##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION



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(Mark One)

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|CHECKBOX  Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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|For the quarterly period ended October 31, 2001 or                                               
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|BOX  Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934    
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|For the transition period from 
to                                                               
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|Commission file number 0-17521                                                                   





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|                                                              |  |                                     
|------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                      |  | 86-0619668                          
|                                                              |  |                                     
|State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

|                                         |  |           
|---------------------------------------- |  | ----------
|5227 North 7th Street, Phoenix, Arizona  |  | 85014     
|                                        
|(Address of Principal Executive Offices) |  | (Zip Code)

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

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 October 31, 2001, the number of shares of common stock outstanding was
43,653,727.

Exhibit Index 20
Total pages 20

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 (UNAUDITED)                             
|                            | 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                                                                   
|EX-99.1                    
|EX-99.2                    
|EX-99.3                    



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##### Table of Contents



TABLE OF CONTENTS

|        |  |                                                                                                      |  |         
|------- |  | ---------------------------------------------------------------------------------------------------- |  | --------
|        |  |                                                                                                      |  | Page no.
|        |  |                                                                                                      |  |         
|Part I  |  | FINANCIAL INFORMATION                                                                                |  |         
|       
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|        |  |                                                                                                      |  |         
|       
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|       
|        |  |                                                                                                      |  |         
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|       
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|       
|Item 1. |  | Financial Statements (Unaudited)                                                                     |  |         
|       
|       
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|        |  |                                                                                                      |  |         
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|        |  |                                                                                                      |  |         
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|        |  | Condensed consolidated balance sheets as of October
31, 2001 and July 31, 2001                       |  | 3       
|       
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|        |  |                                                                                                      |  |         
|       
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|        |  | Condensed consolidated statements of operations for
the three months ended October 31, 2001 and 2000 |  | 4       
|       
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|       
|       
|        |  |                                                                                                      |  |         
|       
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|        |  | Condensed consolidated statements of cash flows for
three months ended October 31, 2001 and 2000     |  | 5       
|       
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|        |  |                                                                                                      |  |         
|       
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|        |  |                                                                                                      |  |         
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|        |  | Notes to condensed consolidated financial statements                                                 |  | 6-12    
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|        |  |                                                                                                      |  |         
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|        |  |                                                                                                      |  |         
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|Item 2. |  | Managements discussion and analysis of financial condition
and results of operations                |  | 13-18   
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|        |  |                                                                                                      |  |         
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|        |  |                                                                                                      |  |         
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|Item 3  |  | Quantitative and qualitative disclosures about market risk                                           |  | 18      
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|        |  |                                                                                                      |  |         
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|        |  |                                                                                                      |  |         
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|Part II |  | OTHER INFORMATION                                                                                    |  |         
|       
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|        |  |                                                                                                      |  |         
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|        |  |                                                                                                      |  |         
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|Item 1. |  | Legal proceedings                                                                                    |  | 18-19   
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|        |  |                                                                                                      |  |         
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|Item 5. |  | Other information                                                                                    |  | 19      
|       
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|        |  |                                                                                                      |  |         
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|Item 6. |  | Exhibits and Reports on Form 8-K                                                                     |  | 20      
|       
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|        |  |                                                                                                      |  |         
|       
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|        |  | SIGNATURES                                                                                           |  | 20      

2



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##### Table of Contents






ZILA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

|                                             |                                                                                                  |                            |                           |                   |            |            |            |             |            |            |            | 
|-------------------------------------------- | ------------------------------------------------------------------------------------------------ | -------------------------- | ------------------------- | ----------------- | ---------- | ---------- | ---------- | ----------- | ---------- | ---------- | ---------- | 
|ASSETS                                       |                                                                                                  | October 31, 2001           |                           | July 31, 2001    
|                                             |                                                                                                  |                            |                           |                  
|CURRENT ASSETS:                              |                                                                                                  |                            |                           |                   |            |            |            |            
|                                            
|                                            
|                                            
|                                            
|                                             | Cash and cash equivalents                                                                        |                            | $                         | 1,308,342         |            |            | $          | 1,651,266   |           
|                                            
|                                            
|                                            
|                                            
|                                             | Trade receivables  net                                                                          |                            |                           | 9,521,016         |            |            |            | 10,412,372  |           
|                                            
|                                            
|                                            
|                                            
|                                             | Inventories  net                                                                                |                            |                           | 15,971,180        |            |            |            | 17,751,148  |           
|                                            
|                                            
|                                            
|                                            
|                                             | Prepaid expenses and other current assets                                                        |                            |                           | 2,906,496         |            |            |            | 2,254,764   |           
|                                             |                                                                                                  |                            |                           |                   |            |            |            |            
|                                             |                                                                                                  |                            | Total current assets      |                   |            | 29,707,034 |            |             |            | 32,069,550 |           
|                                             |                                                                                                  |                            |                           |                   |            |            |            |            
|PROPERTY AND EQUIPMENT  net                 |                                                                                                  |                            | 9,682,730                 |                   |            |            | 9,843,103  |            
|                                            
|                                            
|                                            
|                                            
|PURCHASED TECHNOLOGY RIGHTS  net            |                                                                                                  |                            | 5,055,425                 |                   |            |            | 5,164,535  |            
|                                            
|                                            
|                                            
|                                            
|GOODWILL  net                               |                                                                                                  |                            | 12,793,501                |                   |            |            | 12,894,874 |            
|                                            
|                                            
|                                            
|                                            
|TRADEMARKS AND OTHER INTANGIBLE ASSETS  net |                                                                                                  |                            | 12,725,076                |                   |            |            | 12,721,567 |            
|                                            
|                                            
|                                            
|                                            
|OTHER ASSETS                                 |                                                                                                  |                            | 3,901,297                 |                   |            |            | 3,863,500  |            
|                                             |                                                                                                  |                            |                           |                   |            |            |            |            
|TOTAL                                        |                                                                                                  | $                          | 73,865,063                |                   |            | $          | 76,557,129 |            
|                                             |                                                                                                  |                            |                           |                   |            |            |            |            
|                                             |                                                                                                  |                            |                           |                   |            |            |            |            
|                                            
|                                            
|                                            
|                                            
|                                             |                                                                                                  |                            |                           |                   |            |            |            |            
|                                            
|                                            
|                                            
|                                            
|LIABILITIES AND SHAREHOLDERS EQUITY         |                                                                                                  |                            |                           |                   |            |            |            |            
|                                            
|                                            
|                                            
|                                            
|CURRENT LIABILITIES:                         |                                                                                                  |                            |                           |                   |            |            |            |            
|                                            
|                                            
|                                            
|                                            
|                                             | Accounts payable                                                                                 |                            | $                         | 5,303,833         |            |            | $          | 5,331,668   |           
|                                            
|                                            
|                                            
|                                            
|                                             | Accrued liabilities                                                                              |                            |                           | 3,328,398         |            |            |            | 3,379,472   |           
|                                            
|                                            
|                                            
|                                            
|                                             | Short-term borrowings                                                                            |                            |                           | 5,079,388         |            |            |            | 6,160,947   |           
|                                            
|                                            
|                                            
|                                            
|                                             | Current portion of long-term debt                                                                |                            |                           | 469,826           |            |            |            | 811,166     |           
|                                             |                                                                                                  |                            |                           |                   |            |            |            |            
|                                             |                                                                                                  |                            | Total current liabilities |                   |            | 14,181,445 |            |             |            | 15,683,253 |           
|                                            
|                                            
|                                            
|                                            
|LONG-TERM DEBT  net of current portion      |                                                                                                  |                            | 4,017,427                 |                   |            |            | 4,153,271  |            
|                                             |                                                                                                  |                            |                           |                   |            |            |            |            
|                                             |                                                                                                  |                            |                           | Total liabilities |            |            | 18,198,872 |             |            |            | 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
43,653,727 shares           |                            |                           | 43,654            |            |            |            | 43,654      |           
|                                            
|                                            
|                                            
|                                            
|                                             | Capital in excess of par value                                                                   |                            |                           | 79,930,094        |            |            |            | 79,930,094  |           
|                                            
|                                            
|                                            
|                                            
|                                             | Accumulated other comprehensive income                                                           |                            |                           | 117,177           |            |            |            | 150,976     |           
|                                            
|                                            
|                                            
|                                            
|                                             | Accumulated deficit                                                                              |                            |                           | (24,352,114       | )          |            |            | (23,331,499 | )         
|                                            
|                                            
|                                            
|                                            
|                                             | Common stock in treasury, at cost, 195,000 shares                                                |                            |                           | (535,120          | )          |            |            | (535,120    | )         
|                                             |                                                                                                  |                            |                           |                   |            |            |            |            
|                                             |                                                                                                  | Total shareholders equity |                           |                   | 55,666,191 |            |            |             | 56,720,605 |           
|                                             |                                                                                                  |                            |                           |                   |            |            |            |            
|TOTAL                                        |                                                                                                  | $                          | 73,865,063                |                   |            | $          | 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 October 31,
|                                                    |                      |                                     |            |          |                               
|                                                    |                      |                                     |            |          | 2001                           |            | 2000      
|                                                    |                      |                                     |            |          |                                |            |           
|NET REVENUES                                        |                      | $                                   | 19,704,252 |          |                                | $          | 18,836,235 |         
|                                                    |                      |                                     |            |          |                                |            |            |         
|OPERATING COSTS AND EXPENSES:                       |                      |                                     |            |          |                                |            |            |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                      | Cost of products sold               |            |          | 11,160,536                     |            |            |          | 10,115,663 |           
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                      | Selling, general and administrative |            |          | 7,905,852                      |            |            |          | 7,339,277  |           
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                      | Research and development            |            |          | 567,689                        |            |            |          | 363,867    |           
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                      | Impairment charge                   |            |          |                                |            |            |          | 310,000    |           
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                      | Depreciation and amortization       |            |          | 889,555                        |            |            |          | 841,389    |           
|                                                    |                      |                                     |            |          |                                |            |            |         
|                                                    |                      |                                     | 20,523,632 |          |                                |            | 18,970,196 |         
|                                                    |                      |                                     |            |          |                                |            |            |         
|                                                    | LOSS FROM OPERATIONS |                                     |            | (819,380 | )                              |            |            | (133,961 | )         
|                                                    |                      |                                     |            |          |                                |            |            |         
|OTHER INCOME (EXPENSE):                             |                      |                                     |            |          |                                |            |            |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                      | Interest income                     |            |          | 34,964                         |            |            |          | 59,066     |           
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                      | Interest expense                    |            |          | (190,253                       | )          |            |          | (22,977    | )         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                      | Other expense                       |            |          | (16,699                        | )          |            |          | (64,683    | )         
|                                                    |                      |                                     |            |          |                                |            |            |         
|                                                    |                      |                                     | (171,988   | )        |                                |            | (28,594    | )       
|                                                    |                      |                                     |            |          |                                |            |            |         
|LOSS BEFORE INCOME TAXES                            |                      |                                     | (991,368   | )        |                                |            | (162,555   | )       
|                                                   
|                                                   
|                                                   
|                                                   
|INCOME TAX EXPENSE                                  |                      |                                     |           |          |                                |            |           |         
|                                                    |                      |                                     |            |          |                                |            |            |         
|NET LOSS                                            |                      | $                                   | (991,368   | )        |                                | $          | (162,555   | )       
|                                                    |                      |                                     |            |          |                                |            |            |         
|NET LOSS PER SHARE:                                 |                      |                                     |            |          |                                |            |            |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                      |                                     | BASIC      |          | $                              | (0.02      | )          |          | $          | (0.00      | )
|                                                    |                      |                                     |            |          |                                |            |            |         
|                                                    |                      |                                     | DILUTED    |          | $                              | (0.02      | )          |          | $          | (0.00      | )
|                                                    |                      |                                     |            |          |                                |            |            |         
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC |                      |                                     | 43,458,727 |          |                                |            | 43,335,050 |         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                      |                                     | DILUTED    |          |                                | 43,458,727 |            |          |            | 43,335,050 |  

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)

|                                               |                                                                             |                                   |                                                     |                                                     |         |                                |            |            |         |            |            |  
|---------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ------- | ------------------------------ | ---------- | ---------- | ------- | ---------- | ---------- | -
|                                               |                                                                             |                                   |                                                     |                                                     |         | Three months ended October 31,
|                                               |                                                                             |                                   |                                                     |                                                     |         |                               
|                                               |                                                                             |                                   |                                                     |                                                     |         | 2001                           |            | 2000      
|                                               |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|OPERATING ACTIVITIES:                          |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Net loss                                                                    |                                   | $                                                   | (991,368                                            | )       |                                | $          | (162,555   | )      
|                                              
|                                              
|                                              
|                                              
|                                               | Adjustments to reconcile net loss to net cash used in operating activities: |                                   |                                                     |                                                     |         |                                |            |            |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                             | Depreciation and amortization     |                                                     |                                                     | 889,555 |                                |            |            | 841,389 |           
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                             | Impairment of asset               |                                                     |                                                     |        |                                |            |            | 310,000 |           
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                             | Deferred income taxes and other   |                                                     |                                                     | (72,407 | )                              |            |            | 44,370  |           
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                             | Change in assets and liabilities: |                                                     |                                                     |         |                                |            |            |         |           
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                             |                                   | Receivables  net                                   |                                                     |         | 891,356                        |            |            |         | (1,230,058 | )         
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                             |                                   | Inventories                                         |                                                     |         | 1,779,968                      |            |            |         | (2,961,083 | )         
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                             |                                   | Prepaid expenses and other assets                   |                                                     |         | (689,529                       | )          |            |         | (160,005   | )         
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                             |                                   | Accounts payable and accrued liabilities            |                                                     |         | (108,156                       | )          |            |         | (1,860,405 | )         
|                                               |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|                                               |                                                                             |                                   |                                                     | Net cash provided by (used in) operating activities |         |                                | 1,699,419  |            |         |            | (5,178,347 | )
|                                               |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|INVESTING ACTIVITIES:                          |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Purchases of property and equipment                                         |                                   |                                                     | (112,992                                            | )       |                                |            | (1,704,646 | )      
|                                              
|                                              
|                                              
|                                              
|                                               | Purchases of intangible assets                                              |                                   |                                                     | (370,608                                            | )       |                                |            | (261,394   | )      
|                                               |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|                                               |                                                                             |                                   | Net cash used in investing activities               |                                                     |         | (483,600                       | )          |            |         | (1,966,040 | )         
|                                               |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|FINANCING ACTIVITIES:                          |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Net (repayments) proceeds from short-term borrowings                        |                                   |                                                     | (1,081,559                                          | )       |                                |            | 2,217,857  |        
|                                              
|                                              
|                                              
|                                              
|                                               | Net proceeds from issuance of common stock                                  |                                   |                                                     |                                                     |         |                                |            | 449,609    |        
|                                              
|                                              
|                                              
|                                              
|                                               | Cash released by trustee                                                    |                                   |                                                     |                                                     |         |                                |            | 507,489    |        
|                                              
|                                              
|                                              
|                                              
|                                               | Principal payments on long-term debt                                        |                                   |                                                     | (477,184                                            | )       |                                |            | (133,506   | )      
|                                               |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|                                               |                                                                             |                                   | Net cash (used in) provided by financing activities |                                                     |         | (1,558,743                     | )          |            |         | 3,041,449  |           
|                                               |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|NET DECREASE IN CASH AND CASH EQUIVALENTS      |                                                                             |                                   | (342,924                                            | )                                                   |         |                                | (4,102,938 | )         
|                                              
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |                                                                             |                                   | 1,651,266                                           |                                                     |         |                                | 5,558,487  |           
|                                               |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|CASH AND CASH EQUIVALENTS, END OF PERIOD       |                                                                             | $                                 | 1,308,342                                           |                                                     |         | $                              | 1,455,549  |           
|                                               |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|                                              
|CASH PAID FOR INTEREST                         |                                                                             | $                                 | 136,319                                             |                                                     |         | $                              | 25,019     |           
|                                               |                                                                             |                                   |                                                     |                                                     |         |                                |            |           
|CASH PAID FOR INCOME TAXES                     |                                                                             | $                                 | 10,481                                              |                                                     |         | $                              | 32,068     |           
|                                               |                                                                             |                                   |                                                     |                                                     |         |                                |            |           

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, Zila
Technologies, Inc., formerly Cygnus Imaging, Inc. (Cygnus), 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 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.
|  
|   |  | On February 5, 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 8).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | The cash flows used to measure long-lived assets related to OraTest® are
dependent upon obtaining FDA approval and generating sufficient revenues
from sales of OraTest®. The rigorous clinical testing and an extensive
regulatory approval process mandated by the Food and Drug Administration
(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 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 currently has
net intangible assets related to OraTest® recorded as of October 31, 2001,
of $6.5 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 $4.6 million remains as of October 31, 2001.
The ultimate probable future economic benefit associated with such
inventory is contingent on the Companys                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

6



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|   |  | 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 Peridex® is dependent on
the Companys ability to achieve its forecast of estimated cash flows.
The Company currently has net intangible assets related to Peridex®,
recorded as of October 31, 2001, of $7.9 million.
|  
|2. |  | NET LOSS PER SHARE                                                                                                                                                                                                                                                    
|  
|   |  | The following is a reconciliation of the numerator and denominator of
basic and diluted loss per common share:                                                                                                                                                        

|                                                           |  |                                |            |      |  |   |            |  
|---------------------------------------------------------- |  | ------------------------------ | ---------- | ---- |  | - | ---------- | -
|                                                           |  | Three months ended October 31,
|                                                           |  |                               
|                                                           |  | 2001                           |            | 2000
|                                                           |  |                                |            |     
|Net loss                                                   |  | $                              | (991,368   | )    |  | $ | (162,555   | )
|                                                           |  |                                |            |      |  |   |            |  
|Average outstanding common shares                          |  |                                | 43,458,727 |      |  |   | 43,335,050 |  
|                                                           |  |                                |            |      |  |   |            |  
|Basic net loss per share                                   |  | $                              | (0.02      | )    |  | $ | (0.00      | )
|                                                           |  |                                |            |      |  |   |            |  
|Diluted net loss per share:                                |  |                                |            |      |  |   |            |  
|                                                          
|                                                          
|                                                          
|                                                          
|Net loss available for diluted earnings                    |  | $                              | (991,368   | )    |  | $ | (162,555   | )
|                                                           |  |                                |            |      |  |   |            |  
|Average outstanding and potentially dilutive
common shares |  |                                | 43,458,727 |      |  |   | 43,335,050 |  
|                                                           |  |                                |            |      |  |   |            |  
|Diluted net loss per share                                 |  | $                              | (0.02      | )    |  | $ | (0.00      | )
|                                                           |  |                                |            |      |  |   |            |  



|   |  | Since a loss was incurred for the quarters ended October 31, 2001 and
2000, 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.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | INVENTORIES                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Inventories consist of the following:                                                                                                                                                                                                                                                                                                     

|                   |  |             |            |          |  |   |            |  
|------------------ |  | ----------- | ---------- | -------- |  | - | ---------- | -
|                   |  | October 31, |            | July 31,
|                   |  | 2001        |            | 2001    
|                   |  |             |            |         
|Finished goods     |  | $           | 10,138,694 |          |  | $ | 10,965,370 |  
|                  
|                  
|                  
|                  
|Raw materials      |  |             | 6,162,414  |          |  |   | 7,052,981  |  
|                  
|                  
|                  
|                  
|Inventory reserves |  |             | (329,928   | )        |  |   | (267,203   | )
|                   |  |             |            |          |  |   |            |  
|                   |  | $           | 15,971,180 |          |  | $ | 17,751,148 |  
|                   |  |             |            |          |  |   |            |  



|4. |  | 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

7



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|   |  | on a current year-to-date basis. In the three months ended October 31,
2001, 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 the three months ended October 31, 2000, the Company
recorded no tax benefit or expense as its effective tax rate for the
fiscal year was estimated to be at or near zero.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company has recorded total deferred tax assets of $6.0 million and a
valuation allowance against the deferred tax assets of $2.5 million. The
Company has offset its total 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. However, continued
actual or forecast losses could result in additional valuation allowances
in the future.                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|5. |  | 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,
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 (excluding the inventory of Zila Dental Supply)
and was $7.6 million, of which, borrowings of $5.1 million were
outstanding at October 31, 2001.                                                                                                                                                                                                                                      
|  
|   |  | 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. The Agreement
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 October 31, 2001, the
Company was in compliance with the covenant. The obligations of Oxycal to
Bank One with respect to the 1999 Industrial Revenue Development Bonds
have not changed.                                                                                                                                                                                
|  
|6. |  | ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | As discussed in Note 7, 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. 121 required that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicated that the book value of the asset was not
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 located at 533 Madison
Avenue, Prescott, Arizona to an estimated fair value related to its
anticipated sale. The building was sold in February 2001.

8



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|7. |  | NEW ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In May 2000, the Financial Accounting Standards Boards Emerging Issues
Task Force (EITF) issued 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 will be effective
for the Company in the third quarter of 2002. The implementation of this
consensus will require the Company to change the way it classifies certain
sales incentives, which are currently recorded as selling, general and
administrative expenses. The cost of coupons and rebates will be recorded
as a reduction of net sales. The cost of free products will be recorded
as a reduction of products sold. The Company is in the process of
analyzing the impact that this statement will have on the financial
statements.                                                                                                                                                                                                                                                     
|  
|   |  | In April 2001, the EITF issued 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 will be effective for the Company in the third
quarter of 2002. The Company is in the process of analyzing the impact
that this statement will have on the financial statements.
|  
|   |  | In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. The statements will change the accounting for business
combinations and goodwill in two significant ways. SFAS No. 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the
pooling-of-interests method will be prohibited. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Thus, amortization of goodwill, including goodwill recorded in
past business combinations, will cease upon adoption of that statement.
The Company will adopt SFAS 142 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.                                                                               
|  
|   |  | In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets.
This Statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as previously
defined in that Opinion). The Company adopted SFAS 144 effective August
1, 2001 and, as a result of its adoption, the Company will reflect the
recently sold operations of Zila Dental Supply as discontinued operations
in its second quarter of fiscal 2002 (see Note 12).                                                                                                                                                                                                                                                                          

9



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|   |  | The Companys policy is to review the carrying amounts of long-lived
assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may 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 net present value of future cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|8. |  | CONVERTIBLE PREFERRED STOCK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | On February 1, 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. No
dividends were paid during the quarter ended October 31, 2001. Holders of
the preferred shares have no voting rights except as required by
applicable law. The Company has accrued dividends of $9,750 for the
quarter ended October 31, 2001 and has accumulated accrued
dividends of $29,250.                                                                                                                                                                                                        
|  
|9. |  | SEGMENT INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The Company is organized into four 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 Peridex®,
the Pro-Series line of products including Pro-Ties, OraTest®,and the IST
line of products; Dental Supply,which includes Bio-Dental Technologies
Corporation and Ryker Dental of Kentucky, Inc. (a subsidiary of Bio-Dental
Technologies Corporation) which does business under the name Zila Dental
Supply (see Note 12); 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 the manufacturing facility for Zila
Tolonium Chloride and the ongoing OraTest® clinical study have been
combined with the Corporate segment.
|  
|   |  | The table below presents information about reported segments as of and for
the three months ended October 31 (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                   |      |  |          |       |              |  |        |        |                |  |           |        |       |  |   |        |  |  |   |        |   |  |   |        |  
|---------------------------------- | ---- |  | -------- | ----- | ------------ |  | ------ | ------ | -------------- |  | --------- | ------ | ----- |  | - | ------ |  |  | - | ------ | - |  | - | ------ | -
|                                   |      |  |          |       |              |  |        |        |                |  | Dental    |        |       |  |   |        |  |  |   |        |   |  |  
|                                   |      |  | Consumer |       | Professional |  | Supply |        | Nutraceuticals |  | Corporate |        | Total
|Net revenues:                      |      |  |          |       |              |  |        |        |                |  |           |        |       |  |   |        |  |  |   |        |   |  |   |       
|                                  
|                                  
|                                  
|                                  
|                                   | 2001 |  | $        | 2,843 |              |  | $      | 1,433  |                |  | $         | 10,713 |       |  | $ | 4,715  |  |  | $ | 0      |   |  | $ | 19,704 |  
|                                  
|                                  
|                                  
|                                  
|                                   | 2000 |  | $        | 3,721 |              |  | $      | 1,177  |                |  | $         | 10,174 |       |  | $ | 3,764  |  |  | $ | 0      |   |  | $ | 18,836 |  
|                                  
|                                  
|                                  
|                                  
|Income (loss) before
income taxes: |      |  |          |       |              |  |        |        |                |  |           |        |       |  |   |        |  |  |   |        |   |  |   |       
|                                  
|                                  
|                                  
|                                  
|                                   | 2001 |  |          | 916   |              |  |        | (446   | )              |  |           | (7     | )     |  |   | 557    |  |  |   | (2,001 | ) |  |   | (981   | )
|                                  
|                                  
|                                  
|                                  
|                                   | 2000 |  |          | 1,975 |              |  |        | (887   | )              |  |           | 41     |       |  |   | 176    |  |  |   | (1,468 | ) |  |   | (163   | )
|                                  
|                                  
|                                  
|                                  
|Depreciation and
amortization:     |      |  |          |       |              |  |        |        |                |  |           |        |       |  |   |        |  |  |   |        |   |  |   |       
|                                  
|                                  
|                                  
|                                  
|                                   | 2001 |  |          | 18    |              |  |        | 307    |                |  |           | 55     |       |  |   | 307    |  |  |   | 203    |   |  |   | 890    |  
|                                  
|                                  
|                                  
|                                  
|                                   | 2000 |  |          | 19    |              |  |        | 247    |                |  |           | 69     |       |  |   | 264    |  |  |   | 242    |   |  |   | 841    |  
|                                  
|                                  
|                                  
|                                  
|Total assets:                      |      |  |          |       |              |  |        |        |                |  |           |        |       |  |   |        |  |  |   |        |   |  |   |       
|                                  
|                                  
|                                  
|                                  
|                                   | 2001 |  |          | 2,376 |              |  |        | 14,232 |                |  |           | 11,187 |       |  |   | 32,585 |  |  |   | 13,485 |   |  |   | 73,865 |  
|                                  
|                                  
|                                  
|                                  
|                                   | 2000 |  |          | 3,381 |              |  |        | 10,492 |                |  |           | 11,655 |       |  |   | 37,165 |  |  |   | 15,574 |   |  |   | 78,267 |  

10



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|10. |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company and certain officers of the Company were named as defendants
in a consolidated First Amended Class Action Complaint filed July 6, 1999
in the United States District Court for the District of Arizona under the
caption In re Zila Securities Litigation, No. CIV 99 0115 PHX EHC. The
First Amended Class Action Complaint sought damages in an unspecified
amount on behalf of a class consisting of purchasers of the Companys
securities for alleged violations of the federal securities laws. During
the fourth quarter 2001, the parties settled this matter without a
material impact on the Companys financial statements.                                                                                                                                                                                             
|   
|    |  | On September 8, 1999, the Securities and Exchange Commission (the
Commission) entered an order directing an investigation
entitled In the
Matter of Zila, Inc.At that time, the Commission stated it was
investigating, inter alia, whether there were false and misleading
statements in press releases, filings with the Commission, or elsewhere
concerning the prospects that the Oncologic Drugs Advisory Committee for
the FDA would recommend approval of the OraTest® New Drug Application
(the NDA) and whether the FDA would subsequently approve the NDA. The
Company has cooperated with the Commission in its investigation. The
Company, Mr. Hines, its Chairman and President, and the staff of the
Commission have reached a tentative settlement of this matter, which is
now subject to the approval of the Commission.
|   
|    |  | 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, that (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.                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   

11



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|11. |  | COMPREHENSIVE LOSS
|--- |  | ------------------

Statements of Comprehensive Loss

|                                               |                                                                   |   |                                |         |      |   |          |        |  
|---------------------------------------------- | ----------------------------------------------------------------- | - | ------------------------------ | ------- | ---- | - | -------- | ------ | -
|                                               |                                                                   |   | Three months ended October 31, |        
|                                               |                                                                   |   |                                |        
|                                               |                                                                   |   | 2001                           |         | 2000
|                                               |                                                                   |   |                                |         |     
|Net loss                                       |                                                                   | $ | (991,368                       | )       |      | $ | (162,555 | )     
|                                              
|                                              
|                                              
|                                              
|Other comprehensive (loss) income, net of tax: |                                                                   |   |                                |         |      |   |          |       
|                                              
|                                              
|                                              
|                                              
|                                               | Foreign currency translation adjustment                           |   |                                | (33,799 | )    |   |          | 45,728 |  
|                                              
|                                              
|                                              
|                                              
|                                               | Unrealized holding losses on securities
arising during the period |   |                                |         |      |   |          | (1,250 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                   |   |                                |         |      |   |          |       
|Other comprehensive (loss) income              |                                                                   |   | (33,799                        | )       |      |   | 44,478   |       
|                                               |                                                                   |   |                                |         |      |   |          |       
|Comprehensive loss                             |                                                                   | $ | (1,025,167                     | )       |      | $ | (118,077 | )     
|                                               |                                                                   |   |                                |         |      |   |          |       



|12. |  | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In November and December 2001, the Company announced the sales of
substantially all of the assets and certain liabilities of its Zila Dental
Supply reporting segment. Total gross proceeds (excluding liabilities not
assumed) from the sales are estimated to be approximately $13.8 million in
a combination of cash and notes. The division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 and the mail order
operations (assets and liabilities) were sold on December 4, 2001 to
PracticeWares, Inc. of Sacramento, CA. for approximately $8.0 million in
short and long-term notes. Approximately $5.7 million of the $8.0 million
purchase price is due and payable on or before January 11, 2002. The
proceeds from these two transactions are subject to certain post-closing
adjustments. The required pro forma financial statements will be filed by
February 4, 2002.
|   
|    |  | On December 5, 2001, the Company announced the acquisition of the world
marketing rights (excluding the Pacific Rim) for the ViziLite
chemiluminescent light technology from Trylon Corporation of Torrance, CA.
Under the transaction, the Company will issue 750,000 of Rule 144
restricted shares of common stock and up to 1,250,000 additional shares,
whereby such restrictions will be removed at the earlier of 10 years
following the closing date or the achievement of certain future sales and
government approval milestones. 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 in the first five years, and five percent
in the next five years.                                                                                                                                                     

12



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##### Table of Contents






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, the dental supplies and equipment
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) adverse publicity
regarding the industries where the Company markets its products; (vi) the
Companys dependence upon its ability to develop new products; (vii) the
Companys ability to gain or expand distribution within new or existing
channels of trade; (viii) 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; (ix) adverse changes in government regulations; (x) exposure to
product liability claims; (xi) dependence on significant customers; (xii) the
Companys ability to keep and attract key management employees; (xiii) the
Companys inability to manage growth and execute its business plan; (xiv) sales
and earnings volatility; (xv) volatility of the stock market; (xvi) the
Companys reliance on independent brokers to sell many of its products; (xvii)
the inability of the Company to protect its intellectual property; and (xviii)
a general downturn in the national economy as a whole.

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

13



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##### Table of Contents



COMPANY OVERVIEW

Zila is a worldwide manufacturer and marketer of pharmaceutical,
biomedical, dental and nutritional products. During the quarter ended October
31, 2001, the Company had four major product groups: Consumer Pharmaceuticals,
Professional Pharmaceutical Products, Dental Supplies and Nutraceuticals. The
Consumer Pharmaceuticals group consists of over-the-counter products, including
the Zilactin® family of over-the-counter products. The Professional
Pharmaceuticals group includes Peridex® prescription mouth rinse, OraTest®, an
oral cancer detection system, the Pro-Series line of products, including
Pro-Ties, a bundling system for instrument sterilization and the plastic
molded products from Innovative Swab Technologies (IST). The Dental Supply
group includes Zila Dental Supply, a national distributor of professional
dental supplies. 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.

On February 5, 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 and December 2001, the Company announced the sales of
substantially all of the assets and certain liabilities of its Zila Dental
Supply reporting segment. Total gross proceeds (excluding liabilities not
assumed) from the sales are estimated to be approximately $13.8 million in a
combination of cash and notes. The division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 and the mail order operations (assets and
liabilities) were sold on December 4, 2001 to PracticeWares, Inc. of
Sacramento, CA. for approximately $8.0 million in short and long-term notes.
Approximately $5.7 million of the $8.0 million purchase price is due and
payable on or before January 11, 2002. The proceeds from these two
transactions are subject to certain post-closing adjustments. The required pro
forma financial statements will be filed by February 4, 2002.

On December 5, 2001, the Company announced the acquisition of the world
marketing rights (excluding the Pacific Rim) for the ViziLite chemiluminescent
light technology from Trylon Corporation of Torrance, CA. Under the
transaction, the Company will issue 750,000 of Rule 144 restricted shares of
common stock and up to 1,250,000 additional shares, whereby such restrictions
will be removed at the earlier of 10 years following the closing date or the
achievement of certain future sales and government approval milestones. 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 in the first five
years, and five percent in the next five years.

RESULTS OF OPERATIONS

THREE MONTHS ENDED OCTOBER 31, 2001 AND 2000

Total net revenues increased 4.6% to $19.7 million for the quarter ended
October 31, 2001, compared to revenues of $18.8 million during the first
quarter of the prior fiscal year.

14



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##### Table of Contents



Net revenues for Zila Dental Supply increased 5.3% to $10.7 million for
the quarter ended October 31, 2001, compared to $10.2 million for the
corresponding fiscal quarter in 2001. This increase was primarily due to an
increase in sales of full service supplies and equipment sales. Consumer
Pharmaceuticals had net revenues of $2.8 million for the quarter ended October
31, 2001, a 23.6% decline over the $3.7 million recorded during the
corresponding quarter last year. The decrease was due primarily to increased
promotional discounts offered to customers in the previous year period coupled
with the adverse affects on consumer demand caused by the events of September
11, 2001 during the current quarter.

Net revenues for Professional Pharmaceuticals (including sales of
OraTest®) were $1.4 million, a 21.7% increase from the $1.2 million recorded
during the prior year quarter. The increase was due primarily to the inclusion
of the sales for the new IST division of $296,000 (excluding $199,000 of
interdivisional sales). Sales of Peridex® decreased 8% due to increased
pricing pressures and substitutions of generic equivalents. In order to
increase the sales of Peridex®, the Company obtained the rights to market
Peridex® in certain countries in Western Europe from Proctor and Gamble during
the quarter. Sales of the new Pro-Series of products, which are being marketed
directly to dental professionals, were adversely affected by the events of
September 11, 2001 due to the cancellation of a major trade show for dental
professionals and reduced attendance at two subsequent shows. The cancellation
caused the introduction of the products to be delayed.

Net revenues for Inter-Cal for the quarter ended October 31, 2001, were
$4.7 million, a 25.3% increase compared to $3.8 million for the corresponding
2001 fiscal quarter. The increase is attributable to increased radio and
television advertising of Ester-C® and an increase in sales of saw palmetto
products. Inter-Cals international sales during the quarter decreased
approximately 5.6% compared to the previous years first quarter.

For the quarter ended October 31, 2001, cost of products sold was $11.2
million, a 10.3% increase from the $10.1 million recorded in the quarter ended
October 31, 2000. Cost of products sold as a percentage of net revenues
increased to 56.6% in the quarter ended October 31, 2001 from 53.7% in the
quarter ended October 31, 2000. The increase for the quarter primarily
reflects the effect of the addition of IST and the increase in sales of
Palmettx products. Each product line has a higher cost of sales than the
other product lines of the Company.

Cost of products sold as a percentage of net revenues for Zila Dental
Supply increased slightly to 75.1% for the quarter ended October 31, 2001
compared to the 73.8% recorded in the prior year quarter, primarily due to a
change in product mix.

Cost of products sold as a percentage of net revenues for Consumer
Pharmaceuticals increased to 23.6% in the quarter ended October 31, 2001, from
22.1% in the quarter ended October 31, 2000. The increase 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 increased to
35.1% for the quarter ended October 31, 2001 from 25.1% in the quarter ended
October 31, 2000. The increase is due primarily to the higher costs to
manufacture ISTs products compared to the other products in the group.

Cost of products sold as a percentage of net revenues for Inter-Cal
increased to 39.1% in the quarter ended October 31, 2001 from 33.4% in the
corresponding quarter of the previous year. The increase was caused by a change
in the mix of products sold as more of the new Palmettx botanical line of
products was sold in the current quarter than in the previous year quarter.
During the current quarter, Inter-Cal began an aggressive sales campaign to
reduce its inventory of Palmettx products. This action, along with the
competitive marketplace for saw palmetto products, resulted in the sale price
of several Palmettx products being less than their carrying value. Inter-Cal
plans to discontinue the

15



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##### Table of Contents





|sales campaign and reduce the discounts offered customers at the end of
December 2001. However, if Inter-Cal is unsuccessful in its efforts to sell
Palmettx at higher prices and continues to sell certain Palmettx product lines
below cost, then the Company may be required to take a charge in future
quarters for the write-down to net realizable value of the Palmettx inventory.
As of October 31, 2001, Inter-Cal had approximately $4.6 million of Palmettx
inventory (raw material and finished goods).
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company incurred selling, general and administrative expenses of $7.9
million, or 40.1% of net revenues during the first quarter of fiscal year 2002,
compared to $7.3 million, or 39.0% of net revenue in the same period in fiscal
2001. The increase is due primarily to increased marketing and advertising at
Inter-Cal, increased salaries at Zila Dental Supply, the inclusion of the costs
at IST and increased legal expenses at Consumer Pharmaceutical.

Research and development expenses increased $204,000, or approximately
56%, from $364,000 in the first quarter of fiscal year 2001 to $568,000 for the
same period in fiscal year 2002. The increase is primarily due to expenses
related to the development of new Consumer Pharmaceutical products and the
increased costs paid to ILEX Oncology related to the clinical study associated
with OraTest®.

Depreciation and amortization expenses increased slightly to $890,000 in
the first quarter of fiscal year 2002 from $841,000 for the same period in
fiscal year 2001. The increase is due primarily to the increased depreciation
of assets associated with Inter-Cals new manufacturing facility and the
inclusion of the costs at IST.

The Company recorded interest expense of $190,000 for the quarter ended
October 31, 2001 compared to $23,000 in the same period of the previous year.
The increase was attributable to increased bank borrowings and debt obligations
during the current quarter as 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. In the three months ended October 31, 2001, 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 the
three months ended October 31, 2000, the Company recorded no tax benefit or
expense as its effective tax rate for the fiscal year was estimated to be at or
near zero. The Company continually analyzes the reasonableness of its reserves
against deferred tax assets. If the Company continues to experience losses,
additional allowances may be required.

For the quarter ended October 31, 2001, the Company had a net loss of
$991,000 compared to net loss of $163,000 for the prior year quarter. The
decrease in profitability is primarily attributable to the decrease in sales
and the level of profitability at Consumer Pharmaceuticals, increased research
and development expenses and increased interest expense during the current
quarter.

LIQUIDITY AND CAPITAL RESOURCES

At October 31, 2001, the Companys primary sources of liquidity included
cash and cash equivalents of $1.3 million and the line of credit discussed
below. Working capital decreased to $15.5 million at October 31, 2001 from
$16.4 million at July 31, 2001, and the current ratio increased to 2.1 at
October 31, 2001 from 2.0 at July 31, 2001. The primary reason for the decrease
in working capital is the decrease in trade receivables, inventory and
short-term borrowings during the quarter.

16



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##### Table of Contents



Net cash provided by operating activities was $1.7 million during the
three months ended October 31, 2001, attributable to the net loss of $991,000
plus changes in operating assets and liabilities totaling $1.9 million
partially offset by non-cash items of $817,000. Significant changes in
operating assets and liabilities were primarily comprised of (i) a decrease in
accounts receivable of $891,000 related to increased collection efforts; (ii) a
decrease in inventory of $1.8 million related primarily to the increased sales
of Palmettx line of products and lower purchases at Zila Dental Supply and
Consumer Pharmaceuticals; and (iii) an increase in prepaid expenses and other
assets of $690,000 primarily due to the renewal of insurance policies and the
deferred financing costs incurred during the period.

Net cash used in investing activities was $484,000 related primarily to
capital purchases, the purchase of the Peridex® distribution rights for Western
Europe and patent filings for Inter-Cal.

Net cash used in financing activities was $1.6 million. Significant
changes were: (i) the outstanding balance of the line of credit was reduced by
$1.1 million; (ii) the building loan with Bank One of approximately $277,000
was paid in full; and (iii) the bonds payable related to the new Inter-Cal
facility was reduced by approximately $100,000.

At October 31, 2001, the Company had income tax net operating loss
carryforwards of approximately $15 million, which expire in years 2007 through
2022.

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, 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 (excluding
the inventory of Zila Dental Supply) and was $7.6 million, of which, borrowings
of $5.1 million were outstanding at October 31, 2001.

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. The Agreement 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 October 31, 2001, the Company was in compliance with the
covenant. The 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 Bond proceeds were held by the
trustee, Bank One, Arizona, until such time as invoices for building
construction and new equipment were submitted for payment. The Bonds consisted
of $3.9 million Series A and $575,000 of Taxable Series B, which, as of October
31, 2001 carried interest rates of 2.4% and 2.6%, 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.

17



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##### Table of Contents



On November 5, 2001, the Company received approximately $5.8 million in
cash from the sale of the full service assets of its Zila Dental Supply
division and paid down its line of credit with Congress in full. The Company
is expected to receive approximately $5.7 million of the $8.0 million sales
price related to the sale of the mail order business no later than January 11,
2002 (see Note 12).

The Company believes that cash generated from its operations, the sale of
the full-service assets of Zila Dental Supply, 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. The Company
will require additional financing to support the production and future OraTest®
clinical, regulatory, manufacturing and marketing costs or to make any
significant acquisitions. There can be 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

The Company and certain officers of the Company were named as defendants
in a consolidated First Amended Class Action Complaint filed July 6, 1999 in
the United States District Court for the District of Arizona under the caption
In re Zila Securities Litigation, No. CIV 99 0115 PHX EHC. The First Amended
Class Action Complaint sought damages in an unspecified amount on behalf of a
class consisting of purchasers of the Companys securities for alleged
violations of the federal securities laws. During the fourth quarter 2001, the
parties settled this matter without a material impact on the Companys
financial statements.

18



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##### Table of Contents



On September 8, 1999, the Securities and Exchange Commission (the
Commission) entered an order directing an investigation
entitled In the
Matter of Zila, Inc.At that time, the Commission stated it was
investigating, inter alia, whether there were false and misleading statements
in press releases, filings with the Commission, or elsewhere concerning the
prospects that the Oncologic Drugs Advisory Committee for the FDA would
recommend approval of the OraTest® New Drug Application (the NDA) and whether
the FDA would subsequently approve the NDA. The Company has cooperated with
the Commission in its investigation. The Company, Mr. Hines, its Chairman and
President, and the staff of the Commission have reached a tentative settlement
of this matter, which is now subject to the approval of the Commission.

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, that (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.

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
| |  | --------------

ITEM 5. OTHER INFORMATION



| |  |  | In November and December 2001, the Company sold substantially all of its
assets and certain liabilities of its Zila Dental Supply division. Total
gross proceeds from the sales will be approximately $13.8 million in a
combination of cash and notes. The divisions full service operations were
sold to Henry Schein, Inc. of Melville, NY (Nasdaq: HSIC) and the mail
order operations were sold to PracticeWares, Inc. of Sacramento, CA. The
gross proceeds are subject to certain post-closing adjustments.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19



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##### Table of Contents



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------

|               |  |                                                                                                                                                                                                                                                              
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                  
|               |  |                                                                                                                                                                                                                                                              
|99.1           |  | Asset Purchase Agreement, dated as of November 1, 2001,
by and between Ryker Dental of Kentucky, Inc. and Henry Schein,
Inc.                                                                                                                                 
|              
|              
|              
|              
|99.2           |  | Press Release, dated December 5, 2001                                                                                                                                                                                                                        
|              
|              
|              
|              
|99.3           |  | Amended and Restated Asset Purchase Agreement dated as of
December 4, 2001 by and among Zila, Inc., Ryker Dental of
Kentucky, Inc. and PracticeWares, Inc.                                                                                                   
|              
|              
|              
|              
|99.4           |  | Loan and Security Agreement dated August 17, 2001 by and
between Congress Financial Corporation (Western) and Zila, Inc.,
Zila Pharmaceuticals, Inc., Ryker Dental of KY, and Inter-Cal
Corporation, Inc. (previously filed with Form 8-K on August 27,
2001)



| | (b) |  | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | During the quarter ended October 31, 2001, the Company filed Current
Reports on Form 8-K containing information pursuant to Item 5
(Other Events), dated August 27, 2001, announcing that certain of
its operating subsidiaries (collectively, the Borrower) and
Congress Financial Corporation (Congress) entered into a Loan and
Security Agreement whereby Congress will provide a $12 million
revolving line of credit to the Borrower.

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: December 14, 2001 |  | By:/s/Joseph Hines
Joseph Hines
President, Chairman of the Board
(Principal Executive Officer)                                     
|                       
|                        |  |                                                                                                                                    
|                       
|                        |  |                                                                                                                                    
|                       
|                        |  | By:/s/Bradley C. Anderson
Bradley C. Anderson
Vice President and Chief
Financial Officer (Principal
Financial & Accounting Officer)

20



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Exhibit Index



|               |  |                                                                                                                                                                                                                                                              
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                  
|               |  |                                                                                                                                                                                                                                                              
|99.1           |  | Asset Purchase Agreement, dated as of November 1, 2001,
by and between Ryker Dental of Kentucky, Inc. and Henry Schein,
Inc.                                                                                                                                 
|              
|              
|              
|              
|99.2           |  | Press Release, dated December 5, 2001                                                                                                                                                                                                                        
|              
|              
|              
|              
|99.3           |  | Amended and Restated Asset Purchase Agreement dated as of
December 4, 2001 by and among Zila, Inc., Ryker Dental of
Kentucky, Inc. and PracticeWares, Inc.                                                                                                   
|              
|              
|              
|              
|99.4           |  | Loan and Security Agreement dated August 17, 2001 by and
between Congress Financial Corporation (Western) and Zila, Inc.,
Zila Pharmaceuticals, Inc., Ryker Dental of KY, and Inter-Cal
Corporation, Inc. (previously filed with Form 8-K on August 27,
2001)

21