##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
 (Mark one)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended April 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-17521
 Zila, Inc.
 (Exact Name of Registrant as Specified in its Charter)
 Delaware
    
    86-0619668(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation)
    
    Identification No.)
 5227 North 7th Street, Phoenix, Arizona, 85014-2800  (Address of Principal Executive Offices) (Zip Code)
 (602) 266-6700  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



TABLE OF CONTENTS
 PAGEPART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of April 30, 2008 (unaudited) and July 31, 2007
    
    
    2Unaudited Condensed Consolidated Statements of Operations for the three and nine Months Ended
April 30, 2008 and 2007
    
    
    3Unaudited Condensed Consolidated Statement of Shareholders Equity for the nine
Months Ended April 30, 2008
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the nine Months Ended
April 30, 2008 and 2007
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    32Signatures
    
    
    33EX-31.1EX-31.2EX-32.1
  1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ZILA, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 April 30,
    
    
    July 31,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,540,591
    
    
    $
    14,859,159Trade receivables  net of allowances of $185,000 and $173,000
    
    
    5,483,514
    
    
    
    4,273,580Inventories  net
    
    
    4,114,440
    
    
    
    4,074,733Prepaid expenses and other current assets
    
    
    2,191,288
    
    
    
    1,646,229Total current assets
    
    
    15,329,833
    
    
    
    24,853,701Property and equipment  net
    
    
    5,721,533
    
    
    
    6,219,436Goodwill
    
    
    10,171,351
    
    
    
    10,171,351Purchased technology  net
    
    
    9,116,359
    
    
    
    9,884,017Trademarks and other intangible assets  net
    
    
    10,449,303
    
    
    
    11,555,041Other assets
    
    
    910,601
    
    
    
    1,197,684Total assets
    
    $
    51,698,980
    
    
    $
    63,881,230LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,562,882
    
    
    $
    3,207,480Accrued liabilities
    
    
    4,452,674
    
    
    
    5,587,825Warrant and common stock repurchase liability
    
    
    
    
    
    
    1,376,393Current portion of deferred gain on sale leaseback
    
    
    113,903
    
    
    
    152,976Short-term borrowings and current portion of long-term debt
    
    
    135,628
    
    
    
    77,472Current liabilities of discontinued operations
    
    
    128,542
    
    
    
    165,368Total current liabilities
    
    
    9,393,629
    
    
    
    10,567,514Deferred gain on sale leaseback
    
    
    
    
    
    
    75,659Long-term debt  net of current portion
    
    
    8,541,810
    
    
    
    7,258,569Total liabilities
    
    
    17,935,439
    
    
    
    17,901,742Shareholders equity:Preferred stock  Series B, $.001 par value - 2,500,000 shares authorized,
100,000 shares issued and outstanding, liquidation preference of $650,000
    
    
    462,500
    
    
    
    462,500Common stock, $.001 par value - 147,500,000 shares authorized,
63,183,036 and 62,466,338 shares issued and outstanding
    
    
    63,183
    
    
    
    62,466Additional paid-in capital
    
    
    124,023,449
    
    
    
    123,436,957Accumulated deficit
    
    
    (90,119,564
    )
    
    
    (76,054,251
    )Accumulated other comprehensive loss
    
    
    (114,956
    )
    
    
    (127,118
    )Treasury stock, at cost (218,411 and 1,151,243 common shares)
    
    
    (551,071
    )
    
    
    (1,801,066
    )Total shareholders equity
    
    
    33,763,541
    
    
    
    45,979,488Total liabilities and shareholders equity
    
    $
    51,698,980
    
    
    $
    63,881,230
  2




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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended April 30,
    
    
    Nine Months Ended April 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    11,244,786
    
    
    $
    10,894,268
    
    
    $
    33,175,880
    
    
    $
    18,382,838Cost of products sold
    
    
    4,437,621
    
    
    
    4,230,900
    
    
    
    13,263,824
    
    
    
    7,757,354Gross profit
    
    
    6,807,165
    
    
    
    6,663,368
    
    
    
    19,912,056
    
    
    
    10,625,484Operating costs and expenses:Marketing and selling
    
    
    6,046,250
    
    
    
    4,470,426
    
    
    
    16,563,524
    
    
    
    9,483,784General and administrative
    
    
    3,281,067
    
    
    
    2,682,130
    
    
    
    9,883,070
    
    
    
    9,566,765Research and development
    
    
    246,597
    
    
    
    2,388,298
    
    
    
    2,237,265
    
    
    
    5,740,536Depreciation and amortization
    
    
    952,241
    
    
    
    909,085
    
    
    
    2,810,965
    
    
    
    1,997,486Loss from operations
    
    
    (3,718,990
    )
    
    
    (3,786,571
    )
    
    
    (11,582,768
    )
    
    
    (16,163,087
    )Other income (expense):Interest income
    
    
    26,116
    
    
    
    120,067
    
    
    
    223,617
    
    
    
    396,693Interest expense
    
    
    (786,289
    )
    
    
    (877,636
    )
    
    
    (2,353,816
    )
    
    
    (6,479,659
    )Derivative income (expense)
    
    
    
    
    
    
    
    
    
    
    (23,600
    )
    
    
    1,058,873Other income (expense)
    
    
    2,049
    
    
    
    (47,412
    )
    
    
    (991
    )
    
    
    (29,150
    )Other expense  net
    
    
    (758,124
    )
    
    
    (804,981
    )
    
    
    (2,154,790
    )
    
    
    (5,053,243
    )Loss from continuing operations
before income taxes
    
    
    (4,477,114
    )
    
    
    (4,591,552
    )
    
    
    (13,737,558
    )
    
    
    (21,216,330
    )Income tax benefit
    
    
    33,979
    
    
    
    190,809
    
    
    
    22,387
    
    
    
    4,000,948Loss from continuing operations
    
    
    (4,443,135
    )
    
    
    (4,400,743
    )
    
    
    (13,715,171
    )
    
    
    (17,215,382
    )Income (loss) from discontinued operations
    
    
    (1,858
    )
    
    
    303,257
    
    
    
    (320,892
    )
    
    
    (407,620
    )Gain (loss) on disposal of discontinued operations
    
    
    
    
    
    
    (19,741
    )
    
    
    
    
    
    
    10,973,697Income tax expense
    
    
    
    
    
    
    (190,809
    )
    
    
    
    
    
    
    (4,067,809
    )Total income (loss) from discontinued operations
    
    
    (1,858
    )
    
    
    92,707
    
    
    
    (320,892
    )
    
    
    6,498,268Net loss
    
    
    (4,444,993
    )
    
    
    (4,308,036
    )
    
    
    (14,036,063
    )
    
    
    (10,717,114
    )Preferred stock dividends
    
    
    9,750
    
    
    
    9,750
    
    
    
    29,250
    
    
    
    29,250Net loss attributable to common shareholders
    
    $
    (4,454,743
    )
    
    $
    (4,317,786
    )
    
    $
    (14,065,313
    )
    
    $
    (10,746,364
    )Basic and diluted net income (loss) per common share:Loss from continuing operations
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    (0.22
    )
    
    $
    (0.32
    )Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    0.12Net loss attributable to common shareholders
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    (0.23
    )
    
    $
    (0.20
    )Weighted average common shares
outstanding  basic and diluted
    
    
    61,872,729
    
    
    
    62,117,309
    
    
    
    61,563,648
    
    
    
    54,411,050
  3




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ZILA, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 For the Nine Months Ended April 30, 2008
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Treasury
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    Stock
    
    
    EquityBalance  July 31, 2007
    
    
    100,000
    
    
    $
    462,500
    
    
    
    62,466,338
    
    
    $
    62,466
    
    
    $
    123,436,957
    
    
    $
    (76,054,251
    )
    
    $
    (127,118
    )
    
    $
    (1,801,066
    )
    
    $
    45,979,488Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,250
    )
    
    
    
    
    
    
    
    
    
    
    (29,250
    )Issuance of common stock
under employee stock
purchase plan
    
    
    
    
    
    
    
    
    
    
    63,426
    
    
    
    63
    
    
    
    82,588
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,651Exercise of common stock
options
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10
    
    
    
    11,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,200Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    215,635
    
    
    
    216
    
    
    
    1,257,803
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,258,019Shares issued for
payment of interest
    
    
    
    
    
    
    
    
    
    
    1,360,469
    
    
    
    1,361
    
    
    
    483,973
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    485,334Retirement of
treasury stock
    
    
    
    
    
    
    
    
    
    
    (932,832
    )
    
    
    (933
    )
    
    
    (1,249,062
    )
    
    
    
    
    
    
    
    
    
    
    1,249,995
    
    
    
    Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,162
    
    
    
    
    
    
    
    12,162Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,036,063
    )
    
    
    
    
    
    
    
    
    
    
    (14,036,063
    )Balance  April 30,
2008
    
    
    100,000
    
    
    $
    462,500
    
    
    
    63,183,036
    
    
    $
    63,183
    
    
    $
    124,023,449
    
    
    $
    (90,119,564
    )
    
    $
    (114,956
    )
    
    $
    (551,071
    )
    
    $
    33,763,541
  4




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ZILA, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended April 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (14,036,063
    )
    
    $
    (10,717,114
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation and amortization
    
    
    3,154,531
    
    
    
    2,344,741Non-cash amortization of financing costs
    
    
    293,576
    
    
    
    2,378,592Non-cash amortization of debt discounts
    
    
    1,336,259
    
    
    
    3,046,165Non-cash interest
    
    
    485,334
    
    
    
    201,940Non-cash derivative (income) expense
    
    
    23,600
    
    
    
    (1,058,873
    )Gain on disposal of discontinued operations
    
    
    
    
    
    
    (10,972,694
    )Non-cash stock-based compensation expense
    
    
    1,279,961
    
    
    
    1,453,739Other non-cash items  net
    
    
    40,386
    
    
    
    (35,758
    )Changes in operating assets and liabilities:Trade receivables
    
    
    (1,209,934
    )
    
    
    225,490Inventories
    
    
    (39,707
    )
    
    
    20,789Prepaid expenses and other assets
    
    
    (277,146
    )
    
    
    844,896Accounts payable and accrued liabilities
    
    
    187,350
    
    
    
    2,494,993Net cash used in operating activities
    
    
    (8,761,853
    )
    
    
    (9,773,094
    )Cash flows from investing activities:Additions to property and equipment
    
    
    (630,753
    )
    
    
    (440,780
    )Additions to intangible assets
    
    
    (310,855
    )
    
    
    (463,959
    )Proceeds from sale of assets
    
    
    11,495
    
    
    
    Restricted cash returned from collateralized letter of credit
    
    
    
    
    
    
    3,610,950Proceeds from disposition of discontinued operations
    
    
    
    
    
    
    34,705,077Acquisition of Pro-Dentec
    
    
    
    
    
    
    (35,554,421
    )Net cash provided by (used in) investing activities
    
    
    (930,113
    )
    
    
    1,856,867Cash flows from financing activities:Short-term borrowings  net
    
    
    
    
    
    
    61,351Proceeds from convertible notes payable
    
    
    
    
    
    
    24,075,000Proceeds from issuance of common stock
    
    
    71,909
    
    
    
    15,971,481Financing costs
    
    
    
    
    
    
    (2,528,004
    )Principal payments on debt
    
    
    (269,268
    )
    
    
    (23,940,285
    )Payment of obligation to repurchase common stock and
warrants
    
    
    (1,399,993
    )
    
    
    Dividends paid to preferred stockholders
    
    
    (29,250
    )
    
    
    (29,250
    )Net cash provided by (used in) financing activities
    
    
    (1,626,602
    )
    
    
    13,610,293Net increase (decrease) in cash and cash equivalents
    
    
    (11,318,568
    )
    
    
    5,694,066Cash and cash equivalents  beginning of period
    
    
    14,859,159
    
    
    
    3,958,190Cash and cash equivalents  end of period
    
    $
    3,540,591
    
    
    $
    9,652,256
  5




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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1.
Description of Business and Basis of Presentation
  ® TM ® ® ® ® ® Disclosures about
Segments of an Enterprise and Related Information.
    6




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ZILA, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Three Months Ended April 30,
    
    
    Nine Months Ended April 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Options and warrants to purchase
common shares
    
    
    
    
    
    
    191
    
    
    
    32
    
    
    
    400Common stock awards
    
    
    6
    
    
    
    1
    
    
    
    57
    
    
    
    16Convertible preferred stock
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Convertible secured notes
    
    
    
    
    
    
    5,454
    
    
    
    
    
    
    
    2,737Total potentially dilutive securities
    
    
    106
    
    
    
    5,746
    
    
    
    189
    
    
    
    3,253
  2. Recently Issued Accounting Pronouncements and Adopted Accounting
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
 
    
    an allocation or a shift of income between taxing jurisdictions,
    
    the characterization of income or a decision to exclude reporting taxable income in a
tax return, or
    
    a decision to classify a transaction, entity or other position in a tax return as tax
exempt.
     Fair Value Measures
 7




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ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  The Fair Value Option for Financial Assets
and Financial Liabilities  Including an Amendment of FASB Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133
 3. Acquisition of Pro-Dentec
  8




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ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Net revenues
    
    $
    30,001Loss from continuing operations
    
    $
    (16,282
    )Basic and diluted net loss per common share from continuing operations
    
    $
    (0.26
    )Pro forma weighted average common shares outstanding  basic and diluted
    
    
    61,915
  4. Dispositions
 ®
  ®
 ® ® ®
 Accounting for the
Impairment or Disposal of Long-Lived Assets.
 9




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ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Three Months Ended April 30, 2007Nutraceuticals
    
    
    Pharmaceuticals
    
    
    TotalNet revenues
    
    $
    
    
    
    $
    1,114
    
    
    $
    1,114Income (loss) from discontinued operations
    
    $
    (179
    )
    
    $
    483
    
    
    $
    304Gain (loss) on disposal of discontinued
operations
    
    
    3
    
    
    
    (23
    )
    
    
    (20
    )Income tax expense
    
    
    
    
    
    
    (191
    )
    
    
    (191
    )Total income (loss) from discontinued operations
    
    $
    (176
    )
    
    $
    269
    
    
    $
    93
 Nine Months Ended April 30, 2007Nutraceuticals
    
    
    Pharmaceuticals
    
    
    TotalNet revenues
    
    $
    1,629
    
    
    $
    3,540
    
    
    $
    5,169Income (loss) from discontinued operations
    
    $
    (1,216
    )
    
    $
    808
    
    
    $
    (408
    )Gain (loss) on disposal of discontinued
operations
    
    
    11,025
    
    
    
    (51
    )
    
    
    10,974Income tax expense
    
    
    (3,877
    )
    
    
    (191
    )
    
    
    (4,068
    )Total income from discontinued operations
    
    $
    5,932
    
    
    $
    566
    
    
    $
    6,498
  5. Inventories
  April 30,
    
    
    July 31,2008
    
    
    2007(Unaudited)Finished goods
    
    $
    986
    
    
    $
    1,413Work-in-process
    
    
    324
    
    
    
    323Raw materials
    
    
    3,074
    
    
    
    2,659Inventory reserves
    
    
    (270
    )
    
    
    (320
    )Total inventories
    
    $
    4,114
    
    
    $
    4,075
 10




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ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 6. Property and Equipment
  April 30,
    
    
    July 31,2008
    
    
    2007(Unaudited)Land
    
    $
    529
    
    
    $
    529Building and improvements
    
    
    2,114
    
    
    
    2,181Furniture and equipment
    
    
    3,401
    
    
    
    2,360Leasehold improvements and other assets
    
    
    823
    
    
    
    1,360Production, laboratory and warehouse equipment
    
    
    4,601
    
    
    
    4,423Total property and equipment
    
    
    11,468
    
    
    
    10,853Less: Accumulated depreciation and amortization
    
    
    (5,746
    )
    
    
    (4,634
    )Property and equipment  net
    
    $
    5,722
    
    
    $
    6,219
 7. Goodwill and Other Intangible Assets
  April 30, 2008 (Unaudited)
    
    
    July 31, 2007Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizable intangible assets:Purchased technology
    
    $
    15,592
    
    
    $
    (6,476
    )
    
    $
    9,116
    
    
    $
    15,592
    
    
    $
    (5,708
    )
    
    $
    9,884Trademarks
    
    
    163
    
    
    
    (14
    )
    
    
    149
    
    
    
    132
    
    
    
    (11
    )
    
    
    121Patents
    
    
    2,615
    
    
    
    (448
    )
    
    
    2,167
    
    
    
    2,495
    
    
    
    (350
    )
    
    
    2,145Licensing costs
    
    
    2,674
    
    
    
    (1,711
    )
    
    
    963
    
    
    
    2,674
    
    
    
    (1,514
    )
    
    
    1,160Covenants not to
compete and other
    
    
    3,556
    
    
    
    (1,834
    )
    
    
    1,722
    
    
    
    3,556
    
    
    
    (876
    )
    
    
    2,680Total amortizable
intangible assets
    
    
    24,600
    
    
    
    (10,483
    )
    
    
    14,117
    
    
    
    24,449
    
    
    
    (8,459
    )
    
    
    15,990Unamortizable trademarks
    
    
    5,449
    
    
    
    
    
    
    
    5,449
    
    
    
    5,449
    
    
    
    
    
    
    
    5,449Total other intangible assets
    
    
    30,049
    
    
    
    (10,483
    )
    
    
    19,566
    
    
    
    29,898
    
    
    
    (8,459
    )
    
    
    21,439Goodwill
    
    
    10,171
    
    
    
    
    
    
    
    10,171
    
    
    
    10,171
    
    
    
    
    
    
    
    10,171Total intangible assets
    
    $
    40,220
    
    
    $
    (10,483
    )
    
    $
    29,737
    
    
    $
    40,069
    
    
    $
    (8,459
    )
    
    $
    31,610
  Weighted AverageRange of
    
    Remaining Useful LivesUseful Lives
    
    April 30, 2008
    
    July 31, 2007(Unaudited)Purchased technology
    
    
    15
    
    
    
    13.7
    
    
    
    14.5Trademarks
    
    
    7-10
    
    
    
    7.0
    
    
    
    7.6Patents
    
    
    4-17
    
    
    
    6.0
    
    
    
    6.2Licensing costs
    
    
    7-10
    
    
    
    3.7
    
    
    
    4.4Covenants not to compete and other
    
    
    2-15
    
    
    
    1.1
    
    
    
    1.8
 11




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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 8. Accrued Liabilities
  April 30,
    
    
    July 31,2008
    
    
    2007(Unaudited)Accrued research and development
    
    $
    1,165
    
    
    $
    1,864Accrued employee compensation and related taxes
    
    
    887
    
    
    
    1,876Accrued professional and consulting fees
    
    
    1,015
    
    
    
    569Accrued fee due Investors for Restructuring (see
Note 9)
    
    
    
    
    
    
    600Other accrued expenses
    
    
    1,386
    
    
    
    679Total accrued liabilities
    
    $
    4,453
    
    
    $
    5,588
 9. Debt
  April 30,
    
    
    July 31,2008
    
    
    2007(Unaudited)Short-term borrowings and current portion of long-term debt:Short-term borrowings
    
    $
    62
    
    
    $
    Capital lease obligations
    
    
    74
    
    
    
    77Total short-term borrowings and current portion of long-term debt
    
    $
    136
    
    
    $
    77Long-term debt:Senior secured convertible notes  net of unamortized
discount of $4,009 and $5,345
    
    $
    7,991
    
    
    $
    6,655PharmaBio
    
    
    500
    
    
    
    500Capital lease obligations
    
    
    125
    
    
    
    181Total long-term debt
    
    
    8,616
    
    
    
    7,336Less: Current portion of long-term debt
    
    
    (74
    )
    
    
    (77
    )Long-term debt  net of current portion
    
    $
    8,542
    
    
    $
    7,259
 Short-term Borrowings
  Private Placements
   (i)
    
    9,100,000 shares of Zilas common stock for $1.75 per share (the Shares);(ii)
    
    Approximately $12.1 million in aggregate principal amount of 12.0% Unsecured
Convertible Notes (the Unsecured Notes), which converted into 6,900,000 shares (the
Unsecured Note Shares) of Zilas common stock at a conversion
price of $1.75 per share on December 14, 2006, the date on which our stockholders approved,
among other things, the Private Placements;
 12




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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (iii)
    
    Warrants to purchase approximately 5,403,000 shares of Zilas common stock, which
became exercisable in May 2007 for five years at an exercise price of $2.21 per share (the
Initial Warrants);(iv)
    
    Warrants to purchase approximately 3,105,000 shares of Zilas common stock, which
became exercisable for five years at an exercise price of $2.21 per share following
approval by our stockholders on December 14, 2006 (the Additional Warrants).
  (i)
    
    Approximately $12.0 million in aggregate principal amount of 6.0% Senior Secured
Convertible Notes (the Secured Notes), which are due in November 2009 and became
convertible into 5,454,546 shares of Zilas common stock at a conversion price of $2.20
following approval by our stockholders on December 14, 2006; and(ii)
    
    Warrants to purchase 1,909,091 shares of Zilas common stock, which became exercisable
for five years at an exercise price of $2.21 per share following approval by our
stockholders on December 14, 2006 (the Secured Note Warrants).
   (i)
    
    Repurchase 932,832 Unsecured Note Shares from the Investors for approximately $1.25
million in cash, at a price based on the average closing bid price of our common stock for
the ten trading days prior to August 13, 2007, or $1.34 per Unsecured Note Share;
 (ii)
    
    Repurchase 227,270 Secured Note Warrants from the Investors for approximately $0.15
million in cash, at a price based on a Black-Scholes valuation, or $0.66 per Secured Note
Warrant; and
 (iii)
    
    Pay the Investors a $0.6 million fee.
   13




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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  (i)
    
    The required cash and cash equivalents balance that is required to be maintained at the
end of each fiscal quarter commencing with the fiscal quarter ending July 31, 2007 was
reduced from $2.0 million to $1.0 million; and(ii)
    
    The required EBITDA level, as defined in the Second Amended and Restated Secured Notes
(Defined EBITDA), of at least $1.00 must be met for any one fiscal quarter on or prior to
our quarter ending July 31, 2009. Prior to the Second Amendment Agreement, we were
required to have Defined EBITDA of at least $1.00 for each of the fiscal quarters ending
July 31, 2008 and October 31, 2008.
    PharmaBio Development, Inc.
 ®
 10. Share-Based Payments
  14




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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Three Months Ended April 30,
    
    Nine Months Ended April 30,2008
    
    2007
    
    2008
    
    2007Risk-free interest rate
    
    
    N/A
    
    
    
    3.7
    %
    
    
    3.5
    %
    
    
    4.8
    %Expected volatility
    
    
    N/A
    
    
    
    67.0
    %
    
    
    59.6
    %
    
    
    62.0
    %Expected term (in years)
    
    
    N/A
    
    
    
    5.5
    
    
    
    5.2
    
    
    
    5.8Dividend yield
    
    
    N/A
    
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
  Share-Based Payment
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber
    
    Exercise
    
    Contractual
    
    Intrinsicof Options
    
    Price
    
    Term (Years)
    
    ValueOptions outstanding  beginning of period
    
    
    2,917
    
    
    $
    3.11
    
    
    
    5.8
    
    
    $
    130Granted
    
    
    3,128
    
    
    
    1.11Exercised
    
    
    (10
    )
    
    
    1.12Expired
    
    
    (226
    )
    
    
    2.63Forfeited
    
    
    (208
    )
    
    
    1.61Options outstanding  end of period
    
    
    5,601
    
    
    
    2.07
    
    
    
    7.3
    
    
    
    Options vested or expected to vest  end of period
    
    
    5,054
    
    
    
    2.16
    
    
    
    7.1
    
    
    
    Options exercisable  end of period
    
    
    2,608
    
    
    
    2.81
    
    
    
    5.3
    
    
    
    
  15




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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  WeightedWeighted
    
    AverageAverage
    
    RemainingNumber
    
    Grant
    
    Recognitionof Shares
    
    Value
    
    Period (Years)Unvested balance  beginning of period
    
    
    133
    
    
    $
    2.42
    
    
    
    1.4Granted
    
    
    598
    
    
    
    1.13Vested
    
    
    (309
    )
    
    
    1.50Forfeited
    
    
    
    
    
    
    Unvested balance  end of period
    
    
    422
    
    
    
    1.27
    
    
    
    1.3
  Three Months Ended April 30,
    
    
    Nine Months Ended April 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Marketing and selling expense
    
    $
    48
    
    
    $
    26
    
    
    $
    150
    
    
    $
    118General and administrative expense
    
    
    336
    
    
    
    337
    
    
    
    1,107
    
    
    
    1,317Research and development expense
    
    
    1
    
    
    
    6
    
    
    
    3
    
    
    
    8Inventory
    
    
    12
    
    
    
    7
    
    
    
    20
    
    
    
    16Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Total stock-based compensation
    
    $
    397
    
    
    $
    376
    
    
    $
    1,280
    
    
    $
    1,454
   11. Warrants
  12. Convertible Preferred Stock
  16




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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  13. Treasury Stock
   14. Income Taxes
 ®
 15. Supplemental Cash Flow Information
  Nine Months Ended April 30,2008
    
    2007Interest paid
    
    $
    246
    
    
    $
    957Income taxes paid
    
    
    45
    
    
    
    164Insurance policy financed with short-term borrowings
    
    
    275
    
    
    
    Conversion of Unsecured Notes
    
    
    
    
    
    
    4,452Capital lease obligations for new equipment
    
    
    
    
    
    
    181
 16. Comprehensive Loss
  Three Months Ended April 30,
    
    
    Nine Months Ended April 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (4,445
    )
    
    $
    (4,308
    )
    
    $
    (14,036
    )
    
    $
    (10,717
    )Foreign currency translation adjustment
    
    
    1
    
    
    
    (10
    )
    
    
    12
    
    
    
    (37
    )Comprehensive loss
    
    $
    (4,444
    )
    
    $
    (4,318
    )
    
    $
    (14,024
    )
    
    $
    (10,754
    )
 17




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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 17. Commitments and Contingencies
 Legal Proceedings
   Indemnifications
  Data Management Services Agreement
  Appointment of Chief Executive Officer
  18




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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  19




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Forward-Looking Statements
  Company Overview
  ® TM ® ® ® ® ® ® ®
 Recent Developments
  (i)
    
    The required cash and cash equivalents balance that is required to be maintained at the
end of each fiscal quarter commencing with the fiscal quarter ending July 31, 2007 was
reduced from $2.0 million to $1.0 million; and(ii)
    
    The required EBITDA level, as defined in the Second Amended and Restated Secured Notes
(Defined EBITDA), of at least $1.00 must be met for any one fiscal quarter on or prior to
our quarter ending July 31, 2009. Prior to the Second Amendment Agreement, we were
required to have Defined EBITDA of at least $1.00 for each of the fiscal quarters ending
July 31, 2008 and October 31, 2008.
 20




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##### Table of Contents



(i)
    
    Completing the hiring of the targeted level of sales representatives and completing
their training across the full-portfolio of our products. This action helped to achieve a
7.2% growth in revenues in the third quarter of fiscal 2008 over the preceding quarter and
provides the foundation for future growth.(ii)
    
    Improving revenues and gross profit through the implementation of selective price
increases effective May 15, 2008 and implementing initiatives to reduce our cost of goods.(iii)
    
    Reducing headcount in our non-selling workforce by over 10.0%, temporarily reducing
the salaries of our management employees and reducing certain other employee benefits.(iv)
    
    Reducing, deferring or eliminating non-critical programs across the organization while
maintaining key selling initiatives.
  ®
 ®
 ®
 ® ®
 21




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##### Table of Contents



Results of Operations
  For the Three Months Ended April 30,% of
    
    
    
    
    
    
    % of
    
    
    %2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    ChangeNet revenues
    
    $
    11,245
    
    
    
    100.0
    %
    
    $
    10,894
    
    
    
    100.0
    %
    
    
    3.2
    %Cost of products sold
    
    
    4,438
    
    
    
    39.5
    
    
    
    4,231
    
    
    
    38.8
    
    
    
    4.9Gross profit
    
    
    6,807
    
    
    
    60.5
    
    
    
    6,663
    
    
    
    61.2
    
    
    
    2.2Operating costs and expenses:Marketing and selling
    
    
    6,046
    
    
    
    53.7
    
    
    
    4,470
    
    
    
    41.0
    
    
    
    35.3General and administrative
    
    
    3,281
    
    
    
    29.2
    
    
    
    2,683
    
    
    
    24.8
    
    
    
    22.3Research and development
    
    
    247
    
    
    
    2.2
    
    
    
    2,388
    
    
    
    21.9
    
    
    
    (89.7
    )Depreciation and amortization
    
    
    952
    
    
    
    8.5
    
    
    
    909
    
    
    
    8.3
    
    
    
    4.7Loss from operations
    
    
    (3,719
    )
    
    
    (33.1
    )
    
    
    (3,787
    )
    
    
    (34.8
    )
    
    
    (1.8
    )Other expense  net
    
    
    (758
    )
    
    
    (6.7
    )
    
    
    (805
    )
    
    
    (7.4
    )
    
    
    (5.8
    )Loss from continuing operations
before income taxes
    
    
    (4,477
    )
    
    
    (39.8
    )
    
    
    (4,592
    )
    
    
    (42.2
    )
    
    
    (2.5
    )Income tax benefit
    
    
    34
    
    
    
    0.3
    
    
    
    191
    
    
    
    1.8
    
    
    
    (82.2
    )Loss from continuing operations
    
    $
    (4,443
    )
    
    
    (39.5
    )%
    
    $
    (4,401
    )
    
    
    (40.4
    )%
    
    
    1.0
 For the Nine Months Ended April 30,% of
    
    
    
    
    
    
    % of
    
    
    %2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    ChangeNet revenues
    
    $
    33,176
    
    
    
    100.0
    %
    
    $
    18,383
    
    
    
    100.0
    %
    
    
    80.5
    %Cost of products sold
    
    
    13,264
    
    
    
    40.0
    
    
    
    7,758
    
    
    
    42.2
    
    
    
    71.0Gross profit
    
    
    19,912
    
    
    
    60.0
    
    
    
    10,625
    
    
    
    57.8
    
    
    
    87.4Operating costs and expenses:Marketing and selling
    
    
    16,564
    
    
    
    49.9
    
    
    
    9,483
    
    
    
    51.6
    
    
    
    74.7General and administrative
    
    
    9,883
    
    
    
    29.8
    
    
    
    9,566
    
    
    
    52.0
    
    
    
    3.3Research and development
    
    
    2,237
    
    
    
    6.7
    
    
    
    5,741
    
    
    
    31.2
    
    
    
    (61.0
    )Depreciation and amortization
    
    
    2,811
    
    
    
    8.5
    
    
    
    1,998
    
    
    
    10.9
    
    
    
    40.7Loss from operations
    
    
    (11,583
    )
    
    
    (34.9
    )
    
    
    (16,163
    )
    
    
    (87.9
    )
    
    
    (28.3
    )Other expense  net
    
    
    (2,155
    )
    
    
    (6.5
    )
    
    
    (5,053
    )
    
    
    (27.5
    )
    
    
    (57.4
    )Loss from continuing operations
before income taxes
    
    
    (13,738
    )
    
    
    (41.4
    )
    
    
    (21,216
    )
    
    
    (115.4
    )
    
    
    (35.2
    )Income tax benefit
    
    
    23
    
    
    
    0.1
    
    
    
    4,001
    
    
    
    21.8
    
    
    
    (99.4
    )Loss from continuing operations
    
    $
    (13,715
    )
    
    
    (41.3
    )%
    
    $
    (17,215
    )
    
    
    (93.6
    )%
    
    
    (20.3
    )
 Net Revenues
 ®
 22




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##### Table of Contents



® ® ®
 ® ® ®
 Gross Profit
  ® ® ® ® ®
 Marketing and Selling Expense
  ® ®
 General and Administrative Expense
   23




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##### Table of Contents



Research and Development Expense
 ® ® TM
 Depreciation and Amortization Expense
  Other Expense  Net
  Three Months Ended April 30,
    
    
    Nine Months Ended April 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Senior secured convertible notes
    
    $
    240
    
    
    $
    178
    
    
    $
    701
    
    
    $
    306BDCF secured term loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    520Amortization of financing costs
    
    
    97
    
    
    
    123
    
    
    
    293
    
    
    
    2,507Amortization of debt discounts
    
    
    438
    
    
    
    560
    
    
    
    1,336
    
    
    
    3,046Capital leases
    
    
    3
    
    
    
    1
    
    
    
    12
    
    
    
    3Other
    
    
    8
    
    
    
    16
    
    
    
    12
    
    
    
    98Total interest expense
    
    $
    786
    
    
    $
    878
    
    
    $
    2,354
    
    
    $
    6,480
   Accounting for Registration Payment Arrangements
 24




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##### Table of Contents



Income Tax Benefit (Expense)
 ®
 Inflation and Seasonality
  Liquidity and Capital Resources
  ® ® ® ® ® TM
 ®
 (i)
    
    The required cash and cash equivalents balance that is required to be maintained at the
end of each fiscal quarter commencing with the fiscal quarter ending July 31, 2007 was
reduced from $2.0 million to $1.0 million; and(ii)
    
    The required Defined EBITDA level of at least $1.00 must be met for any one fiscal
quarter on or prior to our quarter ending July 31, 2009. Prior to the Second Amendment
Agreement, we were required to have Defined EBITDA of at least $1.00 for each of the fiscal
quarters ending July 31, 2008 and October 31, 2008.
  25




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##### Table of Contents



(i)
    
    Completing the hiring of the targeted level of sales representatives and completing
their training across the full-portfolio of our products. This action helped to achieve a
7.2% growth in revenues in the third quarter of fiscal 2008 over the preceding quarter and
provides the foundation for future growth.(ii)
    
    Improving revenues and gross profit through the implementation of selective price
increases effective May 15, 2008 and implementing initiatives to reduce our cost of goods.(iii)
    
    Reducing headcount in our non-selling workforce by over 10.0%, temporarily reducing
the salaries of our management employees and reducing certain other employee benefits.(iv)
    
    Reducing, deferring or eliminating non-critical programs across the organization while
maintaining key selling initiatives.
   Nine Months Ended April 30,2008
    
    2007Net cash used in operating activities
    
    $
    (8,762
    )
    
    $
    (9,773
    )Net cash provided by (used in) investing activities
    
    
    (930
    )
    
    
    1,857Net cash provided by (used in) financing activities
    
    
    (1,627
    )
    
    
    13,610
 April 30,
    
    July 31,2008
    
    2007Cash and cash equivalents
    
    $
    3,541
    
    
    $
    14,859Working capital
    
    
    5,936
    
    
    
    14,286Current ratio
    
    
    1.6
    
    
    
    2.4
 ®
 Cash Flows from Operating Activities
 ® ® ®
 26




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##### Table of Contents



Cash Flows from Investing Activities
  Cash Flows from Financing Activities
  Private Placements
   (i)
    
    9,100,000 shares of Zilas common stock for $1.75 per share (the Shares);(ii)
    
    Approximately $12.1 million in aggregate principal amount of 12.0% Unsecured
Convertible Notes (the Unsecured Notes), which converted into 6,900,000 shares (the
Unsecured Note Shares) of Zilas common stock at a conversion price of $1.75 per share on
December 14, 2006, the date on which our stockholders approved, among other things, the
Private Placements;(iii)
    
    Warrants to purchase approximately 5,403,000 shares of Zilas common stock, which
became exercisable in May 2007 for five years at an exercise price of $2.21 per share (the
Initial Warrants);(iv)
    
    Warrants to purchase approximately 3,105,000 shares of Zilas common stock, which
became exercisable for five years at an exercise price of $2.21 per share following
approval by our stockholders on December 14, 2006 (the Additional Warrants).
  (i)
    
    Approximately $12.0 million in aggregate principal amount of 6.0% Secured Notes, which
are due in November 2009 and became convertible into approximately 5,454,546 shares of
Zilas common stock at a conversion price of $2.20 following approval by our stockholders
on December 14, 2006; and(ii)
    
    Warrants to purchase 1,909,091 shares of Zilas common stock, which became exercisable
for five years at an exercise price of $2.21 per share following approval by our
stockholders on December 14, 2006 (the Secured Note Warrants).
  27




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##### Table of Contents



(i)
    
    Zila repurchased 932,832 Unsecured Note Shares from the Investors for approximately
$1.25 million in cash, at a price based on the average closing bid price of our common
stock for the ten trading days prior to August 13, 2007, or $1.34 per Unsecured Note Share;(ii)
    
    Zila repurchased 227,270 Secured Note Warrants from the Investors for approximately
$0.15 million in cash, at a price based on a Black-Scholes valuation, or $0.66 per Secured
Note Warrant;(iii)
    
    Zila and the Investors agreed to amend and restate the Secured Notes (the Amended and
Restated Secured Notes) on the terms set forth below and elsewhere herein; and(iv)
    
    Zila paid the Investors a $0.6 million fee.
   (i)
    
    The required cash and cash equivalents balance that is required to be maintained at the
end of each fiscal quarter commencing with the fiscal quarter ending July 31, 2007 was
reduced from $2.0 million to $1.0 million; and(ii)
    
    The required Defined EBITDA level of at least $1.00 must be met for any one fiscal
quarter on or prior to our quarter ending July 31, 2009. Prior to the Second Amendment
Agreement, we were required to have Defined EBITDA of at least $1.00 for each of the fiscal
quarters ending July 31, 2008 and October 31, 2008.
    PharmaBio Investment
  28




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##### Table of Contents



®
 Convertible Preferred Stock
  EBITDA and Defined EBITDA
  29




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##### Table of Contents



Three Months Ended April 30,
    
    
    Nine Months Ended April 30,2008
    
    
    2007
    
    
    2008
    
    
    2007EBITDA
    
    $
    (2,649
    )
    
    $
    (2,583
    )
    
    $
    (8,774
    )
    
    $
    (1,998
    )Non-cash derivative (income) expense
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    (1,059
    )Gain from disposition of
discontinued operations
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    (10,973
    )Non-cash stock-based
compensation expense
    
    
    397
    
    
    
    376
    
    
    
    1,280
    
    
    
    1,454Other non-cash items  net
    
    
    21
    
    
    
    19
    
    
    
    40
    
    
    
    (37
    )Defined EBITDA
    
    
    (2,231
    )
    
    
    (2,168
    )
    
    
    (7,430
    )
    
    
    (12,613
    )Interest income
    
    
    26
    
    
    
    120
    
    
    
    224
    
    
    
    426Interest expense
    
    
    (786
    )
    
    
    (877
    )
    
    
    (2,354
    )
    
    
    (6,732
    )Income tax expense
    
    
    34
    
    
    
    
    
    
    
    23
    
    
    
    (67
    )Amortization of financing costs
    
    
    97
    
    
    
    123
    
    
    
    293
    
    
    
    2,379Amortization of debt discounts
    
    
    438
    
    
    
    560
    
    
    
    1,336
    
    
    
    3,046Non-cash interest
    
    
    240
    
    
    
    
    
    
    
    485
    
    
    
    202Changes in operating assets and liabilities:Trade receivables
    
    
    313
    
    
    
    399
    
    
    
    (1,210
    )
    
    
    225Inventories
    
    
    235
    
    
    
    269
    
    
    
    (39
    )
    
    
    21Prepaid expenses and other assets
    
    
    (342
    )
    
    
    (90
    )
    
    
    (277
    )
    
    
    845Accounts payable and accrued liabilities
    
    
    (101
    )
    
    
    (291
    )
    
    
    187
    
    
    
    2,495Net cash used in operating
activities
    
    $
    (2,077
    )
    
    $
    (1,955
    )
    
    $
    (8,762
    )
    
    $
    (9,773
    )
 Off-Balance Sheet Financing Arrangements
  Summary of Critical Accounting Policies and Estimates
   30




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##### Table of Contents



Recently Issued Accounting Pronouncements and Adopted Accounting
  Item 3. Quantitative and Qualitative Disclosures about Market Risk.
    Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
  Changes in Internal Control over Financial Reporting
   Part II  OTHER INFORMATION
  Item 1. Legal Proceedings.
   Item 1A. Risk Factors.
  Failure to maintain NASDAQ Marketplace Rules could materially and adversely affect our
business.
  31




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
   Item 3. Defaults Upon Senior Securities.
   Item 4. Submission of Matters to a Vote of Security Holders
   Item 5. Other Information.
   Item 6. Exhibits.
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Bylaws of Zila, Inc. (A)4.1
    
    Form of Second Amended and Restated Senior Secured Convertible Note due July 2010 (B)4.2
    
    Registration Rights Agreement, dated June 3, 2008, by and among Zila, Inc., Visium Balanced
Offshore Fund, Ltd., Visium Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long
Bias Fund, LP, and Atlas Master Fund, Ltd. (B)10.1
    
    Employment Letter, accepted May 9, 2008, by and between Zila, Inc. and David R. Bethune (C)10.2
    
    Second Amendment Agreement, dated June 3, 2008, by and among Zila, Inc., Visium Balanced
Offshore Fund, Ltd., Visium Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long
Bias Fund, LP, and Atlas Master Fund, Ltd. (B)31.1
    
    Section 302 Certification of the Principal Executive Officer31.2
    
    Section 302 Certification of the Principal Financial Officer32.1*
    
    Section 1350 Certification of the Principal Executive Officer and Principal Financial Officer
 
 (A)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed April 4, 2008(B)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed June 6, 2008(C)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed May 12, 2008*
    
    Furnished herewith 32




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##### Table of Contents



SIGNATURES
  Zila, Inc.
 By:
    /s/ DAVID R. BETHUNEDavid R. BethuneChairman and Interim Chief Executive Officer(Principal Executive Officer)By:
    /s/ DIANE E. KLEINDiane E. KleinVice President - Finance and Treasurer(Principal Financial Officer) ExhibitNumber
    
    Description3.1
    
    Amended and Restated Bylaws of Zila, Inc. (A)4.1
    
    Form of Second Amended and Restated Senior Secured Convertible Note due July 2010 (B)4.2
    
    Registration Rights Agreement, dated June 3, 2008, by and among Zila, Inc., Visium Balanced
Offshore Fund, Ltd., Visium Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long
Bias Fund, LP, and Atlas Master Fund, Ltd. (B)10.1
    
    Employment Letter, accepted May 9, 2008, by and between Zila, Inc. and David R. Bethune (C)10.2
    
    Second Amendment Agreement, dated June 3, 2008, by and among Zila, Inc., Visium Balanced
Offshore Fund, Ltd., Visium Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long
Bias Fund, LP, and Atlas Master Fund, Ltd. (B)31.1
    
    Section 302 Certification of the Principal Executive Officer31.2
    
    Section 302 Certification of the Principal Financial Officer32.1*
    
    Section 1350 Certification of the Principal Executive Officer and Principal Financial Officer
  (A)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed April 4, 2008(B)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed June 6, 2008(C)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed May 12, 2008*
    
    Furnished herewith 33