to retailers resulting in unsold product returns, and (vii) material
litigation involving patent and contractual claims, product liabilities or
consumer issues.

Forward-looking statements contained in this Form 10-Q speak only as of
the date of this Form 10-Q or, in the case of any document incorporated by
reference, the date of that document. We do not undertake, and we specifically
disclaim any obligation, to publicly update or revise any forward-looking
statement contained in this Form 10-Q or in any document incorporated herein by
reference to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.

Risk Factors

Our new business focus means we have a limited operating history on which to
assess our current and prospective performance

Although we have been in operations for a number of years, the significant
change of direction and focus in our business that we made in 2001 by exiting
the chewing gum business and refocusing entirely on the development, production
and sale of over-the-counter pharmaceutical products presents a limited
operating history upon which you may evaluate our current and prospective
performance. The possibility of our future success must be considered relative
to the problems, challenges, complications and delays frequently encountered in
connection with the development and operation of a new business, and the
development and marketing of relatively new products such as the Zicam
products.

If our Zicam products do not gain widespread market acceptance, our anticipated
sales and results of operations will suffer

Although studies have indicated that Zicam Cold Remedy can significantly reduce
the duration and severity of the common cold, we cannot be certain that this
product (including our new swab formats) will achieve widespread acceptance by
the market. To date, Zicam Allergy Relief has not achieved the market success
presently enjoyed by Zicam Cold Remedy. In addition, given their recent
introduction in late 2002, our five new Zicam products have not yet reached the
level of market recognition achieved by the original Zicam Cold Remedy. While
we are working to increase the market presence of Zicam Allergy Relief and our
five new Zicam products, we cannot be certain that demand for these products
will grow. It is too soon to determine how the market will respond to the
three new Zicam products that we plan to begin shipping in late 2003. If any
unanticipated problem arises concerning the efficacy of Zicam Cold Remedy,
Zicam Allergy Relief or any of our other new products, or if any of these
products fails to achieve widespread market acceptance for any other reason,
our operating results and prospects would be materially adversely affected.

Unanticipated problems associated with product development and
commercialization could adversely affect our operating results

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Our successful development of existing and new products is subject to the risks
of failure and delay inherent in the development and commercialization of
products based on innovative technologies. These risks include the
possibilities that:



| |  |  | we may experience unanticipated or otherwise negative research and
development results;                                                                                           
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | existing or proposed products may be found to be ineffective or
unsafe, or may otherwise fail to receive required regulatory clearances
or approvals;                             
|
| |  |  | we may find that existing or proposed products, while effective,
are uneconomical to commercialize or market;                                                                     
|
| |  |  | we may be unable to produce sufficient product inventories to meet
customer demand or may encounter other manufacturing difficulties
involving our new products and our new swabs;
|
| |  |  | existing or proposed products do not achieve broad market
acceptance; or                                                                                                          
|
| |  |  | proprietary rights held by third parties preclude us from
developing or marketing existing or proposed products.                                                                  

Our inability to develop and commercialize our existing products or any new
products on a timely basis and within our financial budgets could have a
material adverse effect on our operating results and future prospects.

Our inability to provide scientific proof for product claims may adversely
affect our sales

The marketing of our Zicam products involves claims that these products assist
in reducing the duration and severity of the common cold (in the case of Zicam
Cold Remedy and the related Zicam swab products) and controlling allergy
symptoms (in the case of Zicam Allergy Relief). Under the Federal Food and
Drug Administration (FDA) and Federal Trade Commission (FTC) rules, we are
required to obtain scientific data to support any health claims we make
concerning our products. Although we have neither provided nor been requested
to provide any scientific data to the FDA in support of claims regarding our
Zicam products, we have obtained necessary scientific data to support our
products. We cannot be certain, however, that the scientific data we have
obtained in support of our claims will be deemed acceptable to the FDA or FTC,
should either agency request any such data in the future. If the FDA or the
FTC requests any supporting information, and we are unable to provide support
that is acceptable to the FDA or the FTC, either agency could force us to stop
making the claims in question or restrict us from selling the affected
products.

FDA and other government regulation may restrict our ability to sell our
products

We are subject to various federal, state and local laws and regulations
affecting our business. Our Zicam products are subject to regulation by the
FDA, including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. If we do not comply with these regulations, the FDA could
force us to stop selling the affected products or require us to incur
substantial costs in

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adopting measures to maintain compliance with these regulations. Our
advertising claims regarding our products are subject to the jurisdiction of
the FTC as well as the FDA. In both cases we are required to obtain scientific
data to support any advertising or labeling health claims we make concerning
our products, although no pre-clearance or filing is required to be made with
either agency. If we are unable to provide the required support for such
claims, the FTC may stop us from making such claims or require us to stop
selling the affected products.

We may fail to compete effectively, particularly against larger, more
established pharmaceutical and health products companies, causing our business
and operating results to suffer

The consumer health products industry is highly competitive. We compete with
companies in the United States and abroad that are engaged in the development
of both traditional and innovative healthcare products. Many of these
companies have much greater financial and technical resources and production
and marketing capabilities than we do. As well, many of these companies have
already achieved significant product acceptance and brand recognition with
respect to products that compete directly with our Zicam products. Our
competitors may successfully develop and market superior or less expensive
products which could render our Zicam and other future products less valuable
or unmarketable.

If we are unable to protect our intellectual property or if we infringe the
intellectual property of others, our financial condition and future prospects
could be materially harmed

We rely significantly on the protections afforded by patent and trademark
registrations that we routinely seek from the U.S. Patent and Trademark Office
(USPTO) and from similar agencies in foreign countries. We cannot be certain
that any patent or trademark application that we file will be approved by the
USPTO or other foreign agencies. In addition, we cannot be certain that we
will be able to successfully defend any trademark, trade name or patent that we
hold against claims from, or use by, competitors or other third parties. No
consistent policy has emerged from the USPTO or the courts regarding the
breadth of claims allowed or the degree of protection afforded under
biotechnology and similar patents. Our future success will depend on our
ability to prevent others from infringing on our proprietary rights, as well as
our ability to operate without infringing upon the proprietary rights of
others. We may be required at times to take legal action to protect our
proprietary rights and, despite our best efforts, we may be sued for infringing
on the patent rights of others. Patent litigation is costly and, even if we
prevail, the cost of such litigation could adversely affect our financial
condition. If we do not prevail, in addition to any damages we might have to
pay, we could be required to stop the infringing activity or obtain a license.
We cannot be certain that any required license would be available to us on
acceptable terms, or at all. If we fail to obtain a license, our business
might be materially adversely affected. In addition to seeking patent
protection, we rely upon a combination of non-disclosure agreements, other
contractual restrictions and trade secrecy laws to protect proprietary
information. There can be no assurance that these steps will be adequate to
prevent misappropriation of our proprietary information or that our competitors
will not independently develop technology or trade secrets that compete with
our proprietary information.

We may incur significant costs resulting from product liability claims

We are subject to significant liability should use or consumption of our
products cause injury, illness or death. Although we carry product liability
insurance, there can be no assurance that our insurance will be adequate to
protect us against product liability claims or that insurance coverage will
continue to be available on reasonable terms. A product liability claim, even
one

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without merit or for which we have substantial coverage, could result in
significant legal defense costs, thereby increasing our expenses and lowering
our earnings. Such a claim, whether or not proven to be valid, could have a
material adverse effect on our product branding and goodwill, resulting in
reduced market acceptance of our products. This in turn could materially
adversely affect our results of operations and financial condition.

We do not have manufacturing capabilities of our own

We currently do not have the physical or human resources to independently
manufacture our Zicam products or any other products that we may develop. We
currently outsource all of our product manufacturing and packaging operations
and intend to continue this outsourcing for the foreseeable future. If we are
unable to enter into cost-effective or otherwise suitable arrangements for
manufacturing of our Zicam products or any other products, or if our third
party contractors fail to adequately perform their manufacturing operations (as
has occurred to date with our new swab products), our sales and related
financial results could be materially adversely affected. If, in the future,
we decide to establish our own manufacturing facilities, we will require
substantial additional funds and significant additional personnel to undertake
such operations. We cannot be certain that such funding or a sufficient number
of such qualified persons will be available for such an undertaking.

We may continue to experience product backlogs

At the end of 2002, we had approximately $1.3 million in backlog of swab
orders, which continued at reduced levels until the end of March 2003. While
we are now working to build up our swab product inventory in order to prevent a
similar backlog from occurring in the 2003-2004 cold season, we cannot be
certain that our efforts, even if executed properly, will be sufficient to
prevent a backlog of these products from repeating itself in the 2003-2004 cold
season or that other product backlogs will not occur in the future. Any such
future backlogs will potentially result in higher production costs, higher
freight costs to expedite shipment of raw materials and finished goods, fines
from certain retailers, cancelled orders and lost opportunity costs. These in
turn could materially affect our results of operations and financial condition.

The large number of shares eligible for immediate and future sales may depress
the price of our stock

Sales of substantial amounts of our common stock in the open market or the
availability of a large number of additional shares for sale could adversely
affect the market price of our common stock. Substantially all of our
outstanding shares of common stock, as well as the shares underlying vested but
as yet unexercised warrants and options, have either been registered for public
sale or may be sold under Rule 144 promulgated under the Securities Act of
1933, as amended. Therefore, all of these shares may be immediately sold by
the holders. A substantial increase in sales of our common stock could depress
the price of our common stock.

Our board of directors is authorized to issue shares of preferred stock that
could have rights superior to our outstanding shares of common stock, and, if
issued, could adversely impact the value of our common stock

Our certificate of incorporation permits our board of directors, in its sole
discretion, to issue up to 2,000,000 shares of authorized but unissued
preferred stock. These shares may be issued by our board without further
action by our shareholders, and may include any of the following rights

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(among others) as our board may determine, which rights may be superior to the
rights of our outstanding common stock:



| |  |  | voting rights, including the right to vote as a class on particular matters;
| | - |  | ----------------------------------------------------------------------------
|
| |  |  | preferences as to dividends and liquidation rights;                         
|
| |  |  | conversion rights;                                                          
|
| |  |  | anti-dilution protections; and                                              
|
| |  |  | redemption rights.                                                          

Since our board of directors has the authority to determine, from time to time,
the terms of our authorized preferred stock, there is no limit on the amount of
common stock that could be issuable upon conversion of any future series of
preferred stock that may be issued. The rights of holders of our common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any series of preferred stock that may be issued in the future. In
addition, the market price of our common stock may be adversely affected by the
issuance of any series of preferred stock with voting or other rights superior
to those of our common stock. The issuance of any series of preferred stock
could also have the effect of making it more difficult for a third party to
acquire a majority of our outstanding common stock.

The price of our stock may continue to be volatile

The market price of our common stock, which is quoted for trading on the Nasdaq
National Market, has been highly volatile and may continue to be volatile in
the future. Any or a combination of the following factors could cause the
market value of our common stock to decline quickly: Operating results that
differ from market expectations, negative or other unanticipated results of
clinical trials or other testing, delays in product development, technological
innovations or commercial product introductions by our competitors, changes in
government regulations, developments concerning proprietary rights, including
pending or threatened patent litigation, public concerns regarding the safety
of any of our products and general economic and stock market conditions. Since
the Spring of 2000, the stock market has experienced, and it may continue to
experience, significant price and volume fluctuations. These fluctuations have
particularly affected the market prices of equity securities of many small
capitalization companies, like Matrixx, that are not yet profitable or that
experience low or inconsistent earnings. Often, the effect on the price of
such securities is disproportionate to the operating performance of such
companies. In our case, such broad market fluctuations may adversely affect
our stockholders ability to dispose of their shares of Matrixx at a price
equal to or above the price at which they purchased such shares.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk exposure relates to our variable rate revolving
line of credit with Comerica Bank. At no time during the first six months of
fiscal 2003 did we have any outstanding balance against this line of credit.
During fiscal 2002, the average outstanding balance on our prior line of credit
on a daily basis was approximately $100,000. Assuming future borrowings in
line with our average borrowings in 2002, a hypothetical interest rate change
of 1% would increase our interest expense approximately $1,000 per year from
the expense levels that we experienced in 2002. Consequently, we believe that
moderate interest rate increases will not have a material adverse impact on our
results of operations or financial position in the foreseeable future.

As of each of June 30, 2003 and December 31, 2002, we did not participate
in any market risk-sensitive commodity instruments for which fair value
disclosure would be required under Statement of Financial Accounting Standards
No. 107. We presently hold approximately $8.0 million in short-term U.S.
treasury securities which are not subject to material risk. We believe that
we are not subject in any material way to other forms of market risk, such as
foreign currency exchange risk or foreign customer purchases (of which there
were none in the first six months of fiscal 2003 or in any of 2002) or
commodity price risk.




Item 4. Controls and Procedures

We carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange
Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company and required to be
included in our periodic SEC filings. There were no significant changes in our
internal controls over financial reporting during our most recently completed
quarter that has materially affected, or is reasonably likely to materially
affect our internal control over financial reporting, or other factors that
could significantly affect these controls subsequent to the date of their
evaluation and there were no corrective actions taken with regard to
significant deficiencies or material weaknesses in our controls.

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PART II
OTHER INFORMATION




Item 1.  Legal Proceedings

In April 2003, the Company commenced legal proceedings against IST and its
parent company in connection with the Companys swab product manufacturing
contract with IST. The arbitration proceeding was filed in Phoenix, Arizona
before the American Arbitration Association. In its demand for arbitration,
the Company claimed that, among other things, IST materially breached the
manufacturing contract by repeatedly and consistently failing to meet minimum
swab production levels since the contracts inception in 2002 and by attempting
in March 2003 to unilaterally increase the contracts pricing terms. The
parties to the dispute have agreed to settle all claims. The settlement
agreement, among other things, extends the existing manufacturing contract
through the end of March 2004, requires IST to continue to provide swab
products to the Company at current levels and requires the Company to pay ISTs
increased pricing terms. The Company believes the settlement agreement will
help facilitate an orderly transition to the new swab product that the Company
intends to introduce in January 2004 and which will be produced by a different
contract manufacturer, allowing the Company to provide appropriate levels of
service to its retail customers until the transition is complete.




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

At the Companys 2003 annual meeting of stockholders held on April 30,
2003, our stockholders elected Edward E. Faber and L. White Matthews, III to
our Board of Directors for terms of three years each. Of the 9,432,051 shares
entitled to vote in such election, the votes cast were as follows:

|                       |  |           |           |                |  |  |        | 
|---------------------- |  | --------- | --------- | -------------- |  |  | ------ | 
|Director               |  | Votes For |           | Votes Withheld
|                       |  |           |           |               
|Edward E. Faber        |  |           | 9,036,391 |                |  |  | 29,025 | 
|L. White Matthews, III |  |           | 9,037,191 |                |  |  | 28,225 | 

The Companys four other directors, Edward Walsh, Michael Zeher, William Egan
and Carl Johnson were not scheduled for election this year and will continue as
members of the Board.




Item 6. Exhibits and Reports on Form 8-K

A.     Exhibits

|            |  |                                                                                                                
|----------- |  | ---------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Title                                                                                                          
|            |  |                                                                                                                
|3.01        |  | Articles of Incorporation and Amendments thereto of the registrant (1)                                         
|            |  |                                                                                                                
|3.02        |  | Bylaws of the registrant (1)                                                                                   
|            |  |                                                                                                                
|4.01        |  | Rights Agreement dated as of July 22, 2002 by and between the
registrant and Corporate Stock Transfer, Inc. (2)

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|            |  |                                                                                                                             
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Title                                                                                                                       
|            |  |                                                                                                                             
|10.01*      |  | Second Modification Agreement dated as of July 2, 2003 by and
among Matrixx Initiatives, Inc., Zicam, LLC and Comerica Bank.
|            |  |                                                                                                                             
|31.1*       |  | Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act
of 2002.                                                 
|            |  |                                                                                                                             
|31.2*       |  | Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act
of 2002.                                                 
|            |  |                                                                                                                             
|32.1*       |  | Certification pursuant to 18 U.S.C. Section 1350.                                                                           
|            |  |                                                                                                                             
|32.2*       |  | Certification pursuant to 18 U.S.C. Section 1350.                                                                           



---



|* Filed with this Form 10-Q.
|----------------------------
|                            
|(1)                         
|                            
|(2)                         

B.  Reports on Form 8-K

On April 15, 2003, the Company filed a report on Form 8-K announcing the
commencement of arbitration proceedings against IST.

On April 30, 2003, the Company filed a report on Form 8-K announcing its
preliminary earnings results for the first quarter of fiscal 2003.

On May 1, 2003, the Company filed a report on Form 8-K announcing the
election of two directors at the Companys 2003 annual meeting of
shareholders and the introduction at such annual meeting of three new
Zicam products.

On August 14, 2003, the Company filed a report on Form 8-K announcing the
introduction of a new and improved swab product, the settlement of the
Companys legal proceedings against Zila, Inc. and IST and certain
related adjustments to the Companys second quarter earnings for fiscal
2003.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

| |  |                                                                                             
| |  | --------------------------------------------------------------------------------------------
| |  | Matrixx Initiatives, Inc.                                                                   
| |  |                                                                                             
| |  | /s/ Carl J. Johnson                                                                         
| |  |                                                                                             
| |  | Carl J. Johnson
President and
Chief Executive Officer                                       
| |  |                                                                                             
| |  | /s/ William J. Hemelt                                                                       
| |  |                                                                                             
| |  | William J. Hemelt
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
| |  |                                                                                             
| |  | August 14, 2003                                                                             

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EXHIBIT INDEX

|       |  |                                                                                                                             
|------ |  | ----------------------------------------------------------------------------------------------------------------------------
|10.01* |  | Second Modification Agreement dated as of July 2, 2003 by and
among Matrixx Initiatives, Inc., Zicam, LLC and Comerica Bank.
|       |  |                                                                                                                             
|31.1*  |  | Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act
of 2002.                                                 
|       |  |                                                                                                                             
|31.2*  |  | Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act
of 2002.                                                 
|       |  |                                                                                                                             
|32.1*  |  | Certification pursuant to 18 U.S.C. Section 1350.                                                                           
|       |  |                                                                                                                             
|32.2*  |  | Certification pursuant to 18 U.S.C. Section 1350.                                                                           

29