##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549
FORM 10-Q


(Mark One)

|       |  |                                                                                        
|------ |  | ---------------------------------------------------------------------------------------
|(XBOX) |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended April 30, 2002 or

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|(BOX) |  | 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 0-17521 ________________________________________________________________

ZILA, INC.

---

(Exact Name of Registrant as Specified In Its Charter)


|                                                                                 |  |                                                
|-------------------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or Other Jurisdiction of Incorporation or
Organization)          |  | 86-0619668
(I.R.S. Employer Identification No.)
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                
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|5227 North 7th Street, Phoenix, Arizona
(Address of Principal Executive Offices) |  | 85014
(Zip Code)                               

Registrants Telephone Number, Including Area Code (602) 266-6700

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Indicate by check mark whether the registrant: (1) has 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 (XBOX) No (BOX)

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

At April 30, 2002, the number of shares of common stock outstanding was
45,666,160.

Exhibit Index 28
Total pages 28

1



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TABLE OF CONTENTS



|                                                                                              |                                                      |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  |  | 
|                                                                                              | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                                                                              | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                                                              | CONDENSED CONSOLIDATED 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                           
|Part II  Other Information                                                                  
|ITEM 1. LEGAL PROCEEDINGS                                                                    
|ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|ITEM 5. OTHER INFORMATION                                                                    
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                                                                   



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##### Table of Contents



TABLE OF CONTENTS

|        |        |                                                       |                                                             |  |       |    |          |  | 
|------- | ------ | ----------------------------------------------------- | ----------------------------------------------------------- |  | ----- | -- | -------- |  | 
|        |        |                                                       |                                                             |  |       |    | Page no.
|        |        |                                                       |                                                             |  |       |    |         
|Part I  |        | FINANCIAL INFORMATION                                 |                                                             |  |       |   
|       
|       
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|        |        |                                                       |                                                             |  |       |    |          | 
|       
|       
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|        | Item 1 |                                                       | Financial Statements (Unaudited)                            |  |       |    |         
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|        |        |                                                       |                                                             |  |       |    |          | 
|       
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|        |        | Condensed consolidated balance sheets as of April 30, |                                                             |  |       |   
|       
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|       
|        |        | 2002 and July 31, 2001                                |                                                             |  | 3     |   
|       
|       
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|        |        |                                                       |                                                             |  |       |    |          | 
|       
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|        |        | Condensed consolidated statements of operations for   |                                                             |  |       |   
|       
|       
|       
|       
|        |        | the three months and nine months ended April 30, 2002 |                                                             |  |       |   
|       
|       
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|        |        | and 2001                                              |                                                             |  | 4     |   
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|        |        |                                                       |                                                             |  |       |    |          | 
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|        |        | Condensed consolidated statements of cash flows for   |                                                             |  |       |   
|       
|       
|       
|       
|        |        | nine months ended April 30, 2002 and 2001             |                                                             |  | 5     |   
|       
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|        |        |                                                       |                                                             |  |       |    |          | 
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|        |        | Notes to condensed consolidated financial statements  |                                                             |  | 6-16  |   
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|        |        |                                                       |                                                             |  |       |    |          | 
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|        | Item 2 |                                                       | Management's discussion and analysis of financial condition |  |       |    |         
|       
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|        |        | and results of operations                             |                                                             |  | 17-26 |   
|       
|       
|       
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|        |        |                                                       |                                                             |  |       |    |          | 
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|        | Item 3 |                                                       | Quantitative and qualitative disclosures about market risk  |  |       | 26 |         
|       
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|        |        |                                                       |                                                             |  |       |    |          | 
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|Part II |        | OTHER INFORMATION                                     |                                                             |  |       |   
|       
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|        |        |                                                       |                                                             |  |       |    |          | 
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|        | Item 1 |                                                       | Legal proceedings                                           |  |       | 26 |         
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|        |        |                                                       |                                                             |  |       |    |          | 
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|        |        | SIGNATURES                                            |                                                             |  | 28    |   

2



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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                             |                                                                                                                                               |                            |                           |                   |            |                |            |               |            |            |            | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------- | ----------------- | ---------- | -------------- | ---------- | ------------- | ---------- | ---------- | ---------- | 
|                                             |                                                                                                                                               |                            |                           |                   |            | April 30, 2002 |            | July 31, 2001
|                                             |                                                                                                                                               |                            |                           |                   |            |                |            |              
|ASSETS                                       |                                                                                                                                               |                            |                           |                   |            |                |            |              
|                                            
|                                            
|                                            
|                                            
|CURRENT ASSETS:                              |                                                                                                                                               |                            |                           |                   |            |                |            |              
|                                            
|                                            
|                                            
|                                            
|                                             | Cash and cash equivalents                                                                                                                     |                            | $                         | 1,058,246         |            |                | $          | 1,263,935     |           
|                                            
|                                            
|                                            
|                                            
|                                             | Trade receivables  net                                                                                                                       |                            |                           | 5,592,298         |            |                |            | 6,771,668     |           
|                                            
|                                            
|                                            
|                                            
|                                             | Inventories  net                                                                                                                             |                            |                           | 8,706,496         |            |                |            | 11,101,897    |           
|                                            
|                                            
|                                            
|                                            
|                                             | Assets of business transferred under contractual arrangements                                                                                 |                            |                           | 5,678,512         |            |                |            | 7,877,217     |           
|                                            
|                                            
|                                            
|                                            
|                                             | Assets of discontinued operations                                                                                                             |                            |                           |                   |            |                |            | 4,155,500     |           
|                                            
|                                            
|                                            
|                                            
|                                             | Prepaid expenses and other current assets                                                                                                     |                            |                           | 2,733,663         |            |                |            | 1,823,212     |           
|                                             |                                                                                                                                               |                            |                           |                   |            |                |            |              
|                                             |                                                                                                                                               |                            | Total current assets      |                   |            | 23,769,215     |            |               |            | 32,993,429 |           
|                                             |                                                                                                                                               |                            |                           |                   |            |                |            |              
|PROPERTY AND EQUIPMENT  net                 |                                                                                                                                               |                            | 8,984,929                 |                   |            |                | 9,456,337  |              
|                                            
|                                            
|                                            
|                                            
|PURCHASED TECHNOLOGY RIGHTS  net            |                                                                                                                                               |                            | 4,837,205                 |                   |            |                | 5,164,535  |              
|                                            
|                                            
|                                            
|                                            
|GOODWILL  net                               |                                                                                                                                               |                            | 11,689,358                |                   |            |                | 12,383,291 |              
|                                            
|                                            
|                                            
|                                            
|TRADEMARKS AND OTHER INTANGIBLE ASSETS  net |                                                                                                                                               |                            | 15,533,140                |                   |            |                | 12,721,567 |              
|                                            
|                                            
|                                            
|                                            
|DEFERRED TAXES AND OTHER ASSETS              |                                                                                                                                               |                            | 320,725                   |                   |            |                | 3,837,970  |              
|                                             |                                                                                                                                               |                            |                           |                   |            |                |            |              
|TOTAL                                        |                                                                                                                                               | $                          | 65,134,572                |                   |            | $              | 76,557,129 |              
|                                             |                                                                                                                                               |                            |                           |                   |            |                |            |              
|LIABILITIES AND SHAREHOLDERS EQUITY         |                                                                                                                                               |                            |                           |                   |            |                |            |              
|                                            
|                                            
|                                            
|                                            
|CURRENT LIABILITIES:                         |                                                                                                                                               |                            |                           |                   |            |                |            |              
|                                            
|                                            
|                                            
|                                            
|                                             | Accounts payable                                                                                                                              |                            | $                         | 3,051,551         |            |                | $          | 2,809,203     |           
|                                            
|                                            
|                                            
|                                            
|                                             | Accrued liabilities                                                                                                                           |                            |                           | 2,821,957         |            |                |            | 2,317,317     |           
|                                            
|                                            
|                                            
|                                            
|                                             | Short-term borrowings                                                                                                                         |                            |                           | 3,145,412         |            |                |            | 6,160,947     |           
|                                            
|                                            
|                                            
|                                            
|                                             | Liabilities of business transferred under contractual arrangements                                                                            |                            |                           | 1,498,431         |            |                |            | 2,991,175     |           
|                                            
|                                            
|                                            
|                                            
|                                             | Liabilities of discontinued operations                                                                                                        |                            |                           |                   |            |                |            | 730,738       |           
|                                            
|                                            
|                                            
|                                            
|                                             | Current portion of long-term debt                                                                                                             |                            |                           | 469,826           |            |                |            | 747,648       |           
|                                             |                                                                                                                                               |                            |                           |                   |            |                |            |              
|                                             |                                                                                                                                               |                            | Total current liabilities |                   |            | 10,987,177     |            |               |            | 15,757,028 |           
|                                            
|                                            
|                                            
|                                            
|LONG-TERM DEBT  net of current portion      |                                                                                                                                               |                            | 3,724,498                 |                   |            |                | 4,079,496  |              
|                                             |                                                                                                                                               |                            |                           |                   |            |                |            |              
|                                             |                                                                                                                                               |                            |                           | Total liabilities |            |                | 14,711,675 |               |            |            | 19,836,524 | 
|                                             |                                                                                                                                               |                            |                           |                   |            |                |            |              
|COMMITMENTS AND CONTINGENCIES                |                                                                                                                                               |                            |                           |                   |            |                |            |              
|                                            
|                                            
|                                            
|                                            
|SHAREHOLDERS EQUITY:                        |                                                                                                                                               |                            |                           |                   |            |                |            |              
|                                            
|                                            
|                                            
|                                            
|                                             | Preferred stock  Series B, $.001 par value  authorized 2,500,000 shares,
issued 100,000 shares                                              |                            |                           | 462,500           |            |                |            | 462,500       |           
|                                            
|                                            
|                                            
|                                            
|                                             | Common stock, $.001 par value  authorized 65,000,000 shares, issued
45,666,160 shares (April 30, 2002) and 43,653,727 shares (July 31, 2001) |                            |                           | 45,666            |            |                |            | 43,654        |           
|                                            
|                                            
|                                            
|                                            
|                                             | Capital in excess of par value                                                                                                                |                            |                           | 82,931,477        |            |                |            | 79,930,094    |           
|                                            
|                                            
|                                            
|                                            
|                                             | Accumulated other comprehensive income                                                                                                        |                            |                           | 104,017           |            |                |            | 150,976       |           
|                                            
|                                            
|                                            
|                                            
|                                             | Accumulated deficit                                                                                                                           |                            |                           | (32,585,643       | )          |                |            | (23,331,499   | )         
|                                            
|                                            
|                                            
|                                            
|                                             | Common stock in treasury, at cost, 195,000 shares                                                                                             |                            |                           | (535,120          | )          |                |            | (535,120      | )         
|                                             |                                                                                                                                               |                            |                           |                   |            |                |            |              
|                                             |                                                                                                                                               | Total shareholders equity |                           |                   | 50,422,897 |                |            |               | 56,720,605 |           
|                                             |                                                                                                                                               |                            |                           |                   |            |                |            |              
|TOTAL                                        |                                                                                                                                               | $                          | 65,134,572                |                   |            | $              | 76,557,129 |              
|                                             |                                                                                                                                               |                            |                           |                   |            |                |            |              

See notes to condensed consolidated financial statements.

3



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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |            |            |          |            |  
|------------------------------------------------------- | -------------------- | ----------------------------------- | --------------------------------------------------------------------------------------------------- | --------------------------------- | --------- | ---------------------------- | ---------- | --------------------------- | --------- | -------- | ---------- | ---------- | ---------- | -------- | ---------- | ---------- | ---------- | -------- | ---------- | -
|                                                        |                      |                                     |                                                                                                     |                                   |           | Three months ended April 30, |            | Nine months ended April 30,
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                            
|                                                        |                      |                                     |                                                                                                     |                                   |           | 2002                         |            | 2001                        |           | 2002     |            | 2001      
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |           
|NET REVENUES                                            |                      | $                                   | 8,352,520                                                                                           |                                   |           | $                            | 5,477,893  |                             |           | $        | 26,006,454 |            |            | $        | 22,221,234 |           
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|OPERATING COSTS AND EXPENSES:                           |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      | Cost of products sold               |                                                                                                     |                                   | 3,047,920 |                              |            |                             | 1,990,364 |          |            |            | 9,369,359  |          |            |            | 7,234,299  |         
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      | Selling, general and administrative |                                                                                                     |                                   | 5,617,239 |                              |            |                             | 6,149,706 |          |            |            | 17,455,834 |          |            |            | 16,315,868 |         
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      | Research and development            |                                                                                                     |                                   | 953,034   |                              |            |                             | 1,142,937 |          |            |            | 2,309,773  |          |            |            | 2,639,200  |         
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      | Impairment of building              |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |            | 310,000    |         
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      | Depreciation and amortization       |                                                                                                     |                                   | 918,366   |                              |            |                             | 829,419   |          |            |            | 2,617,234  |          |            |            | 2,412,381  |         
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|                                                        |                      |                                     | 10,536,559                                                                                          |                                   |           |                              | 10,112,426 |                             |           |          | 31,752,200 |            |            |          | 28,911,748 |           
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|                                                        | LOSS FROM OPERATIONS |                                     |                                                                                                     | (2,184,039                        | )         |                              |            | (4,634,533                  | )         |          |            | (5,745,746 | )          |          |            | (6,690,514 | )         
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|OTHER INCOME (EXPENSE):                                 |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      | Interest income                     |                                                                                                     |                                   | 15,530    |                              |            |                             | 16,257    |          |            |            | 53,481     |          |            |            | 132,868    |         
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      | Interest expense                    |                                                                                                     |                                   | (113,166  | )                            |            |                             | (191,957  | )        |            |            | (392,415   | )        |            |            | (358,474   | )       
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      | Other income (expense)              |                                                                                                     |                                   | 52,704    |                              |            |                             | (69,736   | )        |            |            | (36,143    | )        |            |            | (122,410   | )       
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|                                                        |                      |                                     | (44,932                                                                                             | )                                 |           |                              | (245,436   | )                           |           |          | (375,077   | )          |            |          | (348,016   | )         
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|NET LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES |                      |                                     | (2,228,971                                                                                          | )                                 |           |                              | (4,879,969 | )                           |           |          | (6,120,823 | )          |            |          | (7,038,530 | )         
|                                                       
|                                                       
|                                                       
|                                                       
|INCOME TAX BENEFIT (EXPENSE)                            |                      |                                     | 276,504                                                                                             |                                   |           |                              |           |                             |           |          | (2,913,320 | )          |            |          | 335,000    |           
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|NET LOSS FROM CONTINUING OPERATIONS                     |                      |                                     | (1,952,467                                                                                          | )                                 |           |                              | (4,879,969 | )                           |           |          | (9,034,143 | )          |            |          | (6,703,530 | )         
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|DISCONTINUED OPERATIONS:                                |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      |                                     | Loss
from operations of discontinued
Dental Supply segment                                          |                                   |           | (287,712                     | )          |                             |           | (212,988 | )          |            |            | (664,978 | )          |            |            | (178,415 | )         
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      |                                     | Gain from disposal of full-service business of Dental
Supply segment, net of income tax of $329,149 |                                   |           |                             |            |                             |           |          |            |            |            | 493,725  |            |            |            |          |           
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|Total loss from discontinued operations                 |                      |                                     | (287,712                                                                                            | )                                 |           |                              | (212,988   | )                           |           |          | (171,253   | )          |            |          | (178,415   | )         
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|NET LOSS                                                |                      |                                     | (2,240,179                                                                                          | )                                 |           |                              | (5,092,957 | )                           |           |          | (9,205,396 | )          |            |          | (6,881,945 | )         
|                                                       
|                                                       
|                                                       
|                                                       
|Preferred stock dividends                               |                      |                                     | 9,750                                                                                               |                                   |           |                              |            |                             |           |          | 48,750     |            |            |          |            |           
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|Net loss attributable to common shareholders            |                      | $                                   | (2,249,929                                                                                          | )                                 |           | $                            | (5,092,957 | )                           |           | $        | (9,254,146 | )          |            | $        | (6,881,945 | )         
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|BASIC AND DILUTED NET LOSS PER COMMON SHARE:            |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      |                                     |                                                                                                     | Loss from continuing operations   |           | $                            | (0.04      | )                           |           | $        | (0.12      | )          |            | $        | (0.20      | )          |            | $        | (0.16      | )
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      |                                     |                                                                                                     | Loss from discontinued operations |           |                              | (0.01      | )                           |           |          |            |            |            |          | (0.01      | )          |            |          |            |  
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|                                                        |                      |                                     |                                                                                                     | NET LOSS                          |           | $                            | (0.05      | )                           |           | $        | (0.12      | )          |            | $        | (0.21      | )          |            | $        | (0.16      | )
|                                                        |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:          |                      |                                     |                                                                                                     |                                   |           |                              |            |                             |           |          |            |            |            |          |            |           
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        |                      |                                     |                                                                                                     | BASIC AND DILUTED                 |           |                              | 45,471,160 |                             |           |          | 43,446,150 |            |            |          | 44,545,095 |            |            |          | 43,401,455 |  

See notes to consolidated financial statements.

4



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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |            |           |            |            |  
|------------------------------------------------------------------------ | --------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | --------- | --------------------------- | ---------- | ---------- | --------- | ---------- | ---------- | -
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           | Nine months ended April 30,
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                            
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           | 2002                        |            | 2001      
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|OPERATING ACTIVITIES:                                                    |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Net loss                                                                    |                                                                                                           | $                                                   | (9,205,396                                          | )         |                             | $          | (6,881,946 | )        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                                                           |                                                     |                                                     |           |                             |            |            |          
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                             | Depreciation and amortization                                                                             |                                                     |                                                     | 2,617,234 |                             |            |            | 2,412,381 |           
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                             | Loss from discontinued operations                                                                         |                                                     |                                                     | 171,253   |                             |            |            | 178,415   |           
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                             | Impairment of asset                                                                                       |                                                     |                                                     |          |                             |            |            | 310,000   |           
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                             | Deferred income taxes and other                                                                           |                                                     |                                                     | 3,470,286 |                             |            |            | (271,784  | )         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                             | Change in assets and liabilities:                                                                         |                                                     |                                                     |           |                             |            |            |           |           
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                             |                                                                                                           | Receivables  net                                   |                                                     |           | 1,179,370                   |            |            |           | 692,902    |           
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                             |                                                                                                           | Inventories                                         |                                                     |           | 2,395,401                   |            |            |           | (4,389,491 | )         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                             |                                                                                                           | Prepaid expenses and other assets                   |                                                     |           | (538,106                    | )          |            |           | (338,075   | )         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                             |                                                                                                           | Accounts payable and accrued liabilities            |                                                     |           | 727,240                     |            |            |           | (204,158   | )         
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|                                                                         |                                                                             |                                                                                                           |                                                     | Net cash provided by (used in) operating activities |           |                             | 817,282    |            |           |            | (8,491,756 | )
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|INVESTING ACTIVITIES:                                                    |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Purchases of property and equipment                                         |                                                                                                           |                                                     | (341,643                                            | )         |                             |            | (2,258,643 | )        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Transfers to discontinued operations                                        |                                                                                                           |                                                     | (1,791,983                                          | )         |                             |            | (471,701   | )        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Net cash paid for acquisition                                               |                                                                                                           |                                                     |                                                     |           |                             |            | (1,849,418 | )        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Net proceeds from disposition of discontinued operations                    |                                                                                                           |                                                     | 5,751,453                                           |           |                             |            |            |          
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Purchases of intangible assets                                              |                                                                                                           |                                                     | (988,806                                            | )         |                             |            | (550,353   | )        
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|                                                                         |                                                                             |                                                                                                           | Net cash provided by (used in) investing activities |                                                     |           | 2,629,021                   |            |            |           | (5,130,115 | )         
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|FINANCING ACTIVITIES:                                                    |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Net (repayments) proceeds from short-term borrowings                        |                                                                                                           |                                                     | (3,015,535                                          | )         |                             |            | 6,237,762  |          
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Net proceeds from issuance of common stock                                  |                                                                                                           |                                                     | 25,363                                              |           |                             |            | 479,109    |          
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Acquisition of treasury stock                                               |                                                                                                           |                                                     |                                                     |           |                             |            | (125,370   | )        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Dividends paid to preferred stockholders                                    |                                                                                                           |                                                     | (29,000                                             | )         |                             |            |            |          
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Cash released by trustee                                                    |                                                                                                           |                                                     |                                                     |           |                             |            | 2,928,001  |          
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         | Principal payments on long-term debt                                        |                                                                                                           |                                                     | (632,820                                            | )         |                             |            | (368,079   | )        
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|                                                                         |                                                                             |                                                                                                           | Net cash (used in) provided by financing activities |                                                     |           | (3,651,992                  | )          |            |           | 9,151,423  |           
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                |                                                                             |                                                                                                           | (205,689                                            | )                                                   |           |                             | (4,470,448 | )         
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                           |                                                                             |                                                                                                           | 1,263,935                                           |                                                     |           |                             | 5,192,251  |           
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                 |                                                                             | $                                                                                                         | 1,058,246                                           |                                                     |           | $                           | 721,803    |           
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|CASH PAID FOR INTEREST                                                   |                                                                             | $                                                                                                         | 299,050                                             |                                                     |           | $                           | 296,589    |           
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|CASH PAID FOR INCOME TAXES                                               |                                                                             | $                                                                                                         | 22,156                                              |                                                     |           | $                           | 36,177     |           
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES: |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|                                                                         |                                                                             | Issuance of common stock related to ViziLite in exchange
for license and prepaid research and development |                                                     | $                                                   | 2,978,032 |                             |            |            |           |           
|                                                                         |                                                                             |                                                                                                           |                                                     |                                                     |           |                             |            |           

5



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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|1. |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The condensed consolidated financial statements include the accounts of
Zila, Inc. and its wholly-owned subsidiaries, Zila Pharmaceuticals, Inc.,
Zila International, Inc., Zila, Ltd., Bio-Dental Technologies Corporation
(Bio-Dental) which does business under the name Zila Dental Supply
(ZDS), Zila Technologies, Inc., Zila Swab Technologies, Inc. dba
Innovative Swab Technologies (IST) and Oxycal Laboratories, Inc.
(Oxycal). This information should be read in conjunction with the
financial statements set forth in the Zila, Inc. Annual Report to
shareholders for the fiscal year ended July 31, 2001. All significant
intercompany balances and transactions are eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | In November 2001, the Company decided to sell the operations of the ZDS
business. These operations were sold during the second fiscal quarter of
2002. The financial statements have been prepared to reflect our
historical financial position and results of operations and cash flows as
adjusted for the reclassification of the ZDS business as discontinued
operations. The historical results of the operations of the ZDS business
up to November 2001 and the gain recognized on the components of the sale
that have been transacted to date are reported as discontinued operations
in the accompanying consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | In the opinion of management of Zila, Inc. and its subsidiaries
(collectively referred to herein as Zila or the Company), all
adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation have been included in the condensed consolidated
financial statements. The results of operations for the interim period
are not necessarily indicative of the results that may be expected for the
entire year. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates
include estimated cash flows used to measure long-lived assets for
impairment and the estimated net realizable value of inventories and
deferred tax assets.
|  
|   |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The Company recognizes revenue when the earnings process is complete and
the risks and rewards of ownership have transferred to the customer, which
is considered to have occurred upon shipment of the finished product, as
shipping terms are FOB shipping point. Cash discounts, sales
incentives, and returns are estimated and recognized at the date of
shipment based upon historical activity and current customer commitments.
The Company evaluates these estimates on a quarterly basis and revises
them as necessary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The Company enters into arrangements to license its technology on
specifically approved products. For those arrangements where the Company
has continuing involvement with the licensee, royalty revenues are
recognized as they are earned over the life of the agreement. For
perpetual license agreements where the Company has no further continuing
involvement with the licensee, the Company recognizes the guaranteed
minimum royalties at the time the arrangement becomes effective.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

6



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##### Table of Contents





| |  | Deferred revenues of $13,750 for the periods ended April 30, 2002 and
April 30, 2001, are included as a component of accrued expenses and will
be recognized ratably through July 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Purchased Technology Rights                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The Company capitalized approximately $7,419,000 in purchased technology
rights from its 1996 acquisition of CTM Associates, Inc. (CTM). The
purchase of CTM perfected the Companys interest in the OraTest technology
and eliminated the Companys obligation to pay royalties to CTM on future
sales of the OraTest product. The purchased technology rights are
amortized on a straight-line basis over the expected period of benefit,
which was 17 years at the time of the acquisition and was based on the
remaining life of the related patents that will expire in 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the
expected period to be benefited with estimated useful lives ranging from
15 to 40 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Trademarks and Other Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Trademarks of $11,514,000, net of accumulated amortization of $2,063,000
at April 30, 2002, are amortized over the lesser of their legal or
estimated useful lives, which range from 17 to 25 years. Other intangible
assets include deferred patent and licensing costs, which represent legal
costs associated with filing patent and regulatory license applications,
are amortized over the lesser of their legal or estimated economic useful
lives, which range from 10 to 17 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | For goodwill and intangible assets, the Company continuously evaluates the
reasonableness of the useful lives of these assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The costs associated with research and development programs for new
products and significant product improvements are expensed as incurred.
Research and development costs totaled $2,310,000 and $2,639,000 for the
nine months ended April 30, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The cash flows used to measure long-lived assets related to the OraTest®
product are dependent upon obtaining Food and Drug Administration (the
FDA) approval and generating sufficient revenues from sales of the
OraTest® product. The rigorous clinical testing and an extensive
regulatory approval process mandated by the FDA and equivalent foreign
authorities before the Company can market any new drug can take a number
of years and require the expenditure of substantial resources. The Company
will require significant additional financing to support these activities.
Obtaining such approvals and completing such testing is a costly and
time-consuming process, and approval may not be ultimately obtained. The
length of the FDA review period varies considerably, as does the amount of
clinical data required to demonstrate the safety and efficacy of a
specific product. The Company has net intangible assets related to the
OraTest® product as of April 30, 2002 of $6.1 million.
|
| |  | The Nutraceuticals Group entered the saw palmetto business with its
Palmettx line of products during the prior fiscal year. In order to take
advantage of bulk purchase discounts and to establish a reputation as a
reliable supplier, the Company purchased a large amount of inventory in
fiscal year 2001, of which $3.7 million remains as of April 30, 2002.
The ultimate probable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

7



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|   |  | future economic benefit associated with such inventory is contingent on
the Companys ability to sell its line of saw palmetto products for a
price greater than the carrying value of the inventory.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The measurement of long-lived assets related to the Peridex® product is
dependent on the Companys ability to achieve its forecast of estimated
cash flows. The Company currently has net intangible assets related to
the Peridex® product as of April 30, 2002, of $7.4 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|2. |  | ACQUISITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | In February 2001, the Company acquired the patent rights and the Antioch,
Illinois manufacturing operations for swab products from National
Healthcare Manufacturing Corporation, headquartered in Winnipeg, Canada.
Intellectual property, inventory, plus molding, labeling, filling and
sealing equipment were included in the acquisition. The business unit is
known as Innovative Swab Technologies and is combined in the Professional
Products segment. Zila paid approximately $2.4 million in a combination of
cash and preferred stock for the unit (See Note 10).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | On December 4, 2001, the Company acquired the world marketing and
distribution rights (excluding the Pacific Rim) for the ViziLite
chemiluminescent light technology from The Trylon Corporation of Torrance,
CA (Trylon). In payment of the purchase price for the transaction, the
Company issued 2,000,000 shares of restricted common stock, of which
1,625,000 shares were delivered to Trylon and 375,000 shares were placed
into escrow. The shares of common stock are restricted in accordance with
the following provisions: (i) all 2,000,000 shares are restricted within
the meaning of Rule 144 under the Securities Act of 1933, as amended; (ii)
500,000 of the shares delivered to Trylon have an additional contractual
restriction upon sale or transfer that will be removed at the earlier of
ten years following the closing date or the achievement of certain future
sales milestones of the ViziLite product; (iii) 375,000 of the other
shares delivered to Trylon have an additional contractual restriction that
will be removed at the earlier of ten years following the closing date or
in the event of the submission and approval in filing a 510(k) application
with the FDA for a product currently under development. The 375,000
shares in escrow are to remain in escrow until the date upon which the
Company receives FDA marketing clearance on the new product described in
item (iii) above. If the Company does not receive such clearance on or
before the second anniversary of the closing date, then the stock in
escrow is to be returned to the Company and cancelled, subject to certain
exceptions.
|  
|   |  | The 1,625,000 shares of restricted common stock were valued at $2,978,000
as follows: (i) the fair value of the 750,000 shares restricted within
the meaning of Rule 144 but not otherwise restricted, were valued at
$1,853,000 which was based upon the common stock share market price of
$2.47 on December 4, 2001; (ii) the 500,000 shares of restricted common
stock subject to additional contractual restrictions relating to sales
milestones were valued at $753,000 and were discounted from the December
4, 2001 share price based upon the length of time and probability of
achieving the requisite sales milestones; and (iii) the 375,000 restricted
shares of common stock subject to additional contractual restrictions tied
to FDA submissions were valued at $372,000 and were discounted based upon
the length of time and probability of submitting an acceptable 510(k)
application to the FDA. The $2,606,000 of value referenced in items (i)
and (ii) above was recorded as an intangible asset as a license. The
$372,000 in value referenced in item (iii) above was recorded as a prepaid
research and development fee and will be amortized as research and
development expense over the two-year period in which the application is
prepared.                                                                                                                                                                                                                                                                                                                                                                            

8



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|   |  | The release of the 375,000 shares in escrow is contingent upon Trylon
obtaining regulatory approval of a product currently under development.
Due to the contingent nature of the approval process, the Company will not
record the research and development costs associated with these shares
until approval is obtained. The Company is in the process of obtaining an
independent valuation of the restricted stock issued and will adjust its
estimates of the value upon its completion. Management believes that
assumptions used in developing the recorded value of the restricted stock
are supportable and does not anticipate a material change in the original
valuation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In addition, the Company entered into a license agreement with Trylon
related to the chemiluminescent light technology that requires the Company
to pay a royalty on sales of the ViziLite product of 10 percent during
the first five years, and five percent during the next five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|3. |  | DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | In November 2001, the Company made the decision to divest its Zila Dental
Supply (ZDS) reporting segment. In November and December 2001, the
Company sold substantially all of the assets and certain liabilities of
the ZDS segment in two separate transactions. ZDSs full-service assets
were sold on November 5, 2001 to Henry Schein, Inc. of Melville, NY
(Nasdaq: HSIC) for approximately $5.8 million in cash. The Company
realized a gain from the disposal of the full service assets of
approximately $494,000, net of a current tax expense of approximately
$329,000. Proceeds from the sale were used to repay borrowings
outstanding under the revolving line of credit with Congress Financial
Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | The ZDS mail order operations (assets and liabilities) were sold on
December 4, 2001 to PracticeWares, Inc. of Sacramento, CA for
approximately $8.0 million in one short and two long-term notes.
Approximately $5.7 million of the $8.0 million purchase price (net of post
closing adjustments) was due and payable January 11, 2002. The Company
extended the maturity date of the short-term note, upon payment of accrued
and prepaid interest, to February 15, 2002, and further extended the note
to March 1, 2002, with interest prepaid through the new maturity date.
The note has not been paid and is currently in default. Zila has various
remedies including the right to effect reconveyance to the Company. As a
result of PracticeWares failure to pay the short term notes, the
transaction to sell the mail order business does not qualify as a sale for
accounting purposes and the assets and liabilities of that operation have
been classified as current and shown as assets and liabilities of business
transferred under contractual arrangements. Operating results of the ZDS
mail order business will continue to be reflected in the income statement
as income (loss) from operation of the discontinued Dental Supply Segment.
For current and future quarters for which the business transferred has
net income, such net income may be recognized by the Company to the extent
of any cumulative quarterly losses within the same fiscal year.
Similarly, quarterly losses of the business need not be recognized by the
Company except to the extent that they exceed any cumulative quarterly net
income within the same fiscal year. ZDS had net losses of $415,000 for
the period from December 4, 2001 to April 30, 2002, and they are included
in the loss from operations of the Dental Supply segment.
|  
|   |  | In March 2002, Zila and PracticeWares agreed in principle to restructure
the terms relating to the sale. In June 2002, Zila, PracticeWares and
PracticeWorks, Inc. entered into an agreement under which PracticeWares
will pay Zila $4,000,000 in cash plus a 19.0% ownership interest in
PracticeWares (on a fully diluted basis). In addition, PracticeWares will
pay Zila approximately                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

9



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| |  | $130,000 in accrued interest. In exchange for the consideration, Zila
agreed to reduce the purchase price to equal the consideration paid and
modify the principal balances of the notes receivable so that they will be
paid in full at closing. The $4,000,000 payment is contingent upon the
successful completion and funding of the public offering by PracticeWorks
of 3,750,000 shares of its common stock made on June 7, 2002. It is
expected that such funding will be completed prior to June 30, 2002,
although there can be no assurance such funding and the anticipated
closing will occur by such date or at all. Upon funding, PracticeWorks
will make a cash infusion into PracticeWares in return for equity and a
note receivable. Five percent of the cash payment to Zila will be held
in escrow for 60 days to offset certain indemnifications of Zila to
PracticeWares. The Company will recognize the sale of the ZDS mail order
business for accounting purposes upon receipt of the cash proceeds.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The accompanying financial statements have been restated to conform to
discontinued operations treatment for all historical periods presented.
The following table shows the components of the discontinued operations as
of April 30, 2002 and July 31, 2001. Also included are the assets and
liabilities of the business transferred under contractual arrangements as
of April 30, 2002:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                                               |  |                |           |               |  |   |            | 
|-------------------------------------------------------------- |  | -------------- | --------- | ------------- |  | - | ---------- | 
|                                                               |  | April 30, 2002 |           | July 31, 2001
|                                                               |  |                |           |              
|Current assets                                                 |  | $              | 4,970,874 |               |  | $ | 11,108,838 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Property and equipment net                                    |  |                | 210,086   |               |  |   | 386,766    | 
|                                                              
|                                                              
|                                                              
|                                                              
|Other assets                                                   |  |                | 497,552   |               |  |   | 537,113    | 
|                                                               |  |                |           |               |  |   |            | 
|Assets of business transferred and
discontinued operations     |  | $              | 5,678,512 |               |  | $ | 12,032,717 | 
|                                                               |  |                |           |               |  |   |            | 
|                                                              
|                                                              
|                                                              
|                                                              
|Current liabilities                                            |  |                | 1,449,611 |               |  |   | 3,648,138  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Long-term debt                                                 |  |                | 48,820    |               |  |   | 73,775     | 
|                                                               |  |                |           |               |  |   |            | 
|Liabilities of business transferred                            |  | $              | 1,498,431 |               |  | $ | 3,721,913  | 
|                                                               |  |                |           |               |  |   |            | 
|Net assets of business transferred and
discontinued operations |  | $              | 4,180,081 |               |  | $ | 8,310,804  | 
|                                                               |  |                |           |               |  |   |            | 



|   |  | Sales for ZDS for the three and nine month period ended April 30, 2002
were $4,929,000 and $21,004,000, respectively. Sales for the corresponding
periods in 2001 were $10,471,000 and $30,814,000, respectively.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|4. |  | NET LOSS PER SHARE                                                                                                                                                                                               
|  
|   |  | The following is a reconciliation of the numerator and denominator of
basic and diluted loss per common share:                                                                                                   

|                         |  |   |            |                            |  |                           |            |      |  |      |            |   |  |   |            |   |  | 
|------------------------ |  | - | ---------- | -------------------------- |  | ------------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | - |  | 
|                         |  |   |            | For the three months ended |  | For the nine months ended
|                         |  |   |            | April 30,                  |  | April 30,                
|                         |  |   |            | 2002                       |  | 2001                      |            | 2002 |  | 2001
|                         |  |   |            |                            |  |                           |            |      |  |     
|Net loss from continuing |  |   |            |                            |  |                           |            |      |  |      |            |   |  |   |            |  
|                        
|                        
|                        
|                        
|operations               |  | $ | (1,952,467 | )                          |  | $                         | (4,879,969 | )    |  | $    | (9,034,143 | ) |  | $ | (6,703,530 | )

10



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|                                     |                   |                   |            |                            |       |                           |            |            |       |      |            |            |       |   |            |            |       |  
|------------------------------------ | ----------------- | ----------------- | ---------- | -------------------------- | ----- | ------------------------- | ---------- | ---------- | ----- | ---- | ---------- | ---------- | ----- | - | ---------- | ---------- | ----- | -
|                                     |                   |                   |            | For the three months ended |       | For the nine months ended
|                                     |                   |                   |            | April 30,                  |       | April 30,                
|                                     |                   |                   |            | 2002                       |       | 2001                      |            | 2002       |       | 2001
|                                     |                   |                   |            |                            |       |                           |            |            |       |     
|                                    
|                                    
|                                    
|                                    
|Loss from discontinued operations    |                   |                   | (287,712   | )                          |       |                           | (212,988   | )          |       |      | (171,253   | )          |       |   | (178,415   | )         
|                                     |                   |                   |            |                            |       |                           |            |            |       |      |            |            |       |   |            |           
|Net loss                             |                   |                   | (2,240,179 | )                          |       |                           | (5,092,957 | )          |       |      | (9,205,396 | )          |       |   | (6,881,945 | )         
|                                    
|                                    
|                                    
|                                    
|Preferred stock dividends            |                   |                   | 9,750      |                            |       |                           |            |            |       |      | 48,750     |            |       |   |            |           
|                                     |                   |                   |            |                            |       |                           |            |            |       |      |            |            |       |   |            |           
|Net loss attributable to common      |                   |                   |            |                            |       |                           |            |            |       |      |            |            |       |   |            |           
|                                    
|                                    
|                                    
|                                    
|shareholders                         |                   | $                 | (2,249,929 | )                          |       | $                         | (5,092,957 | )          |       | $    | (9,254,146 | )          |       | $ | (6,881,945 | )         
|                                     |                   |                   |            |                            |       |                           |            |            |       |      |            |            |       |   |            |           
|                                    
|                                    
|                                    
|                                    
|Average number of common shares      |                   |                   |            |                            |       |                           |            |            |       |      |            |            |       |   |            |           
|                                    
|                                    
|                                    
|                                    
|outstanding:                         |                   |                   |            |                            |       |                           |            |            |       |      |            |            |       |   |            |           
|                                    
|                                    
|                                    
|                                    
|                                     | Basic and diluted |                   |            | 45,471,160                 |       |                           |            | 43,446,150 |       |      |            | 44,545,095 |       |   |            | 43,401,455 |      
|                                     |                   |                   |            |                            |       |                           |            |            |       |      |            |            |       |   |            |           
|Net loss per share from continuing   |                   |                   |            |                            |       |                           |            |            |       |      |            |            |       |   |            |           
|                                    
|                                    
|                                    
|                                    
|operations:                          |                   |                   |            |                            |       |                           |            |            |       |      |            |            |       |   |            |           
|                                    
|                                    
|                                    
|                                    
|                                     |                   | Basic and diluted |            | $                          | (0.04 | )                         |            | $          | (0.12 | )    |            | $          | (0.20 | ) |            | $          | (0.16 | )
|                                    
|                                    
|                                    
|                                    
|Net loss per share from discontinued |                   |                   |            |                            |       |                           |            |            |       |      |            |            |       |   |            |           
|                                    
|                                    
|                                    
|                                    
|operations:                          |                   |                   |            |                            |       |                           |            |            |       |      |            |            |       |   |            |           
|                                    
|                                    
|                                    
|                                    
|                                     |                   | Basic and diluted |            | $                          | (0.01 | )                         |            | $          | 0.00  |      |            | $          | (0.01 | ) |            | $          | 0.00  |  



|   |  | Since a loss from continuing operations was incurred for the quarters and
nine months ended April 30, 2001 and 2002, convertible preferred stock,
options and warrants to purchase shares of common stock that would
otherwise qualify as common stock equivalents were not included in the
computation of diluted net income per share because their effect would be
antidilutive.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | INVENTORIES                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | Inventories consist of the following:                                                                                                                                                                                                                                                                                                                                              

|                   |  |           |           |          |  |   |            |  
|------------------ |  | --------- | --------- | -------- |  | - | ---------- | -
|                   |  | April 30, |           | July 31,
|                   |  | 2002      |           | 2001    
|                   |  |           |           |         
|Finished goods     |  | $         | 2,382,652 |          |  | $ | 4,128,119  |  
|                  
|                  
|                  
|                  
|Work in progress   |  |           | 1,910,867 |          |  |   |            |  
|                  
|                  
|                  
|                  
|Raw materials      |  |           | 4,513,187 |          |  |   | 7,052,981  |  
|                  
|                  
|                  
|                  
|Inventory reserves |  |           | (100,210  | )        |  |   | (79,203    | )
|                   |  |           |           |          |  |   |            |  
|                   |  | $         | 8,706,496 |          |  | $ | 11,101,897 |  
|                   |  |           |           |          |  |   |            |  



|6. |  | INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Deferred income taxes reflect the tax effect of temporary differences
between the amounts of assets and liabilities recognized for financial
reporting and tax purposes. At the end of each fiscal quarter, the
Company makes its best estimate of the effective tax rate expected to be
applicable for the full fiscal year. The rate so determined is used in
providing for income taxes on a current year-to-date basis. In the three
months ended April 30, 2002, the Company recorded a tax benefit based on
the effective tax rate and offset the tax benefit with an increase in the
deferred tax asset valuation reserve. In addition, the Company recorded a
tax benefit and corresponding receivable of $277,000 related to the filing
of two amended federal income tax returns during the quarter. The amended
return was filed pursuant to section 102 of the Job Creation and Worker
Assistance Act of 2002, which extended the use of NOL carrybacks over

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|   |  | five years instead of three.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company has recorded total deferred tax assets of approximately $5.6
million and a valuation allowance against the deferred tax assets of $5.6
million. The Company has offset a portion of its deferred tax assets with
a valuation allowance due to the Companys lack of earnings history.
Management believes the valuation allowance reduces deferred tax assets to
an amount that represents managements best estimate of the amount of such
deferred tax assets that more likely than not will be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|7. |  | DEBT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | On August 27, 2001, the Company and Congress Financial Corporation
(Congress) entered into a Loan and Security Agreement (the Agreement)
under which Congress provides a $12 million revolving line of credit (the
Line) to the Company at an interest rate equal to the prime rate plus
3/4 percent. A portion of the available funds from the Line were used to
pay off in full the line of credit and building loan due to Bank One,
Arizona, NA (Bank One) totaling approximately $6.4 million. The amount
of funds available to the Company under the Line is based upon a
percentage of the value of eligible receivables and inventory and was $4.8
million at April 30, 2002 of which, borrowings of $3.1 million were
outstanding.                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | The obligations under the Agreement are collateralized by various assets,
including, but not limited to, trade accounts receivable, inventories,
equipment and intangible assets of the Company and of certain of its
operating subsidiaries. Zila and all of its direct and indirect operating
subsidiaries guarantee the obligations under the Agreement, which expires
August 17, 2004; however, the Line is classified as current because of
certain provisions required by Congress. Under the Agreement, the Company
is required to comply with a financial covenant based on an adjusted
tangible net worth calculation. At April 30, 2002, the Company was in
compliance with the covenant. If the Company continues to experience
significant losses, it may violate the covenant in future periods. The
Company is currently reviewing all of its continuing operations to reduce
its operating losses as well as exploring possible equity transactions in
an effort to bolster its tangible net worth. The obligations of Oxycal to
Bank One with respect to the 1999 Industrial Revenue Development Bonds
have not changed.
|  
|8. |  | ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Effective August 1, 2001, the Company adopted the Financial Accounting
Standards
Board Statement of Financial Accounting Standard (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Prior
to that date, the Company accounted for impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. SFAS No. 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the book value of the asset might not be
recoverable. In the quarter ended October 31, 2000, the Company recorded
a non-cash charge of $310,000 in the Nutraceuticals segment to write down
the carrying amount of the land and buildings of its former location in
Prescott, Arizona to an estimated fair value related to its anticipated
sale. The building was sold in February 2001.                                                                                                                      
|  
|   |  | The Companys policy is to review the carrying amounts of long-lived
assets and goodwill whenever events or changes in circumstances indicate
that the carrying amount of an asset may                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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|   |  | not be recoverable. Such events might include a significant decline in
market share, a significant decline in profits, rapid changes in
technology, significant litigation or other items. In evaluating the
recoverability of long-lived assets, managements policy is to compare the
carrying amounts of such assets (or asset group) with the estimated future
cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | During the current quarter, the Company determined that completion of the
OraTest® Phase III clinical trial will require a significant number of
additional patients. The requirement for the larger number of
patients is related to the tumor formation rate within the study
population and not to the efficacy of the OraTest® product. The projected cost of the clinical
study has risen significantly compared to the original budget due to
the additional patients required.
The cost of the clinical study is dependent on many factors including,
but not limited to, the number of clinical sites, patient enrollment
rates, compliance with the study protocol and related monitoring, and the
level of funding throughout the study. Zila intends to increase the rate of funding and the
number of clinical sites to support the larger number of patients
needed to complete the study. This effort is currently underway. SFAS
144 Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144) requires that a long-lived asset
be tested for recoverability whenever events or changes in
circumstances indicate that its carrying amount may not be
recoverable. Therefore, the Company has updated its impairment
analysis in accordance with SFAS 144 for the long-lived assets
related to the OraTest® product with this information. Significant
assumptions impacting the cashflows used in the impairment analysis
include the timing and availability of sufficient additional financing, cost
estimates and completion date of the clinical studies, approval by
the FDA, and the cashflows generated by future sales of the OraTest®
product.
Based upon this updated analysis, the Company has determined that the
assets are not impaired.
|  
|9. |  | NEW ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | In May 2000, the Financial Accounting Standards Boards Emerging Issues
Task Force (EITF) released Issue No. 00-14, Accounting for Certain
Sales Incentives. The Issue addresses the recognition, measurement, and
income statement classification for certain sales incentives including
coupons, rebates and free products. The consensus on EITF 00-14 was
effective for the Company on February 1, 2002. The implementation of this
consensus required the Company to reclassify certain sales incentives,
which were recorded as selling, general and administrative expenses as a
reduction of net sales. The cost of free products is recorded as an
increase of the cost of products sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | In April 2001, the EITF released Issue No. 00-25, Vendor Income Statement
Characterization of Consideration from a Vendor to a Retailer. The Issue
discusses accounting and income statement classification of costs, other
than those directly addressed in Issue 00-14, that are incurred by a
vendor (typically a manufacturer or distributor) to or on behalf of a
customer (typically a retailer) in connection with the customers purchase
or promotion of the vendors products. Such costs include consideration
given to retailers for space in their stores (slotting fees),
consideration given to obtain favorable display positions in the
retailers stores and other promotional activity such as cooperative
advertising. The Issue addresses the recognition and measurement of such
costs and whether a vendor should classify such costs in its income
statement when incurred as a reduction of revenues or as an expense item.
The consensus on EITF 00-25 was effective for the Company on February 1,
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | The effect of the adoption of EITF-0014 and EITF-00-25 did not have a
material impact on the Companys results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Thus, amortization
of goodwill and intangible assets determined to have indefinite useful
lives, will cease upon adoption of that statement. The Company will adopt
SFAS 142                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

13



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|    |  | effective August 1, 2002, as required. The Company expects that the
adoption of SFAS No. 142 will reduce annual amortization expense by
approximately $1.2 million annually pre-tax. The Company is in the
process of analyzing the impact that the impairment analyses will have on
the Companys recorded intangibles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|10. |  | CONVERTIBLE PREFERRED STOCK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | In February 2001, the Company issued 100,000 shares of Series B
convertible preferred stock to National Healthcare Manufacturing
Corporation, U.S. as part of the acquisition of the patent rights and the
Antioch, Illinois manufacturing operations for swab products. The
preferred stock is convertible into shares of the Companys common stock
at any time at a conversion ratio of one to one. The holders of the
preferred stock are entitled to receive cumulative quarterly dividends at
a rate of $0.0975 per share per fiscal quarter, payable in arrears. The
Company paid $29,000 in dividends during the quarter ended April 30, 2002.
Holders of the preferred shares have no voting rights except as required
by applicable law. The Company has accumulated accrued dividends of
$19,750 as of April 30, 2002.                                                                                                              
|   
|11. |  | SEGMENT INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | The Company is organized into three major groups, all of which have
distinct product lines, brand names and are managed as autonomous business
units. The Company has identified the following segments for purposes of
applying SFAS No. 131: Consumer,which includes Zila Pharmaceuticals, Inc.
and the Zilactin® line of products; Professional,which includes the
Peridex® product, the Pro-Series line of products including the Pro-Ties
product, the OraTest® product, the ViziLite product and the IST line of
products; and Nutraceuticals,which includes Oxycal Laboratories, Inc. and
its wholly-owned subsidiary, Inter-Cal, Inc. The Company evaluates
performance and allocates resources to segments based on operating
results. Expenses related to Zila Technical Operations, (the manufacturing
facility for Zila® Tolonium Chloride) and the ongoing OraTest® clinical
trial has been combined with the Corporate segment.
|   
|    |  | In November 2001, the Company made the decision to dispose of its Zila
Dental Supply reporting segment (see Note 3). The segment information has
been restated to reflect historical segment information as adjusted for
the reclassification of Zila Dental Supply as a discontinued operation.
The assets of the business transferred are included in the total assets of
discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | The table below presents information about reported segments as of and for
the nine months ended April 30 (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                     |               |               |      |  |          |       |              |  |                |        |           |  |            |        |       |  |   |        |   |  |              |  |  |  |   |        |  
|-------------------- | ------------- | ------------- | ---- |  | -------- | ----- | ------------ |  | -------------- | ------ | --------- |  | ---------- | ------ | ----- |  | - | ------ | - |  | ------------ |  |  |  | - | ------ | -
|                     |               |               |      |  |          |       |              |  |                |        |           |  |            |        |       |  |   |        |   |  | Discontinued |  |  |  |  
|                     |               |               |      |  | Consumer |       | Professional |  | Nutraceuticals |        | Corporate |  | Operations |        | Total
|                     |               |               |      |  |          |       |              |  |                |        |           |  |            |        |      
|Net revenues:        |               |               |      |  |          |       |              |  |                |        |           |  |            |        |       |  |   |        |   |  |              |  |  | 
|                    
|                    
|                    
|                    
|                     |               |               | 2002 |  | $        | 7,451 |              |  | $              | 3,972  |           |  | $          | 14,583 |       |  | $ | 0      |   |  |              |  |  |  | $ | 26,006 |  
|                    
|                    
|                    
|                    
|                     |               |               | 2001 |  | $        | 8,457 |              |  | $              | 3,634  |           |  | $          | 10,130 |       |  | $ | 0      |   |  |              |  |  |  | $ | 22,221 |  
|                    
|                    
|                    
|                    
|Income (loss) before |               |               |      |  |          |       |              |  |                |        |           |  |            |        |       |  |   |        |   |  |              |  |  | 
|                    
|                    
|                    
|                    
|                     |               | income taxes: |      |  |          |       |              |  |                |        |           |  |            |        |       |  |   |        |   |  |              |  |  |  |   |       
|                    
|                    
|                    
|                    
|                     |               |               | 2002 |  |          | 1,591 |              |  |                | (2,853 | )         |  |            | 1,428  |       |  |   | (6,287 | ) |  |              |  |  |  |   | (6,121 | )
|                    
|                    
|                    
|                    
|                     |               |               | 2001 |  |          | 3,505 |              |  |                | (2,136 | )         |  |            | (1,208 | )     |  |   | (7,200 | ) |  |              |  |  |  |   | (7,039 | )
|                    
|                    
|                    
|                    
|Depreciation and     |               |               |      |  |          |       |              |  |                |        |           |  |            |        |       |  |   |        |   |  |              |  |  | 
|                    
|                    
|                    
|                    
|                     | amortization: |               |      |  |          |       |              |  |                |        |           |  |            |        |       |  |   |        |   |  |              |  |  |  |  
|                    
|                    
|                    
|                    
|                     |               |               | 2002 |  |          | 54    |              |  |                | 1,022  |           |  |            | 924    |       |  |   | 617    |   |  |              |  |  |  |   | 2,617  |  

14



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|              |  |  |      |  |          |       |              |  |                |        |           |  |            |        |       |  |  |        |  |  |              |        |  |  |  |        | 
|------------- |  |  | ---- |  | -------- | ----- | ------------ |  | -------------- | ------ | --------- |  | ---------- | ------ | ----- |  |  | ------ |  |  | ------------ | ------ |  |  |  | ------ | 
|              |  |  |      |  |          |       |              |  |                |        |           |  |            |        |       |  |  |        |  |  | Discontinued |        |  |  | 
|              |  |  |      |  | Consumer |       | Professional |  | Nutraceuticals |        | Corporate |  | Operations |        | Total
|              |  |  |      |  |          |       |              |  |                |        |           |  |            |        |      
|             
|             
|             
|             
|              |  |  | 2001 |  |          | 60    |              |  |                | 850    |           |  |            | 855    |       |  |  | 647    |  |  |              |        |  |  |  | 2,412  | 
|             
|             
|             
|             
|Total assets: |  |  |      |  |          |       |              |  |                |        |           |  |            |        |       |  |  |        |  |  |              |        |  | 
|             
|             
|             
|             
|              |  |  | 2002 |  |          | 2,675 |              |  |                | 17,361 |           |  |            | 29,648 |       |  |  | 10,102 |  |  |              | 5,349  |  |  |  | 65,135 | 
|             
|             
|             
|             
|              |  |  | 2001 |  |          | 3,196 |              |  |                | 14,576 |           |  |            | 33,769 |       |  |  | 12,983 |  |  |              | 12,033 |  |  |  | 76,557 | 



|12. |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On December 19, 2001, the Company and Joseph Hines, its President, reached
a settlement with the Securities and Exchange Commission (the
Commission) relating to certain public statements made by the Company in
January 1999 with respect to the prospects for approval by the Food and
Drug Administration (FDA) of OraTest®, one of the Companys products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | Pursuant to the settlement, the Commission made findings related to an
unsigned draft report that had been prepared by the FDA staff and
delivered to the Company on or about December 28, 1998. The unsigned
draft report recommended against approval of the OraTest® product. The
Commission found that, in public statements made by the Company during the
two-week period subsequent to its receipt of the unsigned draft report and
prior to an FDA advisory committee meeting that was held on January 13,
1999, the Company and Mr. Hines should have disclosed the receipt of the
unsigned draft report. The Commission acknowledged the Companys position
that, at the time, it was represented by experienced FDA counsel who had
advised the Company that its New Drug Application relating to the OraTest®
product was approvable, but the Commission concluded that the receipt of
the unsigned draft report should have been disclosed in the Companys
public statements, and that the failure to do so constituted a violation
of Section 10(b) of the Securities Exchange Act of 1934 (the Act) and
Rule 10b-5 thereunder.
|   
|    |  | In order to resolve the matter, the Company and Mr. Hines submitted Offers
of Settlement, which the Commission accepted. Without admitting or
denying the Commissions findings, the Company and Mr. Hines consented to
the entry of an Order Instituting Public Administrative Proceedings
pursuant to Section 21C of the Act and the issuance of a Cease-and-Desist
Order prohibiting future violations of such Section and Rule.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | In September 2000, counsel advised Zila that its obligation to pay
royalties to Dr. James E. Tinnell, (Tinnell) under a 1980 agreement
ceased as of August 25, 1998 when the patents on the invention expired.
In September 2000, Zila gave notice to Tinnell that it would not continue
paying such royalties and requested reimbursement of royalties paid since
August 1998. After attempts to settle the matter failed, Zila filed suit
in the Federal District Court for the District of Nevada (Zila, Inc. v.
James E. Tinnell, No. CV-S-00-1344), requesting a declaratory judgment
that it had no royalty obligations to Tinnell after August 1998 and
judgment for the overpaid royalties.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | Tinnell asserted a counterclaim for royalties since the last payment in
August 2000 and several additional counterclaims based on transactions
between Tinnell and Zila in the 1980s. Counsel have advised Zila that,
based on their investigations and discovery to date, (i) the counterclaim
for royalties is without merit and (ii) the additional counterclaims are
meritless and, in any event, are time-barred by the applicable statutes of
limitation. Both Zila and Tinnell have filed motions for summary
judgment. The Court has taken these motions under advisement and has
stayed all further proceedings until the motions are decided. These
decisions are not expected for at least several months.                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | In September 2000, Inter-Cal entered into a two year exclusive Processing
Agreement with John                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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|    |  | I. Haas, Inc. (Haas) for the extraction of oleoresin from dried-milled
saw palmetto berries. Haas agreed to provide processing capacity for a
minimum of 1.5 million pounds of dried and milled saw palmetto berries in
the 2001 and 2002 processing seasons as defined in the Agreement.
Inter-Cal agreed to pay Haas a fee of $.904 per pound for any shortfall
not delivered as part of the 1.5 million pounds minimum per season. It is
expected that Inter-Cal will have processed 2.75 million pounds through
the end of the 2002 processing season (July 31, 2002), leaving a shortfall
of 250,000 pounds. The parties have reached agreement in principle to
relieve Inter-Cal of its obligation under the Agreement.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company is subject to other legal proceedings and claims, which arise
in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to these other actions will not
materially affect the financial position or results of operations of the
Company.                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|13. |  | COMPREHENSIVE LOSS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Statements of Comprehensive Loss

|                                  |                                                                   |   |                    |         |                   |   |            |        |      |   |            |         |   |   |            |        | 
|--------------------------------- | ----------------------------------------------------------------- | - | ------------------ | ------- | ----------------- | - | ---------- | ------ | ---- | - | ---------- | ------- | - | - | ---------- | ------ | 
|                                  |                                                                   |   | Three months ended |         | Nine months ended
|                                  |                                                                   |   | April 30,          |         | April 30,        
|                                  |                                                                   |   | 2002               |         | 2001              |   | 2002       |        | 2001
|                                  |                                                                   |   |                    |         |                   |   |            |        |     
|Net loss attributable to common   |                                                                   |   |                    |         |                   |   |            |        |      |   |            |         |   |   |            |       
|                                 
|                                 
|                                 
|                                 
|shareholders                      |                                                                   | $ | (2,249,929         | )       |                   | $ | (5,092,957 | )      |      | $ | (9,254,146 | )       |   | $ | (6,881,945 | )     
|                                 
|                                 
|                                 
|                                 
|Other comprehensive (loss)        |                                                                   |   |                    |         |                   |   |            |        |      |   |            |         |   |   |            |       
|                                 
|                                 
|                                 
|                                 
|income, net of tax:               |                                                                   |   |                    |         |                   |   |            |        |      |   |            |         |   |   |            |       
|                                 
|                                 
|                                 
|                                 
|                                  | Foreign currency
translation adjustment                           |   |                    | (66,500 | )                 |   |            | 28,597 |      |   |            | (46,959 | ) |   |            | 59,767 | 
|                                 
|                                 
|                                 
|                                 
|                                  | Unrealized holding losses
on securities arising
during the period |   |                    |         |                   |   |            | 5,370  |      |   |            |         |   |   |            | 3,500  | 
|                                  |                                                                   |   |                    |         |                   |   |            |        |      |   |            |         |   |   |            |       
|Other comprehensive (loss) income |                                                                   |   | (66,500            | )       |                   |   | 33,967     |        |      |   | (46,959    | )       |   |   | 63,267     |       
|                                 
|                                 
|                                 
|                                 
|Comprehensive loss                |                                                                   | $ | (2,316,429         | )       |                   | $ | (5,058,992 | )      |      | $ | (9,301,105 | )       |   | $ | (6,818,679 | )     
|                                  |                                                                   |   |                    |         |                   |   |            |        |      |   |            |         |   |   |            |       

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

ZILA, INC. AND SUBSIDIARIES

Forward Looking Information

This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The words believe, expect, anticipate, intend,
estimate and other expressions that are predictions of or indicate future
events and trends and that do not relate to historical matters identify
forward-looking statements. These forward-looking statements are based largely
on the Companys expectations or forecasts of future events, can be affected by
inaccurate assumptions, and are subject to various business risks and known and
unknown uncertainties, a number of which are beyond the Companys control.
Therefore, actual results could differ materially from the forward-looking
statements contained in this document, and readers are cautioned not to place
undue reliance on such forward-looking statements. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. A wide variety of
factors could cause or contribute to such differences and could adversely
impact revenues, profitability, cash flows and capital needs.

Factors that could cause or contribute to the Companys actual results
differing materially from those discussed herein or for the Companys stock
price to be affected adversely include, but are not limited to: (i) the
Companys failure to maintain compliance with the covenants of its outstanding
debt instruments; (ii) industry trends, including a downturn or slowing of the
growth of the dietary supplement industry and the consumer oral care, OTC and
prescription industries; (iii) the Companys ability to sell its line of saw
palmetto products for a price greater than the carrying value of the inventory;
(iv) increased competition from current competitors and new market entrants;
(v) the Companys reliance on single source manufacturing locations for several
of its products (vi) adverse publicity regarding the industries to which the
Company markets its products; (vii) the Companys dependence upon its ability
to develop new products; (viii) the Companys ability to gain or expand
distribution within new or existing channels of trade; (ix) an increase in the
cost of obtaining and maintaining shelf space with major national retailers who
demand various forms of incentives from their suppliers such as slotting fees,
coop advertising, or rebates; (x) adverse changes in government regulations;
(xi) the Companys and its suppliers ability to continue to comply with current
good manufacturing practices (GMP) and other applicable regulatory
requirements; (xii) exposure to product liability claims; (xiii) dependence on
significant customers; (xiv) the Companys ability to keep and attract key
management employees; (xiii) the Companys inability to manage growth and
execute its business plan; (xv) sales and earnings volatility; (xvi) volatility
of the stock market; (xvii) the Companys reliance on independent brokers to
sell many of its products; (xviii) the inability of the Company to protect its
intellectual property; and (xix) a general downturn in the national economy as
a whole.

Included among the factors affecting the OraTest® product are (i)
successful completion of the clinical study; (ii) the Companys ability to
obtain sufficient financing to fund the clinical study; (iii) the FDAs
ultimate decision regarding the OraTest® product; (iv) the length, size and
expense of the new clinical study and the FDA review process; (v) the
limitations on indicated uses for which the OraTest® product may be marketed;
and (vi) if approved, the market reception to the OraTest® product and any
post-marketing reports or surveillance programs to monitor usage or side
effects of the OraTest®product. There can be no assurance that the
forward-looking statements contained in this document will, in fact,

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transpire or prove to be accurate. For a more detailed description of these
and other cautionary factors that may affect the Companys future results,
please refer to the Companys Annual Report on Form 10-K for its fiscal year
ended July 31, 2001 filed with the Securities and Exchange Commission.

COMPANY OVERVIEW

Zila is a worldwide manufacturer and marketer of nutraceutical,
pharmaceutical, and biomedical products. During the quarter ended April 30,
2002, the Company had three major product groups: Consumer Pharmaceuticals,
Professional Pharmaceutical Products and Nutraceuticals. The Consumer
Pharmaceuticals group consists of over-the-counter products, including the
Zilactin® family of products. The Professional Pharmaceuticals group includes
Peridex® prescription mouth rinse, the OraTest® oral cancer detection system,
the Pro-Series line of products, including the Pro-Ties bundling system for
instrument sterilization, the ViziLite disposable light for illumination of
abnormal oral tissue and the plastic molded products from Innovative Swab
Technologies (IST). The Nutraceuticals group is comprised of Oxycal
Laboratories, Inc. (Oxycal) and its Inter-Cal (Inter-Cal) subsidiary, a
manufacturer and distributor of mineral and botanical products including a
patented and unique form of Vitamin C under the trademark Ester-C® and the
Palmettx botanical line of products.

In February 2001, the Company acquired the patent rights and the Antioch,
Illinois manufacturing operations for swab products from National Healthcare
Manufacturing Corporation, headquartered in Winnipeg, Canada. Intellectual
property, inventory, plus molding, labeling, filling and sealing equipment were
included in the acquisition. The business unit is known as Innovative Swab
Technologies, Inc. Zila paid approximately $2.4 million in a combination of
cash and preferred stock for the unit.

In November 2001, the Company made the decision to divest its Zila Dental
Supply (ZDS) reporting segment. In November and December 2001, the Company
sold substantially all of the assets and certain liabilities of the ZDS segment
in two separate transactions. It sold the ZDS full-service assets on November
5, 2001 to Henry Schein, Inc. of Melville, NY (Nasdaq: HSIC) for approximately
$5.8 million in cash. The Company realized a gain from the disposal of the
full service assets of approximately $494,000, net of a current tax expense of
approximately $329,000. Proceeds from the sale were used to repay borrowings
outstanding under the revolving line of credit with Congress Financial
Corporation.

The ZDS mail order operations (assets and liabilities) were sold on
December 4, 2001 to PracticeWares, Inc. of Sacramento, CA for approximately
$8.0 million in one short and two long-term notes. Approximately $5.7 million
of the $8.0 million purchase price (net of post closing adjustments) was due
and payable January 11, 2002. The Company extended the maturity date of the
short-term note, upon payment of accrued and prepaid interest, to February 15,
2002, and further extended the note to March 1, 2002, with interest prepaid
through the new maturity date. The note has not been paid and is currently in
default. Zila has various remedies including the right to effect reconveyance
to the Company. As a result of PracticeWares failure to pay the short term
notes, the transaction to sell the mail order business no longer qualifies as a
sale for accounting purposes and the assets and liabilities of that operation
have been classified as current and shown as net assets and liabilities of
business transferred under contractual arrangements. Operating results of the
ZDS mail order business will continue to be reflected in the income statement
as income (loss) from operation of discontinued Dental Supply Segment. For
current and future quarters for which the transferred business has net income,
such net income may be recognized by the Company to the extent of any
cumulative quarterly losses within the same fiscal year. Similarly, quarterly
losses of the business need not be recognized by the Company except to the
extent that they exceed any cumulative quarterly net income within the same
fiscal year.

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In March 2002, Zila and PracticeWares agreed in principle to restructure
the terms relating to the sale. In June 2002, Zila, PracticeWares and
PracticeWorks, Inc. entered into an agreement under which PracticeWares will
pay Zila $4,000,000 plus a 19.0% ownership interest in PracticeWares (on a
fully diluted basis). In addition, PracticeWares will pay Zila approximately
$130,000 in accrued interest. In exchange for the consideration, Zila agreed
to reduce the purchase price to equal the consideration paid and modify the
principal balances of the notes receivable so that they will be paid in full at
closing. The $4,000,000 payment is contingent upon the successful completion
and funding of the public offering by PracticeWorks of 3,750,000 shares of its
common stock made on June 7, 2002. It is expected that such funding will be
completed prior to June 30, 2002, although there can be no assurance such
funding, and the anticipated closing, will occur by such date or at all. Upon
funding, PracticeWorks will make a cash infusion into PracticeWares in return
for equity and a note receivable. Five percent of the cash payment to Zila
will be held in escrow for 60 days to offset certain indemnifications of Zila
to PracticeWares.

On December 4, 2001, the Company acquired the world marketing and
distribution rights (excluding the Pacific Rim) for the ViziLite
chemiluminescent light technology from The Trylon Corporation of Torrance, CA
(Trylon). In payment of the purchase price for the transaction, the Company
issued 2,000,000 shares of restricted common stock, of which 1,625,000 shares
were delivered to Trylon and 375,000 shares were placed into escrow. The
shares of common stock are restricted in accordance with the following
provisions: (i) all 2,000,000 shares are restricted within the meaning of Rule
144 under the Securities Act of 1933, as amended; (ii) 500,000 of the shares
delivered to Trylon have an additional contractual restriction upon sale or
transfer that will be removed at the earlier of ten years following the closing
date or the achievement of certain future sales milestones of the ViziLite
product; and (iii) 375,000 of the other shares delivered to Trylon have an
additional contractual restriction that will be removed at the earlier of ten
years following the closing date or in the event of the submission and approval
in filing a 510(k) application with the FDA for a product currently under
development. The 375,000 shares in escrow are to remain in escrow until the
date upon which the Company receives FDA marketing clearance on the new product
described in item (iii) above. If the Company does not receive such clearance
on or before the second anniversary of the closing date, then the stock in
escrow is to be returned to the Company and cancelled, subject to certain
exceptions.

The 1,625,000 shares of restricted common stock were valued at $2,978,000
as follows: (i) the fair value of the 750,000 shares restricted within the
meaning of Rule 144 but not otherwise restricted, were valued at $1,853,000
which was based upon the common stock share market price of $2.47 on December
4, 2001; (ii) the 500,000 shares of restricted common stock subject to
additional contractual restrictions relating to sales milestones were valued at
$753,000 and were discounted from the December 4, 2001 share price based upon
the length of time and probability of achieving the requisite sales milestones;
and (iii) the 375,000 restricted shares of common stock subject to additional
contractual restrictions tied to FDA submissions were valued at $372,000 and
were discounted based upon the length of time and probability of submitting an
acceptable 510(k) application to the FDA. The $2,606,000 of value referenced
in items (i) and (ii) above was recorded as an intangible asset as a license.
The $372,000 in value referenced in item (iii) above was recorded as a prepaid
research and development fee and will be amortized as research and development
expense over the two-year period in which the application is prepared.

The release of the 375,000 shares in escrow is contingent upon Trylon
obtaining regulatory approval of a product currently under development. Due to
the contingent nature of the approval process, the Company will not record the
research and development costs associated with these shares until approval is
obtained. The Company is in the process of obtaining an independent valuation
of the restricted stock issued and will adjust its estimates of the value upon
its completion. Management believes that assumptions used in developing the
recorded value of the restricted stock are supportable and does not anticipate
a material change in the original valuation.

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In addition, the Company entered into a license agreement with Trylon
related to the chemiluminescent light technology that requires the Company to
pay a royalty on sales of the ViziLite product of 10 percent during the first
five years, and five percent during the next five years

RESULTS OF OPERATIONS

Comparison of the Quarter ended April 30, 2002 with the Quarter ended April 30, 2001

Total net revenues increased 52.5% to $8.4 million for the quarter ended
April 30, 2002, compared to revenues of $5.5 million during the third quarter
of the prior fiscal year.

Net revenues
for Inter-Cal for the quarter ended April 30, 2002, were $4.6
million, a 88.9% increase compared to $2.5 million for the corresponding 2001
fiscal quarter. The increase is attributable to increased radio and television
advertising of the Ester-C® products in the two previous quarters and an
increase in sales of saw palmetto products of 84.9%. Inter-Cals international sales
during the quarter increased to $945,000 compared to $316,000 in the previous
years third quarter.

Consumer Pharmaceuticals had net revenues of $2.2 million for the quarter
ended April 30, 2002, a 6.8% increase over the $2.1 million recorded during the
corresponding quarter last year. The increase was due primarily to increased
advertising and promotion during the quarter coupled with a delay in shipments
in the prior year quarter due to the inability to receive an adequate supply of
Zilactin®L products from the manufacturer. Several initiatives were started
during the quarter in an effort to increase sales, including new package design
for all Zilactin® products, a new consumer and professional advertising
campaign, increased level of public relations activities and the release of the
new Zilactin® Baby Teething Gel and the Baby Teething Swab products.

Net revenues for Professional Pharmaceuticals were $1.5 million, a 59.2%
increase from the $917,000 recorded during the prior year quarter. Sales of the
Peridex® product increased 63.0%. Sales for the IST division were $301,000
(excluding $253,000 of interdivisional sales), an increase of 26.4% compared to
the $238,000 (excluding $262,000 of interdivisional sales) in the previous year
quarter.

For the quarter ended April 30, 2002, the cost of products sold was $3.0
million; a 53.1% increase from the $2.0 million recorded in the quarter ended
April 30, 2001. Cost of products sold as a percentage of net revenues increased
slightly to 36.5% in the quarter ended April 30, 2002 from 36.3 % in the
quarter ended April 30, 2001. The increase for the quarter primarily reflects
the increase in sales of Palmettx products that have a higher cost of
production as a percentage of revenue than the other product lines of the
Company.

Cost of products sold as a percentage of net revenues for Inter-Cal
increased to 36.4% in the quarter ended April 30, 2002 from 31.8% in the
corresponding quarter of the previous year. The increase was attributable to a
change in the mix of products sold. The increase was caused by the higher
percentage of sales of the Palmettx botanical line of products in the current
quarter, which had a lower contribution margin than the Ester-C® line of
products during the period. Inter-Cal increased prices to customers in
February 2002 for saw palmetto products in an effort to boost its future profit
margins.

Cost of products sold as a percentage of net revenues for Consumer
Pharmaceuticals decreased to 29.4% in the quarter ended April 30, 2002 from
30.3% in the quarter ended April 30, 2001. The decrease for the quarter is the
result of a change in the mix of products sold. Cost of products sold as a
percentage of net product sales for Professional Pharmaceuticals decreased to
43.6% for the quarter

20



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ended April 30, 2002 from 48.6% in the quarter ended April 30, 2001. The
decrease is due primarily to the lower costs to manufacture ISTs products
during the current quarter compared to the previous year quarter and the
addition of the costs for the ViziLite products sold in the current quarter
that have a higher gross profit.

The Company incurred selling, general and administrative expenses of $5.6
million, or 67.3% of net revenues during the third quarter of fiscal year 2002
compared to $6.1 million, or 112.3% of net revenue in the same period in fiscal
2001. The decrease in costs is due primarily to reduced accruals for incentive
compensation, lower legal fees and reduced bad debt expense offset by an
increase in salaries and related expenses as well as building and equipment
rental costs at the Zila Technical Operations manufacturing facility in
Phoenix, Arizona.

Research and development expenses decreased $190,000, or approximately
16.6%, from $1.1 million in the third quarter of fiscal year 2001 to $953,000
for the same period in fiscal year 2002. The decrease is primarily due to a
decrease in expenses related to the cost of the clinical study associated with
the Companys ongoing efforts to obtain FDA approval of the OraTest® product
offset by the addition of costs for a product currently under development
related to ViziLite.

Depreciation and amortization expenses increased slightly to $918,000 in
the third quarter of fiscal year 2002 from $829,000 for the same period in
fiscal year 2001. The increase is due primarily to the inclusion of the
amortization related to ViziLite.

The Company recorded interest expense of $113,000 for the quarter ended
April 30, 2002 compared to $192,000 in the same period of the previous year.
The decrease was attributable to decreased bank borrowings and debt
obligations, as well as lower interest rates during the current quarter
compared to the previous year period.

At the end of each fiscal quarter, the Company makes its best estimate of
the effective tax rate expected to be applicable for the full fiscal year. The
rate so determined is used in providing for income taxes on a current
year-to-date basis. If necessary, the rate is revised, as of the end of each
quarter during the fiscal year to the Companys best estimate of its annual
effective tax rate. In the three months ended April 30, 2002, the Company
recorded a tax benefit based on the effective tax rate and offset the tax
benefit with an increase in the deferred tax asset valuation reserve. In
addition, the Company recorded a tax benefit of $277,000 related to the filing
of two amended federal income tax returns during the quarter. The amended
return was filed pursuant to section 102 of the Job Creation and Worker
Assistance Act of 2002, which extended the use of NOL carrybacks over five
years instead of three. In the three months ended April 30, 2001, the Company
recorded no income tax benefit.

For the quarter ended April 30, 2002, the Company had a net loss from
continuing operations of $2.0 million compared to net loss of $4.9 million for
the prior year quarter. As stated above, the decrease in net loss is primarily
attributable to increased sales at Inter-Cal, a decrease in selling, general
and administrative expenses and increased income tax benefit during the current
quarter.

Comparison of the First Nine Months of 2002 with the First Nine Months of 2001

Total net revenues increased 17.0% to $26.0 million for the nine months
ended April 30, 2002, compared to revenues of $22.2 million for the nine months
ended April 30, 2001.

Net revenues for Inter-Cal for the nine months ended April 30, 2002 were
$14.6 million, a 44.0% increase when compared to $10.1 million for the
corresponding period in fiscal year 2001. The increase is attributable to
increased radio and television advertising for Ester-C® products during the
current

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period and increases in international and saw
palmetto sales. Inter-Cals international sales increased approximately 12%, during
the first nine months of the current fiscal year compared to the previous year
amount. Sales of saw palmetto products increased to $2.0 million during the
current year, or an approximately 100% increase when compared to the same
period last year.

Consumer Pharmaceuticals had net revenues of $7.5 million for the nine
months ended April 30, 2002, an 11.9% decline over the $8.5 million recorded
during the corresponding period last year. The decrease was primarily due to
the entry of several new competitive products into the market, the use of
discount programs in the corresponding period last year and the adverse affects
on consumer demand caused by the events of September 11, 2001. Several
initiatives were started during the third quarter in an effort to increase
sales, including new package design for all Zilactin® products, a new consumer
and professional advertising campaign, increased level of public relations
activities and the release of the new Zilactin® Baby Teething Gel and the Baby
Teething Swab products.

Net revenues for Professional Pharmaceuticals increased 9.3% from $3.6
million during the nine months ended April 30, 2001 to $4.0 million for the
nine months ended April 30, 2002. The increase was due primarily to the
inclusion of IST sales for the entire nine months of the current year period
and the inclusion of the sales of the newly acquired ViziLite product, which
was not included in the segment in the prior year period. In addition, the
prior year period includes $483,000 of license revenue generated from an
agreement executed during the quarter, whereby the Company granted a customer
the right to use its technology related to Chlorhexidine Gluconate to produce a
generic form of the product for distribution.

For the nine months ended April 30, 2002, cost of products sold was $9.4
million; a 29.5% increase from the $7.2 million recorded in the nine months
ended April 30, 2001. Cost of products sold as a percentage of net revenues
increased to 36.0% in the nine months ended April 30, 2002 from 32.6% in the
corresponding 2001 period. The increase for the period reflects (i) the effect
of the non-recurring licensing fees in the prior year that have no costs
associated with them; (ii) the inclusion of IST product costs for the entire
nine month period of the current fiscal year; (iii) the inclusion in the second
and third quarter of the current fiscal year of the ViziLite product costs;
and (iv) the increase in sales of Palmettx products that have a higher cost
of production as a percentage of revenue than the other product lines of the
Company.

Cost of products sold as a percentage of net revenues for Inter-Cal
increased slightly to 37.8% in the nine months ended April 30, 2002 from 35.6%
in the nine months ended April 30, 2001. The increase was caused by the higher
percentage of sales of the Palmettx botanical line of products, which had a
lower profit margin than the Ester-C® line of products during the period.
During the second quarter of 2002, Inter-Cal reduced the carrying value of one
of its saw palmetto products by $55,000 because the sales price of the product
was less than its carrying value. Inter-Cal increased prices to customers in
February 2002 for saw palmetto products. However, if Inter-Cal is unsuccessful
in its efforts to continue to sell the Palmettx products at higher prices and
market conditions force it to sell certain Palmettx products below cost, then
the Company may be required to take an additional charge in future quarters for
the write-down to net realizable value of the Palmettx inventory. As of April
30, 2002, Inter-Cal had approximately $3.7 million of Palmettx in inventory.

Cost of products sold as a percentage of net revenues for Consumer
Pharmaceuticals increased slightly to 27.0% in the nine months ended April 30,
2002 compared to 25.7% for the corresponding period in fiscal 2001. The
increase for the period is a result of a change in the mix of products sold.
Cost of products sold as a percentage of net product sales for Professional
Pharmaceuticals increased to 40.3% in the nine months ended April 30, 2002
compared to 30.1% for the corresponding period in fiscal 2002. The increase is
due primarily to the inclusion of IST costs for the entire nine month period

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of the current fiscal year and the addition of ViziLite product costs to the
segment during the period.

The Company incurred selling, general and administrative expenses of $17.5
million, or 67.1% of net revenues during the first nine months of fiscal year
2002 compared to $16.3 million, or 73.4% of net revenue in the same period in
fiscal 2001. The increase in selling, general and administrative expenses is
attributable to increased marketing and selling expenses at Inter-Cal and
Consumer Pharmaceuticals, the inclusion of IST costs for the entire current
year period, the addition of the ViziLite product costs during the current
period and increased expenses at the Zila Technical Operations manufacturing
facility related to production of the ViziLite product and increased product
testing.

Research and development expenses decreased $329,000, or 12.5%, from the
$2.6 million incurred in the first nine months of fiscal year 2001 to $2.3
million for the same period in fiscal year 2002. The decrease was primarily
due to a reduction of expenses related to research and clinical activities
associated with the OraTest® product.

Depreciation and amortization expenses increased $205,000 from $2.4
million in the first nine months of fiscal year 2001 to $2.6 million for the
same period in fiscal year 2002. The increase is due primarily to the increase
in the depreciation of assets associated with Inter-Cals new manufacturing
facility that were placed in service during the second half of 2001, the
inclusion of IST costs for the entire current period and the addition of the
ViziLite product costs during the current period.

In October 2000, the Company recorded a non-cash impairment charge of
$310,000 to write down the carrying value of the land and buildings related to
the former Inter-Cal operation in Prescott, Arizona to an estimated fair value
related to its anticipated sale. The building was sold in March 2001.

The Company recorded interest expense of $392,000 for the nine months
ended April 30, 2002 compared to $358,000 in the same period of the previous
year. The increase was attributable to increases in debt obligations incurred
during the current year period compared to the previous year period.

At the end of each fiscal quarter, the Company makes its best estimate of
the effective tax rate expected to be applicable for the full fiscal year. The
rate so determined is used in providing for income taxes on a current
year-to-date basis. The rate is revised, if necessary, as of the end of each
quarter during the fiscal year to the Companys best estimate of its annual
effective tax rate.

The Company regularly reviews its deferred tax benefits and related
valuation reserves in accordance with Financial Accounting Standards Board
Statement No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109
requires the Company to assess all available evidence, both positive and
negative, to determine whether a valuation allowance is needed based on the
weight of that evidence. During fiscal year 2000, the Company sold two of its
under performing operating units that had historically created much of the
annual taxable losses. As a result of these disposals, the Company was able to
utilize a large portion of previously existing net operating loss carryforwards
and showed cumulative taxable income from continuing operations for the past
three years. This evidence, combined with the Companys projections of future
taxable income, resulted in the Company reversing $2,912,000 in valuation
allowance during the fiscal year ended July 31, 2000, because it was determined
more likely than not that the Company would not be able to utilize the majority
of the remaining deferred tax assets.

During fiscal year 2001, the Company experienced a taxable loss of
$4,253,000 from the continuing operations. This loss reduced the amount of
three-year cumulative income significantly.

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After a detailed review of the deferred tax valuation allowance, the
Company determined that the net deferred tax asset balance at July 31, 2001 was
recoverable based upon the Companys remaining cumulative income from
continuing operations, a return to historical operating performance of the
Inter-Cal business in the fourth quarter, and future projections of income.
During fiscal year 2001, the Company recorded $1,772,000 in deferred tax assets
offset by an increase in the deferred valuation reserve of $1,437,000, which
resulted in a net income tax benefit of $335,000.

During the nine month period ended April 30, 2002, the Company lost
$9,034,000 from continuing operations. These losses exceeded the Companys
projected operating results and pushed the Company into a three-year cumulative
loss position. Cumulative losses are a form of SFAS 109 evidence that is among
the most objectively verifiable and carries more weight than other evidence
that embodies some degree of subjectivity such as projected future income. For
this reason, whenever an enterprise has suffered cumulative losses in recent
years, realization of a deferred tax asset is difficult to support if those
assertions are based on forecasts of future profitable results without a
demonstrated turnaround to operating profitability. In addition to the losses
incurred in the second quarter, additional negative evidence occurred as a
result of the Companys disposal of the historically profitable Zila Dental
Supply segment.

As a result of this negative evidence, the Company determined that it is
more likely than not that certain future tax benefits will not be realized. In
the nine months ended April 30, 2002, the Company recorded a tax benefit based
on the effective tax rate and offset the tax benefit with an increase in the
deferred tax asset valuation reserve. In addition, the Company recorded income
tax expense of $3,189,000 during the current nine month period primarily due to
an increase in the valuation allowance related to the Companys deferred tax
assets. In addition, the Company recorded a tax benefit of $277,000 related to
the filing of two amended federal income tax returns during the quarter. The
amended return was filed pursuant to section 102 of the Job Creation and
Worker Assistance Act of 2002, which extended the use of NOL carrybacks over
five years instead of three. In the three months ended April 30, 2001, the
Company recorded no income tax benefit. In the nine months ended April 30,
2001, the Company recorded an income tax benefit of $335,000. The Companys
effective tax rate for the prior year nine month period is significantly lower
than the statutory rate due primarily to the non-deductibility of foreign
operating losses and non-deductible amortization of intangible assets.

LIQUIDITY AND CAPITAL RESOURCES

At April 30, 2002, the Companys primary sources of liquidity included
cash and cash equivalents of $1.1 million and the line of credit discussed
below. Working capital decreased to $12.8 million at April 30, 2002 from $17.2
million at July 31, 2001, but the current ratio increased slightly to 2.2 at
April 30, 2002 from 2.1 at July 31, 2001. The primary reason for the decrease
in working capital is the decrease in accounts receivable and inventories
related to the discontinuance of the ZDS segment and the losses incurred during
the period.

Net cash provided by operating activities was $817,000 during the nine
months ended April 30, 2002, attributable to the net loss of $9.2 million
offset by changes in operating assets and liabilities totaling $3.7 million and
by non-cash items of $6.3 million related primarily to depreciation,
amortization and the reversal of the deferred tax asset. Significant changes
in operating assets and liabilities were primarily comprised of (i) a decrease
in accounts receivable of $1.2 million due to increased collection efforts;
(ii) a decrease in inventory of $2.4 million related primarily to the increased
sales of the Palmettx and Ester-C® products and lower purchases at Consumer
Pharmaceuticals; and (iii) a decrease in accounts payable and accrued expenses
of $727,000 related to vendor payments made by Inter-Cal during the current
period for inventory and the construction of the new building.

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Net cash provided by investing activities was $2.6 million related
primarily to the proceeds received from the sale of the full service ZDS assets
of $5.8 million offset by the net transfers of assets and liabilities of the
discontinued operations, capital purchases, the purchase of the Peridex®
product distribution rights for Western Europe and patent filings for Inter-Cal
and the OraTest® product.

Net cash used in financing activities was $3.6 million. Significant
changes were: (i) the outstanding balance of the line of credit was reduced by
$3.0 million; (ii) the building loan with Bank One, Arizona, NA of
approximately $277,000 was paid in full; and (iii) the outstanding principal
balance of the bonds related to the new Inter-Cal facility was reduced by
approximately $356,000.

At April 30, 2002, the Company had income tax net operating loss
carryforwards of approximately $18 million, which expire in years 2007 through
2022. The Companys ability to utilize these income tax net operating loss
carryforwards may be impaired if the Company continues to incur operating
losses.

On August 27, 2001, the Company and Congress Financial Corporation
(Congress) entered into a Loan and Security Agreement (the Agreement) under
which Congress provides a $12 million revolving line of credit (the Line) to
the Company at an interest rate equal to the prime rate plus 3/4 percent. A
portion of the available funds from the Line were used to pay off in full the
line of credit and building loan due to Bank One, Arizona, NA, totaling
approximately $6.4 million. The amount of funds available to the Company from
the Line is based upon a percentage of the value of eligible receivables and
inventory and was $4.8 million at April 30, 2002, of which borrowings of $3.1
million were outstanding.

The obligations under the Agreement are collateralized by various assets,
including, but not limited to, trade accounts receivable, inventories,
equipment and intangible assets of the Company and of certain of its operating
subsidiaries. Zila and all of its direct and indirect operating subsidiaries
guarantee the obligations under the Agreement, which expires August 17, 2004;
however, the Line is classified as current because of certain provisions
required by Congress. Under the Agreement, the Company is required to comply
with a financial covenant based on an adjusted tangible net worth calculation.
At April 30, 2002, the Company was in compliance with the covenant. If the
Company continues to experience significant losses, it may violate the covenant
in future periods. The Company is currently reviewing all of its continuing
operations to reduce its operating losses and exploring possible equity
transactions in an effort to bolster its tangible net worth. The other
obligations of Oxycal to Bank One with respect to the 1999 Industrial Revenue
Development Bonds have not changed.

During October 2000, Inter-Cal moved into its new manufacturing and
laboratory facility in Prescott, AZ. The facility was financed through a
transaction with The Industrial Development Authority of the County of Yavapai
(the Authority) in which the Authority issued $5.0 million in Industrial
Development Revenue Bonds (the Bonds), the proceeds of which were loaned to
Oxycal for the construction of the facility. The Bonds consist of $3.9 million
Series A and $210,000 of Taxable Series B, which, as of April 30, 2002 carried
interest rates of 2.0% and 2.05%, respectively and have a maturity of 20 years.
In connection with the issuance of the Bonds, the Authority required that
Oxycal obtain, for the benefit of the Bondholders, an irrevocable direct-pay
letter of credit to secure payment of principal and interest. Zila guarantees
the letter of credit.

The Company believes that cash generated from its operations, the sale of
the assets of ZDS, its investing activities and the availability of cash under
its line of credit are sufficient to finance its current level of operations
and anticipated capital expenditures. When the Company sold the mail order
operations of ZDS to PracticeWares, Inc. in December 2001, the Company expected
to receive

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approximately $5.7 million in January 2002, of which approximately $3 million
was to be invested in the on-going OraTest® Phase III clinical trial. Due to
the restructuring of the PracticeWares transaction, the Company did not receive
the $5.7 million as expected; however, as a result of the latest restructuring
of the transaction, the Company expects to receive approximately $4.0 million
before the end of June 2002 if the transaction closes as scheduled.

During the current quarter, the Company determined that completion of the
OraTest® Phase III clinical trial will require a significant number of
additional patients and the Company is currently evaluating the number of
patients required to complete the study. The requirement for the larger number
of patients is related to the tumor formation rate within the study population
and not to the efficacy of the OraTest® product. Due to the nature of clinical
trials of this type, it is not feasible for the Company to set a definitive
date for completion of the trial. By taking such measures as adding additional
sites, increasing patient enrollment and obtaining sufficient funds, the
Company believes that the length of the completion of the clinical trial will
not be significantly increased. The cost of the clinical study is dependent on
many factors, including, but not limited to, the number of clinical sites,
patient enrollment rates, compliance with the study protocol and related
monitoring, and the level of funding throughout the study. The projected cost
of the clinical study has risen significantly over the original budget due to
the additional patients required. Zila intends to increase the rate of funding
and the number of clinical sites to support the larger number of patients
needed to complete the study. This effort is currently underway and the Company
believes that it will have sufficient funds for the clinical trial for the next
fiscal year, provided that the closing of the sale of the ZDS mail order
business discussed above occurs as expected. The Company will, however,
require additional financing to support the OraTest® clinical trial, regulatory,
manufacturing and marketing costs extending beyond fiscal year 2003, as well as
to make any significant acquisitions. The Company is currently considering
possible financing sources such as the equity markets, venture capital and
strategic partners and is pursuing two funding strategies that if
completed would provide significant funding for the clinical trial. There is
no assurance that such funds will be available on terms acceptable to the
Company.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk refers to the potential effects of unfavorable changes in
certain prices and rates on the Companys financial results and conditions,
primarily foreign currency exchange rates and interest rates on debt
obligations. The Company transacts business in various foreign countries.
Foreign currency exposures are primarily, but not limited to, vendor and
customer payments and inter-company balances in currencies other than the
functional currency. Fluctuations in foreign currencies could have a material
adverse effect on the Companys results of operations.

The Company is exposed to interest rate fluctuations on its Industrial
Development Revenue Bonds and the line of credit with Congress as the interest
charged is based on variable rates. The Bonds bear interest based on a
floating rate and adjusted weekly by Banc One Capital Markets. Interest on the
outstanding balance of the line of credit is charged at the Index plus 3/4 %.
The Company does not trade in derivative financial instruments. The Company
does not believe that near-term changes in foreign currency exchange rates or
interest rates will have a material effect on its future earnings, fair values
or cash flows.




Part II  Other Information




ITEM 1. LEGAL PROCEEDINGS

On December 19, 2001, the Company and Joseph Hines, its President, reached
a settlement with the Securities and Exchange Commission (the Commission)
relating to certain public statements made by the Company in January 1999 with
respect to the prospects for approval by the Food and Drug Administration
(FDA) of OraTest®, one of the Companys products.

Pursuant to the settlement, the Commission made findings related to an
unsigned draft report that had been prepared by the FDA staff and delivered to
the Company on or about December 28, 1998. The

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unsigned draft report recommended against approval of the OraTest®
product. The Commission found that, in public statements made by the Company
during the two-week period subsequent to its receipt of the unsigned draft
report and prior to an FDA advisory committee meeting that was held on January
13, 1999, the Company and Mr. Hines should have disclosed the receipt of the
unsigned draft report. The Commission acknowledged the Companys position
that, at the time, it was represented by experienced FDA counsel who had
advised the Company that its New Drug Application relating to the OraTest®
product was approvable, but the Commission concluded that the receipt of the
unsigned draft report should have been disclosed in the Companys public
statements, and that the failure to do so constituted a violation of Section
10(b) of the Securities Exchange Act of 1934 (the Act) and Rule 10b-5
thereunder.

In order to resolve the matter, the Company and Mr. Hines submitted Offers
of Settlement, which the Commission accepted. Without admitting or denying the
Commissions findings, the Company and Mr. Hines consented to the entry of an
Order Instituting Public Administrative Proceedings pursuant to Section 21C of
the Act and the issuance of a Cease-and-Desist Order prohibiting future
violations of such Section and Rule.

In September 2000, counsel advised Zila that its obligation to pay
royalties to Dr. James E. Tinnell, (Tinnell) under a 1980 agreement ceased as
of August 25, 1998 when the patents on the invention expired. In September
2000, Zila gave notice to Tinnell that it would not continue paying such
royalties and requested reimbursement of royalties paid since August 1998.
After attempts to settle the matter failed, Zila filed suit in the Federal
District Court for the District of Nevada (Zila, Inc. v. James E. Tinnell, No.
CV-S-00-1344), requesting a declaratory judgment that it had no royalty
obligations to Tinnell after August 1998 and judgment for the overpaid
royalties.

Tinnell asserted a counterclaim for royalties since the last payment in
August 2000 and several additional counterclaims based on transactions between
Tinnell and Zila in the 1980s. Counsel have advised Zila that, based on their
investigations and discovery to date, (i) the counterclaim for royalties is
without merit and (ii) the additional counterclaims are meritless and, in any
event, are time-barred by the applicable statutes of limitation. Both Zila and
Tinnell have filed motions for summary judgment. The Court has taken these
motions under advisement and has stayed all further proceedings until the
motions are decided. These decisions are not expected for at least several
months.

The Company is subject to other legal proceedings and claims, which arise
in the ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these other actions will not materially
affect the financial position or results of operations of the Company.




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not Applicable




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

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ITEM 5. OTHER INFORMATION



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 6, 2002, the Companys Board of Directors appointed Douglas D.
Burkett, Ph.D., President and Chief Executive Officer and elected him to
the Board. Joseph Hines, who had been President and Chief Executive
Officer, will continue as Chairman of the Board. Dr. Burketts
responsibilities have included management of Zila Technical Operations,
Innovative Swab Technologies and Zila Pharmaceuticals. In April 2002, the
Board of Directors appointed him Vice President. Dr. Burkett,
age 38, joined Zila
in 1995 as Manager of Research and Manufacturing, with primary
responsibility to develop, refine and scale up production of Zila Tolonium
Chloride, the active ingredient in Zilas OraTest® oral cancer detection
product. Dr. Burkett received a B.S. in Chemistry from Missouri Western
State College in 1987, and a Ph.D. in Organic Chemistry from Arizona State
University in 1994.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits           
| | --- |  | -------------------
|
| |     |  | None               
|
| | (b) |  | Reports on Form 8-K
|
| |     |  | None               




SIGNATURES

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

|                    |  |                                                                                                                                     
|------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|Date: June 14, 2002 |  | By:/s/Douglas D. Burkett, Ph.D.

Douglas D. Burkett, Ph.D
President and Chief Executive Officer
(Principal Executive Officer)       
|                   
|                   
|                   
|                   
|                    |  |                                                                                                                                     
|                   
|                   
|                   
|                   
|                    |  | By:/s/Bradley C. Anderson

Bradley C. Anderson
Vice President and Chief
Financial Officer (Principal
Financial & Accounting Officer)

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