##### Table of Contents



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 October 31, 2002 or

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

For the transition period from        to

Commission file number 0-17521

|                                                      
|------------------------------------------------------
|ZILA, INC                                             
|                                                      
|(Exact Name of Registrant as Specified In Its Charter)

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

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
 YesþNo

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, 2002, the number of shares of common stock outstanding was
45,465,260.

1



---

TABLE OF CONTENTS



|                            |                                                                                               |                                                                          |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ |  |  |  |  |  | 
|                            |                                                                                               | CONSOLIDATED BALANCE SHEETS                                             
|                            |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
|                            |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)                       
|                            |                                                                                               | NOTES TO 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                           
|                            | Item 4. Controls and Procedures                                                              
|Part II  Other Information
|                            | ITEM 1.- Legal Proceedings                                                                   
|                            | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                 
|CERTIFICATIONS             
|Exhibit Index              
|EX-99.1                    
|EX-99.2                    
|EX-99.3                    



---



##### Table of Contents



TABLE OF CONTENTS

|        |  |                                                                                                      |  |         
|------- |  | ---------------------------------------------------------------------------------------------------- |  | --------
|        |  |                                                                                                      |  | Page no.
|        |  |                                                                                                      |  |         
|Part I  |  | FINANCIAL INFORMATION                                                                                |  |         
|        |  |                                                                                                      |  |         
|Item 1. |  | Financial Statements                                                                                 |  |         
|        |  |                                                                                                      |  |         
|        |  | Consolidated balance sheets as of October 31, 2002
(unaudited) and July 31, 2002                     |  | 3       
|        |  |                                                                                                      |  |         
|        |  | Unaudited consolidated statements of operations for
the three months ended October 31, 2002 and 2001 |  | 4       
|        |  |                                                                                                      |  |         
|        |  | Unaudited consolidated statements of cash flows for
three months ended October 31, 2002 and 2001     |  | 5       
|        |  |                                                                                                      |  |         
|        |  | Notes to unaudited consolidated financial statements                                                 |  | 6-15    
|        |  |                                                                                                      |  |         
|Item 2. |  | Managements discussion and analysis of financial condition and results of operations                |  | 16-23   
|        |  |                                                                                                      |  |         
|Item 3  |  | Quantitative and qualitative disclosures about market risk                                           |  | 23      
|        |  |                                                                                                      |  |         
|Item 4. |  | Controls and procedures                                                                              |  | 23      
|        |  |                                                                                                      |  |         
|Part II |  | OTHER INFORMATION                                                                                    |  |         
|        |  |                                                                                                      |  |         
|Item 1. |  | Legal proceedings                                                                                    |  | 24      
|        |  |                                                                                                      |  |         
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                     |  | 25      
|        |  |                                                                                                      |  |         
|        |  | SIGNATURES                                                                                           |  | 26      
|        |  |                                                                                                      |  |         
|        |  | CERTIFICATIONS                                                                                       |  | 27      

2



---



##### Table of Contents






ZILA, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


|                                             |                                                                                                                                          |                            |                           |                   |            |             |            |             |            |            |            | 
|-------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------- | ----------------- | ---------- | ----------- | ---------- | ----------- | ---------- | ---------- | ---------- | 
|                                             |                                                                                                                                          | October 31, 2002           |                           | July 31, 2002    
|                                             |                                                                                                                                          |                            |                           |                  
|                                             |                                                                                                                                          |                            |                           |                   |            | (unaudited) |            |             |            |           
|ASSETS:                                      |                                                                                                                                          |                            |                           |                   |            |             |            |            
|CURRENT ASSETS:                              |                                                                                                                                          |                            |                           |                   |            |             |            |            
|                                             | Cash and cash equivalents                                                                                                                |                            | $                         | 1,494,410         |            |             | $          | 1,604,205   |           
|                                             | Trade receivables  net                                                                                                                  |                            |                           | 7,458,813         |            |             |            | 5,694,856   |           
|                                             | Inventories  net                                                                                                                        |                            |                           | 7,586,329         |            |             |            | 8,868,539   |           
|                                             | Prepaid expenses and other current assets                                                                                                |                            |                           | 2,521,088         |            |             |            | 2,085,137   |           
|                                             |                                                                                                                                          |                            |                           |                   |            |             |            |             |           
|                                             |                                                                                                                                          |                            | Total current assets      |                   |            | 19,060,640  |            |             |            | 18,252,737 |           
|                                             |                                                                                                                                          |                            |                           |                   |            |             |            |             |           
|PROPERTY AND EQUIPMENT  net                 |                                                                                                                                          |                            | 8,949,527                 |                   |            |             | 8,848,299  |            
|TRADEMARKS AND OTHER INTANGIBLE ASSETS  net |                                                                                                                                          |                            | 14,255,687                |                   |            |             | 14,356,652 |            
|PURCHASED TECHNOLOGY RIGHTS  net            |                                                                                                                                          |                            | 4,347,917                 |                   |            |             | 4,467,579  |            
|GOODWILL  net                               |                                                                                                                                          |                            | 11,014,385                |                   |            |             | 11,014,385 |            
|OTHER ASSETS                                 |                                                                                                                                          |                            | 714,014                   |                   |            |             | 421,001    |            
|                                             |                                                                                                                                          |                            |                           |                   |            |             |            |             |           
|TOTAL                                        |                                                                                                                                          | $                          | 58,342,170                |                   |            | $           | 57,360,653 |            
|                                             |                                                                                                                                          |                            |                           |                   |            |             |            |             |           
|LIABILITIES AND SHAREHOLDERS EQUITY         |                                                                                                                                          |                            |                           |                   |            |             |            |            
|CURRENT LIABILITIES:                         |                                                                                                                                          |                            |                           |                   |            |             |            |            
|                                             | Accounts payable                                                                                                                         |                            | $                         | 4,565,208         |            |             | $          | 3,249,649   |           
|                                             | Accrued liabilities                                                                                                                      |                            |                           | 4,059,334         |            |             |            | 3,588,627   |           
|                                             | Short-term borrowings                                                                                                                    |                            |                           | 1,053,976         |            |             |            | 99,784      |           
|                                             | Current portion of long-term debt                                                                                                        |                            |                           | 484,850           |            |             |            | 489,161     |           
|                                             |                                                                                                                                          |                            |                           |                   |            |             |            |             |           
|                                             |                                                                                                                                          |                            | Total current liabilities |                   |            | 10,163,368  |            |             |            | 7,427,221  |           
|LONG-TERM DEBT  net of current portion      |                                                                                                                                          |                            | 3,492,468                 |                   |            |             | 3,610,483  |            
|                                             |                                                                                                                                          |                            |                           |                   |            |             |            |             |           
|                                             |                                                                                                                                          |                            |                           | Total liabilities |            |             | 13,655,836 |             |            |            | 11,037,704 | 
|                                             |                                                                                                                                          |                            |                           |                   |            |             |            |             |           
|COMMITMENTS AND CONTINGENCIES                |                                                                                                                                          |                            |                           |                   |            |             |            |            
|SHAREHOLDERS EQUITY:                        |                                                                                                                                          |                            |                           |                   |            |             |            |            
|                                             | Preferred stock  Series B, $.001 par value  authorized 2,500,000 shares,
issued 100,000 shares                                         |                            |                           | 462,500           |            |             |            | 462,500     |           
|                                             | Common stock, $.001 par value  authorized 65,000,000 shares, issued
45,690,360 shares (October 31, 2002) and 45,666,160 (July 31, 2002) |                            |                           | 45,690            |            |             |            | 45,666      |           
|                                             | Capital in excess of par value                                                                                                           |                            |                           | 82,920,753        |            |             |            | 82,899,967  |           
|                                             | Accumulated other comprehensive income                                                                                                   |                            |                           | (77,593           | )          |             |            | (75,376     | )         
|                                             | Accumulated deficit                                                                                                                      |                            |                           | (38,093,643       | )          |             |            | (36,474,688 | )         
|                                             | Common
stock in treasury, at cost 225,100 shares (October 31, 2002)
195,000 shares (July 31, 2002)                                       |                            |                           | (571,373          | )          |             |            | (535,120    | )         
|                                             |                                                                                                                                          |                            |                           |                   |            |             |            |             |           
|                                             |                                                                                                                                          | Total shareholders equity |                           |                   | 44,686,334 |             |            |             | 46,322,949 |           
|                                             |                                                                                                                                          |                            |                           |                   |            |             |            |             |           
|TOTAL                                        |                                                                                                                                          | $                          | 58,342,170                |                   |            | $           | 57,360,653 |            
|                                             |                                                                                                                                          |                            |                           |                   |            |             |            |             |           

See notes to consolidated financial statements.

3



---



##### Table of Contents






ZILA, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)


|                                                                |                      |                               |                                         |            |                                |        |              |          |           |         |  
|--------------------------------------------------------------- | -------------------- | ----------------------------- | --------------------------------------- | ---------- | ------------------------------ | ------ | ------------ | -------- | --------- | ------- | -
|                                                                |                      |                               |                                         |            | Three months ended October 31,
|                                                                |                      |                               |                                         |            |                               
|                                                                |                      |                               |                                         |            | 2002                           |        | 2001        
|                                                                |                      |                               |                                         |            |                                |        | (As Restated
|                                                                |                      |                               |                                         |            |                                |        | see Note 11)
|NET REVENUES                                                    |                      | $                             | 10,734,433                              |            |                                | $      | 8,889,874    |         
|                                                                |                      |                               |                                         |            |                                |        |              |         
|OPERATING COSTS AND EXPENSES:                                   |                      |                               |                                         |            |                                |        |              |         
|                                                                |                      | Cost of products sold         |                                         |            | 4,257,848                      |        |              |          | 3,114,579 |        
|                                                                |                      | Marketing and selling         |                                         |            | 2,667,316                      |        |              |          | 2,347,578 |        
|                                                                |                      | General and administrative    |                                         |            | 3,068,296                      |        |              |          | 2,797,948 |        
|                                                                |                      | Severance and related charges |                                         |            | 879,874                        |        |              |          |           |        
|                                                                |                      | Research and development      |                                         |            | 764,010                        |        |              |          | 567,689   |        
|                                                                |                      | Depreciation and amortization |                                         |            | 591,210                        |        |              |          | 803,253   |        
|                                                                |                      |                               |                                         |            |                                |        |              |         
|                                                                |                      |                               | 12,228,554                              |            |                                |        | 9,631,047    |         
|                                                                |                      |                               |                                         |            |                                |        |              |         
|                                                                | LOSS FROM OPERATIONS |                               |                                         | (1,494,121 | )                              |        |              | (741,173 | )        
|                                                                |                      |                               |                                         |            |                                |        |              |         
|OTHER INCOME (EXPENSE):                                         |                      |                               |                                         |            |                                |        |              |         
|                                                                |                      | Interest income               |                                         |            | 7,367                          |        |              |          | 17,664    |        
|                                                                |                      | Interest expense              |                                         |            | (74,870                        | )      |              |          | (190,253  | )      
|                                                                |                      | Other expense                 |                                         |            | (47,581                        | )      |              |          | (6,218    | )      
|                                                                |                      |                               |                                         |            |                                |        |              |         
|                                                                |                      |                               | (115,084                                | )          |                                |        | (178,807     | )       
|                                                                |                      |                               |                                         |            |                                |        |              |         
|LOSS BEFORE INCOME TAXES                                        |                      |                               | (1,609,205                              | )          |                                |        | (919,980     | )       
|INCOME TAX EXPENSE                                              |                      |                               |                                        |            |                                |        |             |         
|                                                                |                      |                               |                                         |            |                                |        |              |         
|LOSS FROM CONTINUING OPERATIONS                                 |                      |                               | (1,609,205                              | )          |                                |        | (919,980     | )       
|LOSS FROM OPERATIONS OF DISCONTINUED
DENTAL SUPPLY SEGMENT      |                      |                               |                                        |            |                                |        | (7,248       | )       
|                                                                |                      |                               |                                         |            |                                |        |              |         
|NET LOSS                                                        |                      |                               | (1,609,205                              | )          |                                |        | (927,228     | )       
|Preferred stock dividends                                       |                      |                               | 9,750                                   |            |                                |        |             |         
|                                                                |                      |                               |                                         |            |                                |        |              |         
|Net loss attributable to common shareholders                    |                      | $                             | (1,618,955                              | )          |                                | $      | (927,228     | )       
|                                                                |                      |                               |                                         |            |                                |        |              |         
|BASIC AND DILUTED NET LOSS PER COMMON SHARE:                    |                      |                               |                                         |            |                                |        |              |         
|                                                                |                      |                               | Loss from continuing operations         |            | $                              | (0.04  | )            |          | $         | (0.02   | )
|                                                                |                      |                               | Loss from discontinued operations       |            |                                |       |              |          |           |        |  
|                                                                |                      |                               |                                         |            |                                |        |              |         
|NET LOSS                                                        |                      | $                             | (0.04                                   | )          |                                | $      | (0.02        | )       
|                                                                |                      |                               |                                         |            |                                |        |              |         
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC AND DILUTED |                      |                               | 45,465,260                              |            |                                |        | 43,458,727   |         
|                                                                |                      |                               |                                         |            |                                |        |              |         
|                                                                |                      |                               |                                         |            |                                |        |              |         
|                                                                |                      | NET LOSS                      |                                         | $          | (1,609,205                     | )      |              | $        | (927,228  | )      
|                                                                |                      | Other
comprehensive loss      |                                         |            |                                |        |              |          |           |        
|                                                                |                      |                               | Foreign currency translation adjustment |            |                                | (2,217 | )            |          |           | (33,799 | )
|                                                                |                      |                               |                                         |            |                                |        |              |         
|                                                                |                      | Other comprehensive loss      |                                         |            | (2,217                         | )      |              |          | (33,799   | )      
|                                                                |                      |                               |                                         |            |                                |        |              |         
|                                                                |                      | COMPREHENSIVE LOSS            |                                         | $          | (1,611,422                     | )      |              | $        | (961,027  | )      
|                                                                |                      |                               |                                         |            |                                |        |              |         

See notes to consolidated financial statements.

4



---



##### Table of Contents






ZILA, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           |              |         |            |          |  
|---------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------- | --------------------------------------------------- | ------------------------------------- | ------- | ------------------------------ | --------- | ------------ | ------- | ---------- | -------- | -
|                                               |                                                                             |                                   |                                                     |                                       |         | Three months ended October 31,
|                                               |                                                                             |                                   |                                                     |                                       |         |                               
|                                               |                                                                             |                                   |                                                     |                                       |         | 2002                           |           | 2001        
|                                               |                                                                             |                                   |                                                     |                                      
|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           | (As Restated
|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           | see Note 11)
|OPERATING ACTIVITIES:                          |                                                                             |                                   |                                                     |                                       |         |                                |           |             
|                                               | Net loss                                                                    |                                   | $                                                   | (1,609,205                            | )       |                                | $         | (927,228     | )      
|                                               | Adjustments to reconcile net loss to net cash used in operating activities: |                                   |                                                     |                                       |         |                                |           |              |        
|                                               |                                                                             | Depreciation and amortization     |                                                     |                                       | 591,210 |                                |           |              | 803,253 |           
|                                               |                                                                             | Loss from discontinued operations |                                                     |                                       |        |                                |           |              | 7,248   |           
|                                               |                                                                             | Other                             |                                                     |                                       | (6,434  | )                              |           |              | (72,409 | )         
|                                               |                                                                             | Change in assets and liabilities: |                                                     |                                       |         |                                |           |              |         |           
|                                               |                                                                             |                                   | Receivables  net                                   |                                       |         | (1,763,957                     | )         |              |         | 485,600    |         
|                                               |                                                                             |                                   | Inventories                                         |                                       |         | 1,282,210                      |           |              |         | 1,125,600  |         
|                                               |                                                                             |                                   | Prepaid expenses and other assets                   |                                       |         | (728,964                       | )         |              |         | (829,470   | )       
|                                               |                                                                             |                                   | Accounts payable and accrued liabilities            |                                       |         | 1,796,016                      |           |              |         | (726,585   | )       
|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           |              |        
|                                               |                                                                             |                                   |                                                     | Net cash used in operating activities |         |                                | (439,124  | )            |         |            | (133,991 | )
|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           |              |        
|INVESTING ACTIVITIES:                          |                                                                             |                                   |                                                     |                                       |         |                                |           |             
|                                               | Purchases of property and equipment                                         |                                   |                                                     | (365,325                              | )       |                                |           | (102,867     | )      
|                                               | Retained liabilities of discontinued operations                             |                                   |                                                     |                                       |         |                                |           | 1,337,719    |        
|                                               | Purchases of intangible assets                                              |                                   |                                                     | (102,269                              | )       |                                |           | (370,608     | )      
|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           |              |        
|                                               |                                                                             |                                   | Net cash (used in) provided by investing activities |                                       |         | (467,594                       | )         |              |         | 864,244    |         
|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           |              |        
|FINANCING ACTIVITIES:                          |                                                                             |                                   |                                                     |                                       |         |                                |           |             
|                                               | Net proceeds (repayments) from short-term borrowings                        |                                   |                                                     | 954,192                               |         |                                |           | (1,081,559   | )      
|                                               | Net proceeds from issuance of common stock                                  |                                   |                                                     | 20,810                                |         |                                |           |              |        
|                                               | Acquisition of treasury stock                                               |                                   |                                                     | (36,253                               | )       |                                |           |              |        
|                                               | Dividends paid to preferred shareholders                                    |                                   |                                                     | (19,500                               | )       |                                |           |              |        
|                                               | Principal payments on long-term debt                                        |                                   |                                                     | (122,326                              | )       |                                |           | (394,956     | )      
|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           |              |        
|                                               |                                                                             |                                   | Net cash provided by (used in) financing activities |                                       |         | 796,923                        |           |              |         | (1,476,515 | )       
|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           |              |        
|NET DECREASE IN CASH AND CASH EQUIVALENTS      |                                                                             |                                   | (109,795                                            | )                                     |         |                                | (746,262  | )           
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |                                                                             |                                   | 1,604,205                                           |                                       |         |                                | 1,263,935 |             
|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           |              |        
|CASH AND CASH EQUIVALENTS, END OF PERIOD       |                                                                             | $                                 | 1,494,410                                           |                                       |         | $                              | 517,673   |             
|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           |              |        
|CASH PAID FOR INTEREST                         |                                                                             | $                                 | 44,392                                              |                                       |         | $                              | 134,623   |             
|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           |              |        
|CASH PAID FOR INCOME TAXES                     |                                                                             | $                                 | 146                                                 |                                       |         | $                              | 10,481    |             
|                                               |                                                                             |                                   |                                                     |                                       |         |                                |           |              |        

See notes to consolidated financial statements.

5



---



##### Table of Contents






ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|1. |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The 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 did business under the name Zila Dental Supply
(ZDS), Zila Technologies, Inc., Zila Swab Technologies, Inc. dba
Innovative Swab Technologies (IST) and Oxycal Laboratories, Inc.
(Oxycal). This information should be read in conjunction with the
financial statements set forth in the Zila, Inc. Annual Report on Form
10-K for the fiscal year ended July 31, 2002. All significant
intercompany balances and transactions are eliminated in consolidation.                                                                                                                                                                                                                                                            
|  
|   |  | Accounting policies utilized in the preparation of the financial
information herein presented are the same as set forth in Zilas annual
financial statements except as modified for interim accounting policies
which are within the guidelines set forth in Accounting Principles Board
(APB) Opinion No. 28, Interim Financial Reporting and the adoption of
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets as discussed in Note 4. The interim
consolidated financial information is unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring accruals,
necessary to present Zilas financial position as of October 31, 2002, and
its results of operations and its cash flows for the three months ended
October 31, 2002 and 2001 have been included. Interim results of
operations are not necessarily indicative of the results of operations for
the full year.
|  
|   |  | In November 2001, the Company decided to sell the operations of the ZDS
business. These operations were sold during the second fiscal quarter of
2002. The accompanying financial statements for the three months ended
October 31, 2001 have been restated to conform to provide discontinued
operations treatment for all historical periods presented. Sales for ZDS
for the three months ended October 31, 2001 were $10,713,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Certain prior year amounts have been reclassified to conform to the 2002
presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|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,
|                                             |                   |   |                               
|                                             |                   |   | 2002                           |            | 2001
|                                             |                   |   |                                |            |     
|Loss from continuing operations              |                   | $ | (1,609,205                     | )          |      | $ | (919,980 | )         
|Loss from discontinued operations            |                   |   |                                |            |      |   | (7,248   | )         
|                                             |                   |   |                                |            |      |   |          |           
|Net loss                                     |                   |   | (1,609,205                     | )          |      |   | (927,228 | )         
|Preferred stock dividends                    |                   |   | 9,750                          |            |      |   |          |           
|                                             |                   |   |                                |            |      |   |          |           
|Net loss attributable to common shareholders |                   | $ | (1,618,955                     | )          |      | $ | (927,228 | )         
|                                             |                   |   |                                |            |      |   |          |           
|Average number of common shares outstanding: |                   |   |                                |            |      |   |          |           
|                                             | Basic and diluted |   |                                | 45,465,260 |      |   |          | 43,458,727 | 

6



---



##### Table of Contents



|                                                 |                   |  |                                |       |      |  |   |       |  
|------------------------------------------------ | ----------------- |  | ------------------------------ | ----- | ---- |  | - | ----- | -
|                                                 |                   |  | Three months ended October 31,
|                                                 |                   |  |                               
|                                                 |                   |  | 2002                           |       | 2001
|                                                 |                   |  |                                |       |     
|Net loss per share from continuing operations:   |                   |  |                                |       |      |  |   |      
|                                                 | Basic and diluted |  | $                              | (0.04 | )    |  | $ | (0.02 | )
|Net loss per share from discontinued operations: |                   |  |                                |       |      |  |   |      
|                                                 | Basic and diluted |  | $                              | (0.00 | )    |  | $ | (0.00 | )



|   |  | Since a loss from continuing operations was incurred for the quarters
ended October 31, 2002 and 2001, 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,
|                   |  | 2002        |           | 2002    
|                   |  |             |           |         
|Finished goods     |  | $           | 2,112,315 |          |  | $ | 2,455,080 |  
|Work in process    |  |             | 1,462,769 |          |  |   | 1,806,783 |  
|Raw materials      |  |             | 4,319,720 |          |  |   | 4,899,401 |  
|Inventory reserves |  |             | (308,475  | )        |  |   | (292,725  | )
|                   |  |             |           |          |  |   |           |  
|                   |  | $           | 7,586,329 |          |  | $ | 8,868,539 |  
|                   |  |             |           |          |  |   |           |  



|   |  | During the quarter ended October 31, 2002 and 2001, the Company recorded
charges of $30,000 and $0 respectively, to reduce the carrying value of
its Saw Palmetto inventory due to costs in excess of current market
prices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|4. |  | INTANGIBLE ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | In August 2002, the Company adopted SFAS No. 142 Goodwill and Other
Intangible Assets. SFAS No. 142 specifies that goodwill and certain
intangible assets with indefinite lives no longer be amortized but instead
be subject to periodic impairment testing. At October 31, 2002, the
Company determined that all other intangible assets had finite lives and,
therefore no transitional impairment test was required. As required by
SFAS No. 142, the transitional impairment test for goodwill will be
performed during the second quarter of the fiscal year ending July 31,
2003.                                                                                                                                                                                                                                                      
|  
|   |  | Intangible assets with finite lives will continue to be amortized over
their respective useful lives and will be tested for impairment in
accordance with SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. This statement, adopted in August 2001, 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. SFAS No. 144 requires that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and
used or newly acquired, and it broadens

7



---



##### Table of Contents





| |  | the presentation of discontinued operations to include more disposal
transactions.
| |  | ----------------------------------------------------------------------------------
|
| |  | A summary of intangible assets at October 31, 2002 is presented below:            

|                               |                                     |                             |            |                |            |              |            |                    |           |   |            |            |            | 
|------------------------------ | ----------------------------------- | --------------------------- | ---------- | -------------- | ---------- | ------------ | ---------- | ------------------ | --------- | - | ---------- | ---------- | ---------- | 
|                               |                                     |                             |            | Gross          |            | Accumulated  |            |                    |           |  
|                               |                                     |                             |            | Carrying Value |            | Amortization |            | Net Carrying Value
|                               |                                     |                             |            |                |            |              |            |                   
|Amortized intangible assets:   |                                     |                             |            |                |            |              |            |                    |           |   |            |           
|                               |                                     | Trademarks                  |            | $              | 11,531,865 |              |            | $                  | 2,301,363 |   |            | $          | 9,230,502  | 
|                               |                                     | Patents                     |            |                | 2,870,836  |              |            |                    | 685,092   |   |            |            | 2,185,744  | 
|                               |                                     | Licensing costs             |            |                | 2,695,630  |              |            |                    | 286,631   |   |            |            | 2,408,999  | 
|                               |                                     | Other                       |            |                | 676,973    |              |            |                    | 246,531   |   |            |            | 430,442    | 
|                               |                                     | Purchased technology rights |            |                | 7,419,472  |              |            |                    | 3,071,555 |   |            |            | 4,347,917  | 
|                               |                                     |                             |            |                |            |              |            |                    |           |   |            |           
|                               | Total amortized intangible assets   |                             |            | 25,194,776     |            |              |            | 6,591,172          |           |   |            | 18,603,604 |           
|                               |                                     |                             |            |                |            |              |            |                    |           |   |            |           
|Unamortized intangible assets: |                                     |                             |            |                |            |              |            |                    |           |   |            |           
|                               |                                     | Goodwill                    |            |                | 16,530,985 |              |            |                    | 5,516,600 |   |            |            | 11,014,385 | 
|                               |                                     |                             |            |                |            |              |            |                    |           |   |            |           
|                               | Total unamortized intangible assets |                             |            | 16,530,985     |            |              |            | 5,516,600          |           |   |            | 11,014,385 |           
|                               |                                     |                             |            |                |            |              |            |                    |           |   |            |           
|Total intangible assets        |                                     | $                           | 41,725,761 |                |            | $            | 12,107,772 |                    |           | $ | 29,617,989 |           
|                               |                                     |                             |            |                |            |              |            |                    |           |   |            |           



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the quarter ended October 31, 2002, the Company capitalized
$100,000 of legal fees associated with patent applications and $2,000
related to trademark applications.                                                 
|
| | Intangible asset amortization expense for the three months ended October
31, 2002 was $316,000. Estimated amortization expense for the five
succeeding fiscal years related to the existing intangible assets is as
follows:

|     |  |   |           | 
|---- |  | - | --------- | 
|2003 |  | $ | 1,313,000 | 
|2004 |  |   | 1,313,000 | 
|2005 |  |   | 1,313,000 | 
|2006 |  |   | 1,313,000 | 
|2007 |  |   | 1,313,000 | 



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | The changes in the carrying amount of goodwill as of October 31, 2002 were
as follows:

|                             |  |                      |           |                     |  |                    |           |       |  |  |   |  |  |   |            | 
|---------------------------- |  | -------------------- | --------- | ------------------- |  | ------------------ | --------- | ----- |  |  | - |  |  | - | ---------- | 
|                             |  | Zila Pharmaceuticals |           | Zila Nutraceuticals |  | Zila Biotechnology |           | Total
|                             |  |                      |           |                     |  |                    |           |      
|Balance at beginning of year |  | $                    | 8,117,459 |                     |  | $                  | 2,896,926 |       |  |  |  |  |  | $ | 11,014,385 | 
|Change                       |  |                      |          |                     |  |                    |          |       |  |  |  |  |  |   |           | 
|                             |  |                      |           |                     |  |                    |           |       |  |  |   |  |  |   |            | 
|Balance at end of period     |  | $                    | 8,117,459 |                     |  | $                  | 2,896,926 |       |  |  |  |  |  | $ | 11,014,385 | 
|                             |  |                      |           |                     |  |                    |           |       |  |  |   |  |  |   |            | 



| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Amortization expense of goodwill for the three months ended October 31,
2001 was $299,857. Loss from continuing operations and net loss, as
reported and as adjusted with the adoption of SFAS No. 142 are presented
below:

8



---



##### Table of Contents



|                                         |                                          |   |                                |       |      |   |          |       |  
|---------------------------------------- | ---------------------------------------- | - | ------------------------------ | ----- | ---- | - | -------- | ----- | -
|                                         |                                          |   | Three months ended October 31,
|                                         |                                          |   |                               
|                                         |                                          |   | 2002                           |       | 2001
|                                         |                                          |   |                                |       |     
|Reported loss from continuing operations |                                          | $ | (1,609,205                     | )     |      | $ | (919,980 | )    
|Add back: goodwill amortization          |                                          |   |                               |       |      |   | 299,857  |      
|                                         |                                          |   |                                |       |      |   |          |      
|Adjusted loss from continuing operations |                                          | $ | (1,609,205                     | )     |      | $ | (620,123 | )    
|                                         |                                          |   |                                |       |      |   |          |      
|Reported net loss                        |                                          | $ | (1,609,205                     | )     |      | $ | (927,228 | )    
|Add back: goodwill amortization          |                                          |   |                               |       |      |   | 299,857  |      
|                                         |                                          |   |                                |       |      |   |          |      
|Adjusted net loss                        |                                          | $ | (1,609,205                     | )     |      | $ | (627,371 | )    
|                                         |                                          |   |                                |       |      |   |          |      
|Basic and diluted loss per share:        |                                          |   |                                |       |      |   |          |      
|                                         | Reported loss from continuing operations |   | $                              | (0.04 | )    |   | $        | (0.02 | )
|                                         | Goodwill amortization                    |   |                                |      |      |   |          | 0.01  |  
|                                         |                                          |   |                                |       |      |   |          |      
|                                         | Adjusted loss from continuing operations |   | $                              | (0.04 | )    |   | $        | (0.01 | )
|                                         |                                          |   |                                |       |      |   |          |      
|                                         | Reported net loss                        |   | $                              | (0.04 | )    |   | $        | (0.02 | )
|                                         | Goodwill amortization                    |   |                                |      |      |   |          | 0.01  |  
|                                         |                                          |   |                                |       |      |   |          |      
|                                         | Adjusted net loss                        |   | $                              | (0.04 | )    |   | $        | (0.01 | )
|                                         |                                          |   |                                |       |      |   |          |      



|5. |  | DEBT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Under its Loan and Security Agreement (the Agreement) with Congress
Financial Corporation (Congress), the Company is required to comply with
a financial covenant based on an adjusted tangible net worth calculation
(as defined). Effective October 1, 2002, the Company and Congress modified
the Agreement to, among other things, reduce the tangible net worth
covenant from $16 million to $12 million and agreed to execute a new
financial covenant that will be based on EBITDA, (earnings before
interest, taxes, depreciation and amortization) that will be substituted
for the modified tangible net worth covenant. The Company must provide a
forecast of its projected income and expenses for the 2003 calendar year
to Congress by January 17, 2003 to form the basis of the covenant. If the
Company does not provide the forecast by that date or if the parties do
not execute an agreement by February 1, 2003, the Company will be in
default under the Agreement. At October 31, 2002, the Company had
tangible net worth of $15.7 million and was in compliance with the
modified tangible net worth covenant.
|  
|6. |  | SEVERANCE AND RELATED CHARGES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | During the quarter ended October 31, 2002, the Company incurred severance
and costs related to employee terminations of $879,874.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

9



---



##### Table of Contents





|7. |  | INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Deferred income taxes reflect the tax effect of temporary differences
between the amounts of assets and liabilities recognized for financial
reporting and tax purposes. At the end of each fiscal quarter, the
Company makes its best estimate of the effective tax rate expected to be
applicable for the full fiscal year. The rate so determined is used in
providing for income taxes on a current year-to-date basis. In the three
months ended October 31, 2002 and 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | The Company has recorded total deferred tax assets of $9.5 million. The
Company has offset its total deferred tax assets with a valuation
allowance due to the Companys lack of earnings history. The Company
believes the valuation allowance reduces deferred tax assets to an amount
that represents the Companys best estimate of the amount of such deferred
tax assets that more likely than not will be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|8. |  | NEW ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | In May 2000, the Financial Accounting Standards Boards Emerging Issues
Task Force (EITF) reached consensus on 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 in
Issue No. 00-14 was effective for the Company on February 1, 2002. The
consensus requires certain sales incentives that were previously
classified as selling, general and administrative expenses to be
classified as a reduction in sales. The cost of free products is now
recorded as a reduction of revenues from products sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | In April 2001, the EITF reached consensus on 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 No. 00-25 was effective for the
Company on February 1, 2002. The effect of the adoption of EITF No. 00-25
did not have a material impact on the Companys consolidated statement of
operations.
|  
|   |  | The table below shows the effect of the Issue No. 00-14 and Issue No.
00-25 adjustment to revenues and selling, general and administrative
expense for the quarter ended October 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

10



---



##### Table of Contents



|                                                                          |  |   |           | 
|------------------------------------------------------------------------- |  | - | --------- | 
|Pre-adoption net revenues                                                 |  | $ | 8,991,219 | 
|Reclassifications of sales incentives from selling and
marketing expenses |  |   | 101,345   | 
|                                                                          |  |   |           | 
|Net revenues reported                                                     |  | $ | 8,889,874 | 
|                                                                          |  |   |           | 



|   |  | In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. This Statement
rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt, SFAS No. 44, Accounting for Intangible Assets of Motor Carriers
and SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking Fund
Requirements. This statement amends SFAS No. 13, Accounting for Leases,
to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 is effective for the Company in the
third quarter of
fiscal year 2003. Zila does not expect the adoption of SFAS No. 145 to
have a significant effect on its results of operations or financial
position.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities,which replaces EITF Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring).The new standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The
statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not expect that the
adoption will have a significant impact on the Companys financial
position or results of operations.                                                                                                                                                                                                              
|  
|9. |  | SEGMENT INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The Company is organized into three major groups, all of which have
distinct product lines, brand names and are managed as autonomous business
units. The Company has identified the following segments for purposes of
applying SFAS No. 131 Disclosures about Segments of an Enterprise and
Related Information: Pharmaceuticals,which includes Zila
Pharmaceuticals, Inc. and the Zilactin® line of products, Peridex®,
ViziLite and the IST line of products; Nutraceuticals,which includes
Oxycal Laboratories, Inc. and its wholly-owned subsidiary, Inter-Cal,
Inc.; and Biotechnology, which includes OraTest® and Zila® Tolonium
Chloride technologies. The Company evaluates performance and allocates
resources to segments based on operating results.                                                                                                                                                                                                                
|  
|   |  | Effective August 1, 2002, the Company changed its reporting segment from
previous disclosures as follows: (i) Consumer and Professional segments
have been combined into the Pharmaceutical segment; (ii) international
sales and expenses related to the OraTest® product were moved from the
Professional segment into the Biotechnology segment; and (iii) expenses
related to the manufacturing facility for Zila® Tolonium Chloride and the
ongoing OraTest® clinical study were previously combined with the
Corporate segment. Previous segment disclosures have been restated to
reflect the new presentation.                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | The table below presents information about reported segments as of and for
the three months                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

11



---



##### Table of Contents





| |  | ended October 31 and for the year ended July 31, 2002 (in thousands):
| |  | ---------------------------------------------------------------------

|                                   |      |  |        |                 |      |                |        |               |  |           |       |        |   |  |       |        |      |  |        |        |   | 
|---------------------------------- | ---- |  | ------ | --------------- | ---- | -------------- | ------ | ------------- |  | --------- | ----- | ------ | - |  | ----- | ------ | ---- |  | ------ | ------ | - | 
|                                   |      |  |        | Pharmaceuticals |      | Nutraceuticals |        | Biotechnology |  | Corporate |       | Total 
|                                   |      |  |        |                 |      |                |        |               |  |           |       |       
|Net revenues:                      |      |  |        |                 |      |                |        |               |  |           |       |        |   |  |       |        |      |  |        |       
|                                   | 2002 |  | $      | 4,247           |      |                | $      | 6,480         |  |           | $     | 7      |   |  |       |       |      |  | $      | 10,734 |  
|                                   | 2001 |  |        | 4,151           |      |                |        | 4,715         |  |           |       | 24     |   |  |       |       |      |  |        | 8,890  |  
|Income (loss) before
Income taxes: |      |  |        |                 |      |                |        |               |  |           |       |        |   |  |       |        |      |  |        |       
|                                   | 2002 |  |        | (47             | )(a) |                |        | 1,844         |  |           |       | (1,021 | ) |  |       | (2,385 | )(b) |  |        | (1,609 | )
|                                   | 2001 |  |        | 710             |      |                |        | 557           |  |           |       | (1,040 | ) |  |       | (1,147 | )    |  |        | (920   | )
|Depreciation and
amortization:     |      |  |        |                 |      |                |        |               |  |           |       |        |   |  |       |        |      |  |        |       
|                                   | 2002 |  |        | 120             |      |                |        | 261           |  |           |       | 179    |   |  |       | 31     |      |  |        | 591    |  
|                                   | 2001 |  |        | 298             |      |                |        | 306           |  |           |       | 185    |   |  |       | 14     |      |  |        | 803    |  
|Total assets:                      |      |  |        |                 |      |                |        |               |  |           |       |        |   |  |       |        |      |  |        |       
|                                   | 2002 |  |        | 17,485          |      |                |        | 30,097        |  |           |       | 7,898  |   |  |       | 2,862  |      |  |        | 58,342 |  
|July 31, 2002                      |      |  | 17,969 |                 |      |                | 28,958 |               |  |           | 7,767 |        |   |  | 2,667 |        |      |  | 57,361 |       



---

|(a) |  | Includes $501,000 of operating costs and expenses related to
the ViziLite product that were not present in 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Includes $880,000 of severance and related costs.                                                                



|10. |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | OraTest®                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | During the third quarter of 2002, the Company determined that completion
of the OraTest® Phase III clinical trial would require a substantial
number of additional patients and has been evaluating the number of
patients required to complete the study. The requirement for the larger
number of patients is related to the tumor formation rate within the study
population and not to the efficacy of the OraTest® product. Factors that
affect the cost and timing of completion of these milestone dates include
but are not limited to: (i) patient enrollment rates, (ii) tumor formation
rate within the study population (iii) compliance with the study protocol
and related monitoring, (iv) level of funding throughout the study, and
(v) protocol modifications.
|   
|    |  | The Company has decided to transition the clinical trial from ILEX
Oncology Services, Inc. to a new global contract research organization
(CRO). The Company requested proposals from several of the largest,
highest quality and most prominent CROs with worldwide capabilities, and
received fee quotations back from each. Each CRO agreed that the current
study could be transitioned successfully without compromising any of the
current study data. Based on the foregoing, we are currently in
negotiations with a prospective CRO although the definitive agreement has
not yet been finalized.                                                                                                                                                                   
|   
|    |  | In order to support the larger number of patients needed to complete the
study, the Company intends to increase the rate of funding for the study
and the number of clinical sites, with the aid of a larger, more
experienced CRO with access to clinical sites in high-density oral cancer
regions around the world. This effort is currently underway and the
Company believes that it will have sufficient funds for the clinical trial
for the current fiscal year. The Company will, however, require additional
funds to support the OraTest® clinical trial, regulatory,                                                                                                                                                                                                

12



---



##### Table of Contents





| |  | manufacturing and marketing costs extending beyond fiscal year 2003. The
Company is currently considering possible financing sources such as
strategic partners and is pursuing funding strategies that, if completed,
would provide significant funding for the clinical trial. The Company is
also considering the possible liquidation of certain Zila assets outside
the Companys areas of core competency strength as part of Zilas new
focus on core strengths and objectives. These assets could also provide
significant funding for the clinical trial. There is no assurance that
such funds will be available on terms acceptable to the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The cash flows used to measure long-lived assets related to the OraTest®
product are dependent upon obtaining Food and Drug Administration (the
FDA) approval and generating sufficient revenues from sales of the
OraTest® product. The rigorous clinical testing and an extensive
regulatory approval process mandated by the FDA and equivalent foreign
authorities before any new drug can be marketed by the Company can take a
number of years and require the expenditure of substantial resources. The
Company anticipates that it will require significant additional funds 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. Net long-lived assets
related to the OraTest® product of $6.1 million at October 31, 2002 have
been capitalized.                                                                                                                                            
|
| |  | The Company has approximately $446,000 of Zila® Tolonium Chloride drug
substance, the active ingredient in the OraTest® product, in inventory at
its manufacturing facility in Phoenix, AZ. The Company intends to realize
the value of this inventory through sales in the United States, once final
approval for the OraTest® products is received from the FDA, and in Europe
and Asia, after utilizing approximately $126,000 of OraTest® finished
product located in the United Kingdom, prior to the date we expect sales
in the United States. The drug substance inventory currently has
expiration dates in 2003 and 2004, which is prior to the date we expect
sales in the United States. Previous testing indicates that the drug
substance product is stable and the Company expects to be able to extend
the expiration dates of the entire drug substance inventory through the
date of expected sales in the United States. However, no assurance can be
given that such future testing efforts will be successful. In addition,
should FDA approval not be granted or be significantly delayed, it may not
be possible to recover the value of this drug substance inventory.
|
| |  | Litigation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | In connection with the acquisition of patent rights in 1980, the Company
agreed to pay to Dr. James E. Tinnell (Tinnell), the inventor of one of
the Companys treatment compositions, a royalty of 5% of gross sales of
the invention disclosed in his then pending patent application.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | In September 2000, counsel advised the Company that its obligation to pay
royalties to Tinnell under the 1980 agreement ceased as of August 25, 1998
when the patents on the invention expired. In September 2000, the Company
gave notice to Tinnell that the Company would not continue paying such
royalties and requested reimbursement of royalties paid since August 1998.
After attempts to settle the matter failed, the Company 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

13



---



##### Table of Contents





|    |  | additional counterclaims based on transactions between Tinnell and Zila in
the 1980s. Counsel has advised the Company that, based on their
investigations and discovery to date, (i) the counterclaim for royalties
is without merit and (ii) the additional counterclaims are meritless and,
in any event, are time-barred by the applicable statutes of limitation.
Both Zila and Tinnell have filed motions for summary judgment, which have
been denied. The Company currently intends to complete pretrial procedures
and proceed to trial.                                                                                                                                                                                                                                                                                              
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | 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 actions will not
materially affect the Companys financial position or results of
operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | Saw Palmetto                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | The Nutraceuticals Group entered the saw palmetto business with its
Palmettx line of products in fiscal year 2000. As of October 31, 2002,
approximately $3.4 million of saw palmetto products (net of reserve of
$221,000) remain in inventory, representing an approximately two-year
supply based on first quarter 2003 sales. Recent sales of saw palmetto
products have generated a nominal profit margin and allowances have been
recorded where appropriate to reduce the carrying value of the inventory
to its estimated market value. However, the ultimate probable future
economic benefit associated with the saw palmetto inventory is contingent
on the Companys ability to maintain the quality of the inventory and to
sell its line of saw palmetto products for a price greater than the
carrying value of the inventory.
|   
|    |  | The Companys current intention is to sell the remaining inventory of saw
palmetto products in the normal course of business. However, the Company
has been contacted by several companies interested in purchasing saw
palmetto inventory in bulk. None of the terms discussed were acceptable to
the Company. While the Company has not made such a decision, if all or a
substantial portion of the inventory is sold in bulk rather than in the
normal course, the ultimate sales price may be substantially less than the
current carrying value of the inventory.                                                                                                                                                                                                                                                                       
|   
|    |  | ViziLite                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | In December 2001, we acquired the world marketing and distribution rights
(excluding the Pacific Rim) for the FDA approved ViziLite
chemiluminescent technology. We issued 2,000,000 shares of stock that
were valued at $2,607,000 for the rights. In addition, we have $277,000
of ViziLite inventory. Actual sales to date of the ViziLite product
have been significantly below our original plans. We currently have
several initiatives underway to stimulate sales of the ViziLite product
during the current fiscal year. If sales do not reach expected levels, we
may have to reduce our carrying value of the assets related to ViziLite.                                                                                                                                                                                     
|   
|11. |  | RESTATEMENT OF FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | As was disclosed in the Companys Annual Report on Form 10-K for the
fiscal year ended July 31, 2002, subsequent to the issuance of the
Companys consolidated financial statements for the first, second and
third quarters of the fiscal year ended July 31, 2002, the Company
determined that certain of its historical accounting practices were not
appropriate under accounting principles generally accepted in the United
States of America (GAAP), as                                                                                                                                                                                                                                                                                                                                                                              

14



---



##### Table of Contents





| |  | discussed below.
| |  | ----------------



| |  |  | Since 1992, the Company had been capitalizing deferred
licensing costs related to the OraTest® product, and amortizing
these costs over the life the OraTest® patent. The Company has
determined that these costs should have been expensed as incurred.                                                                                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In January 2001, the Company entered in a perpetual
licensing agreement and recognized revenue of $483,000. The
Company has determined that because of its continuing involvement
in the generation of revenues under the licensing agreement, the
revenue should have been deferred and recognized over the expected
economic life of the license agreement of approximately eight
years.
|
| |  |  | The Company has determined that it had amortized acquired
purchased technology rights over the incorrect estimated useful
lives.                                                                                                                                                                                                                                                          
|
| |  |  | During 1998 and 1999, the Company incurred severance
obligations of $1,626,000 related to the termination of various
employees, which were being expensed when paid. The Company has
determined that because the individuals involved did not have
substantive future performance obligations, the costs should have
been expensed when incurred.                                         



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result, the accompanying financial statements for the quarter ended
October 31, 2001 have been restated from the amounts previously reported
to correct the accounting for these transactions as summarized in the
table below:

|                                      |                                   |   |                                |       |               |   |           |       |  
|------------------------------------- | --------------------------------- | - | ------------------------------ | ----- | ------------- | - | --------- | ----- | -
|                                      |                                   |   | Quarter ended October 31, 2001
|                                      |                                   |   |                               
|                                      |                                   |   | (As Previously                 |       |               |   |          
|                                      |                                   |   | Reported)                      |       | (As Restated)
|                                      |                                   |   |                                |       |              
|Net revenues                          |                                   | $ | 8,889,874                      |       |               | $ | 8,889,874 |      
|Loss from continuing operations       |                                   |   | (984,120                       | )     |               |   | (919,980  | )    
|Loss from discontinued operations     |                                   |   | (7,248                         | )     |               |   | (7,248    | )    
|Net loss                              |                                   | $ | (991,368                       | )     |               | $ | (927,228  | )    
|Basic and diluted net loss per share: |                                   |   |                                |       |               |   |           |      
|                                      | Loss from continuing operations   |   | $                              | (0.02 | )             |   | $         | (0.02 | )
|                                      | Loss from discontinued operations |   |                                | 0.00  |               |   |           | (0.00 | )
|                                      |                                   |   |                                |       |               |   |           |      
|                                      | Net loss                          |   | $                              | (0.02 | )             |   | $         | (0.02 | )
|                                      |                                   |   |                                |       |               |   |           |      

15



---



##### 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 our 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 our 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. We undertake 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 our actual results differing
materially from those discussed herein or for our stock price to be affected
adversely include, but are not limited to: (i) our failure to maintain
compliance with the covenants of our outstanding debt instruments; (ii)
industry trends, including a downturn or slowing of the growth of the dietary
supplement industry and the consumer oral care, OTC and prescription
industries; (iii) our ability to maintain the quality of the inventory and to
sell our line of saw palmetto products for a price greater than the carrying
value of the inventory; (iv) a decision to sell all or a portion of the saw
palmetto inventory in bulk rather than in the normal course at lower than our
cost; (v) increased competition from current competitors and new market
entrants; (vi) our reliance on single source manufacturing locations for
several of our products; (vii) adverse publicity regarding the industries in
which we market our products; (viii) our dependence upon our ability to develop
new products; (ix) our ability to gain or expand distribution within new or
existing channels of trade; (x) 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; (xi) adverse changes in government regulations; (xii) our suppliers
and our ability to continue to comply with current good manufacturing practices
(GMP) and other applicable regulatory requirements; (xiii) exposure to product
liability claims; (xiv) dependence on significant customers; (xv) our ability
to keep and attract key management employees; (xvi) our inability to manage
growth and execute our business plan; (xvii) sales and earnings volatility;
(xviii) volatility of the stock market; (xix) our reliance on independent
brokers to sell many of our products; (xx) our inability to protect our
intellectual property; and (xxi) a general downturn in the national economy as
a whole.

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

16



---



##### Table of Contents



prove to be accurate. For a more detailed description of these and other
cautionary factors that may affect our future results, please refer to our
Annual Report on Form 10-K for the fiscal year ended July 31, 2002 filed with
the Securities and Exchange Commission.

Effect of Restatement of Financial Statements

As discussed in Note 11 of the Notes to Consolidated Financial Statements,
we have restated our financial statements for the first, second and third
quarters of the fiscal year ended July 31, 2002. The restatement reflects
adjustments related to (i) expensing of certain deferred licensing costs
related to the OraTest® product that were previously capitalized; (ii) reversal
of certain license revenue; (iii) revision of the amortization period related
to the purchased technology rights; and (iv) severance payments made to several
former employees when terminated. The following management discussion and
analysis gives effect to the restatement.

COMPANY OVERVIEW

Zila is a manufacturer and marketer of pharmaceutical, nutritional and
biomedical products. During the quarter ended October 31, 2002, we had three
major product groups: Nutraceuticals, Pharmaceuticals and Biotechnology. The
Nutraceuticals Group is comprised of Oxycal Laboratories, Inc. (Oxycal) and
its Inter-Cal subsidiary (Inter-Cal), 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.
The Pharmaceuticals Group consists of over-the-counter products, including the
Zilactin® family of over-the-counter products, Peridex® prescription mouth
rinse, the ViziLite disposable light for illumination of oral mucosal
abnormalities, and the plastic molded products from Innovative Swab
Technologies (IST). The Biotechnology Group includes the OraTest® products,
an oral cancer detection system and the Zila® Tolonium Chloride technologies
for cancer and pre-cancer detection and treatment.

In November 2001, we decided to sell the operations of the Zila Dental
Supply (ZDS) business. These operations were sold in two separate
transactions during the second fiscal quarter of 2002. The financial statements
have been prepared to reflect our historical financial position and results of
operations and cash flows as adjusted for the reclassification of the ZDS
business as discontinued operations. The historical results of the operations
of the ZDS business and the gain (loss) recognized on the components of the
sale are reported as discontinued operations in the accompanying consolidated
financial statements.

RESULTS OF OPERATIONS

THREE MONTHS ENDED OCTOBER 31, 2002 AND 2001

Total Company

Net revenues increased 20.7% to $10.7 million for the quarter ended
October 31, 2002 compared to revenues of $8.9 million for the first quarter of
the prior year. The increase is due primarily to sales increases in the
Nutraceuticals Group.

For the quarter ended October 31, 2002, cost of products sold as a
percentage of net revenues increased to 39.7% from 35.0% in the prior fiscal
year. An increase in cost of products sold occurred in the Pharmaceuticals
Group due to several one time charges associated with bringing the

17



---



##### Table of Contents



manufacturing of Zilactin ® products in house. This was offset by a
reduction in the Nutraceuticals Group cost of products sold.

Marketing and selling expenses for the quarter ended October 31, 2002 were
$2.7 million, compared to $2.3 million in the quarter ended October 31, 2001.
The increase is attributable to increased marketing and selling expenses at the
Nutraceuticals and Pharmaceuticals Groups offset by the reduction of costs in
Europe and China. Vizilite related costs were included in the Pharmaceutical
Groups selling and marketing expenses for the quarter ended October 31, 2002.

We incurred general and administrative expenses of $3.1 million, or 28.6%
of net revenues, during the quarter ended October 31, 2002 compared to $2.8
million, or 31.5% of net revenue in the same quarter in fiscal 2002. The
increase in general and administrative expenses is attributable to increased
legal and accounting expenses at corporate and the inclusion of the ViziLite
personnel related costs during the current quarter. The ViziLite technology
was acquired in December 2001.

During the first quarter of 2002, we incurred severance and related
charges of $880,000 related to employee terminations.

Research and development expenses increased $196,000, or approximately
34.6%, from $568,000 in the quarter ended October 31, 2001 to $764,000 for the
same period in fiscal year 2003. The increase is primarily due to expenses
related to the costs for a product currently under development utilizing the
ViziLite technology and the costs related to the OraTest® clinical study.

Depreciation and amortization expenses decreased to $591,000 in the
quarter ended October 31, 2002 from $803,000 for the same period in fiscal year
2002. The decrease is due primarily to the cessation of amortization of
goodwill offset by the inclusion of the amortization related to the ViziLite
product.

We recorded interest expense of $75,000 for the quarter ended October 31,
2002 compared to $190,000 in the previous year quarter. The decrease was
attributable to decreased bank borrowings and debt obligations, as well as
lower interest rates during the current year, compared to the previous year
period.

We regularly review our deferred tax assets and related valuation
allowances in accordance with SFAS No. 109, Accounting for Income Taxes.
SFAS No. 109 requires us to assess all available evidence, both positive and
negative, to determine whether a valuation allowance is needed based on the
weight of that evidence.

For the quarters ended October 31, 2002 and 2001, we 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. As of October 31, 2002,
all of our deferred tax assets were offset by a valuation allowance.

Nutraceuticals Group

Net revenues for the Nutraceuticals Group for the quarter ended October
31, 2002, were $6.5 million, a 37.4% increase, compared to $4.7 million for the
corresponding 2002 fiscal quarter. Sales of Ester-C® for the quarter ended
October 31, 2002 increased 48.7% over the same quarter last year. Sales to
existing customers increased during the quarter due to increased radio and
television advertising of the Ester-C® products that we believe have increased
brand awareness of the products with consumers. Additionally, the
Nutraceuticals Group sold approximately $990,000 of an Ester-C®

18



---



##### Table of Contents



product to a new customer during the quarter. Sales of saw palmetto
products decreased 34.9% in the quarter ended October 31, 2002 over the prior
year quarter due to the adverse affects of a price increase that was installed
in fiscal year 2002 and increased competition.

Cost of products sold, as a percentage of net revenues for the
Nutraceuticals Group, was 33.2% for the quarter ended October 31, 2002 and
39.1% for same period in fiscal 2001. The decrease was caused primarily by the
higher percentage of sales of the Ester-C® line of products, which had a higher
profit margin than the Palmettx® line of products during the period.

Ascorbic acid is the major
raw material in our Ester-C® products and is
subject to periodic price fluctuations. The price of ascorbic acid
will increase approximately 50% during the fiscal year 2003 for
shipments of ascorbic acid to be received throughout the fiscal year.
This price increase may cause us to raise our selling prices of Ester-C® products by
approximately 10% in order to achieve the same historical margin.

As of October 31, 2002, approximately $3.4 million, (net of an allowance
of $293,000), of saw palmetto products remain in inventory. We do not intend to
purchase additional saw palmetto inventory in the foreseeable future. Recent
sales of saw palmetto products have generated a nominal profit margin and we
have recorded reserves where appropriate to reduce the carrying value of the
inventory to its estimated market value. During the quarter ended October 31,
2002, we reduced the carrying value of the saw palmetto inventory by
approximately $30,000 because the market value of the product was less than its
carrying value.

In the last half of fiscal 2002, we increased the sales price of saw
palmetto oil products. Sales volume in the fiscal fourth quarter decreased as a
result of the price increase. However, sales in first quarter of fiscal 2003
have improved over the previous quarter, though not at the same volume as in
the quarters prior to the price increase. We continue to sell the products at
the higher sales prices. If future sales of saw palmetto products were to
continue at the same rate as those in the first quarter of fiscal 2003, it
would take us approximately two years to sell the remaining inventory. We have
been contacted by several companies interested in purchasing the saw palmetto
inventory in bulk. None of the terms discussed was acceptable to us. While we
have not made a decision to pursue such a sale, if all or a substantial portion
of the inventory is sold in bulk, the ultimate sales price may be substantially
less than the current carrying value of the inventory. The ultimate probable
future economic benefit associated with the saw palmetto inventory is
contingent on our ability to maintain the quality of the products we currently
hold in inventory and to sell our line of saw palmetto products for a price
greater than the carrying value of the inventory.

Pharmaceuticals Group

The Pharmaceuticals Group had net revenues of $4.2 million for the quarter
ended October 31, 2002, approximately equal to the $4.2 million recorded during
the previous year quarter. Sales of the Zilactin® line of products decreased
28.8% in the quarter ended October 31, 2002 when compared to the same quarter
in fiscal 2002 due primarily to increased competition and product availability
related to a change in suppliers. Net sales of the Peridex® product increased
25.5% to $1.4 million in the quarter ended October 31, 2002 due primarily to
increased purchases from domestic wholesale distributors related to certain
sales incentives that were offered during the quarter. Sales for the IST
division (net of intercompany sales) were $892,000 compared to $296,000 last
year. In July 2002, IST received a contract to produce two new products for a
United States based healthcare company. The contract is expected to generate
over $2.5 million in revenue through October 2004.

19



---



##### Table of Contents



Cost of products sold as a percentage of net revenues for the
Pharmaceuticals segment increased to 44.7% during the quarter ended October 31,
2002 from 25.1% in the previous fiscal year quarter. Cost of products sold as a
percentage of net revenues for the Zilactin® line of products increased from
24.5% in the quarter ended October 31, 2001 to 41.6% due to transfer costs
related to the change in suppliers of the products. We do not anticipate
incurring additional transfer costs. Cost of products sold as a percentage of
net revenues for IST, (which represented 21.0% and 7.1% of the Pharmaceutical
Groups revenue during the quarter ended October 31, 2002 and 2001,
respectively) increased from 67.1% in the quarter ended October 31, 2001 to
85.3% in the current year quarter due to (i) a change in the mix of products
sold as the two new products have a higher cost as a percentage of sales price;
and, (ii) an increase in manufacturing costs during the quarter related to the
startup inefficiencies from the installation of new machinery.

Biotechnology Group

During the quarter ended October 31, 2002 and 2001, revenues from sales of
the OraTest® product in the United Kingdom and the Pacific Rim area were
nominal.

Total operating expenses for the Biotechnology segment were $816,000 for
the quarter ended October 31, 2002, a 4.2 % decrease over the $852,000 for the
corresponding period 2002 fiscal quarter. The decrease is due primarily to (i)
reduced marketing and selling expenses related to the sale of the OraTest®
product in the United Kingdom and China of approximately $159,000; and (ii)
reduced general and administrative expenses at the manufacturing facility in
Phoenix, Arizona of approximately $119,000; offset by an increase in clinical
research for the OraTest® product of approximately $249,000.

LIQUIDITY AND CAPITAL RESOURCES

At October 31, 2002, our primary sources of liquidity included cash and
cash equivalents of $1.5 million and the line of credit discussed below.
Working capital decreased to $8.9 million at October 31, 2002 from $10.8
million at July 31, 2002, and the current ratio decreased to 1.9 at October 31,
2002 from 2.5 at July 31, 2002. The primary reason for the decrease in working
capital is the decrease in inventory and the increase in accounts payable and
short-term borrowings during the quarter.

Net cash used in operating activities was $439,000 during the three months
ended October 31, 2002 and was attributable to the net loss of $1.6 million
offset by non-cash items of $585,000 plus changes in operating assets and
liabilities totaling $586,000. Significant changes in operating assets and
liabilities were primarily comprised of (i) an increase in accounts receivable
of $1.8 million related to an increase in sales; (ii) a decrease in inventory
of $1.3 million related primarily to the sales of Nutraceutical products and
lower inventory purchases at Pharmaceuticals; and (iii) an increase in accounts
payable and accrued expenses of $1.8 million.

Net cash used in investing activities was $468,000 related primarily to
capital purchases and patent filings for Zila Nutraceuticals and the OraTest®
product.

Net cash provided by financing activities was $797,000. Significant
changes were: (i) short-term borrowings increased by $954,000 related to
increased borrowings on the line of credit and the financing of several
insurance policies; (ii) the reduction of the bonds payable related to the Zila
Nutraceuticals facility by approximately $107,000; and (iii) the repurchase of
31,010 shares of Zila common stock on the open market.

20



---



##### Table of Contents



At October 31, 2002, we had income tax net operating loss carryforwards of
approximately $22 million, which expire in years 2007 through 2022.

On August 27, 2001, we entered into a Loan and Security Agreement (the
Congress Agreement) with Congress Financial Corporation (Congress) whereby
Congress would provide a $12 million revolving line of credit to us at an
interest rate equal to the prime rate plus 3/4 percent. The amount of funds
available to us from the line of credit is based upon a percentage of the value
of eligible receivables and inventory and was $5.7 million, of which,
borrowings of $648,000 were outstanding at October 31, 2002. The obligations
under the Congress Agreement are collateralized by various assets, including,
but not limited to our trade accounts receivable, inventories, equipment and
intangible assets and of certain of our operating subsidiaries. Zila and all of
its direct and indirect operating subsidiaries guarantee the obligations under
the Congress Agreement. The Congress Agreement expires August 17, 2004; however
amounts due under the line of credit are classified as current because of
certain provisions required by Congress. The Congress Agreement contains a
provision whereby Congress can call for immediate repayment of all amounts due
under the line upon its determination that the Company has incurred a material
adverse change. While we do not believe that any events have occurred during
fiscal 2003 that would constitute a material adverse change, that determination
is solely the responsibility of Congress

Under the Congress Agreement, the Company is required to comply with a
financial covenant based on an adjusted tangible net worth
calculation (as defined).
Effective October 1, 2002, the Company and Congress modified the Congress
Agreement to, among other things, reduce the tangible net worth covenant from
$16 million to $12 million and agreed to execute a new financial covenant that
will be based on EBITDA, (earnings before interest, taxes, depreciation and
amortization) that will be substituted for the modified tangible net worth
covenant. The Company must provide a forecast of its projected income and
expenses for the 2003 calendar year to Congress by January 17, 2003 to form the
basis of the covenant. If the Company does not provide the forecast by that
date or if the parties do not execute an agreement by February 1, 2003, the
Company will be in default under the Congress Agreement. At October 31, 2002,
the Company had tangible net worth of $15.7 million and was in compliance with
the modified tangible net worth covenant.

During October 2000, the Nutraceuticals Group 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. As of October 31,
2002, the Bonds outstanding consisted of $3.9 million Series, A which carried
an interest rate of 2.1%. During the quarter ended October 31, 2002, principal
payments made to the sinking fund repaid the Taxable Series B bonds in full.
The Bonds were marketed and sold by Banc One Capital Markets and carry 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. The letter of credit was issued by Bank One and is guaranteed by
Zila.

On November 10, 1999, we announced that our Board of Directors authorized
the repurchase of up to one million shares of Zila common stock. Purchases are
made on the open market depending on market conditions and other factors.
During the quarter ended October 31, 2002, we repurchased 31,010 shares of our
common stock for $36,253. As of October 31, 2002, 225,100 shares had been
repurchased for $571,373.

On February 5, 2001, we issued 100,000 shares of Series B Convertible
Preferred Stock as part

21



---



##### Table of Contents



of the IST acquisition. 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. We paid dividends of $19,500 during the
quarter ended October 31, 2002 and we have accumulated accrued dividends of
$19,500 as of October 31, 2002.

In December 2001, we acquired the world marketing and distribution rights
(excluding the Pacific Rim) for the FDA approved ViziLite chemiluminescent
technology. We issued 2,000,000 shares of stock that were valued at $2,607,000
for the rights. In addition, we have $277,000 of ViziLite inventory. Actual
sales to date of the ViziLite product have been significantly below our
original plans. We currently have several initiatives underway to stimulate
sales of the ViziLite product during the current fiscal year. If sales do not
reach expected levels, we may have to reduce our carrying value of the assets
related to ViziLite.

Our current intention is to sell the remaining inventory of saw palmetto
products in the normal course of business. However, we have been contacted by
several companies interested in purchasing the saw palmetto inventory in bulk.
None of the terms discussed were acceptable to us. While we have not made
decision to pursue such a sale, if all or substantial portion of the inventory
is sold in bulk, the ultimate sales price may be substantially less than the
current carrying value of the inventory. Factors we will consider in our
determination of the appropriate disposition of the inventory include, but are
not limited to: (i) the overall terms and conditions of formal offers received,
if any; (ii) the expected future market for saw palmetto products; (iii) our
actual operating performance in relation to the fiscal 2003 plan; (iv) the
extent and availability of funds to support the clinical study related to the
OraTest® products; and (v) our internal cost of capital.

We also have approximately $446,000 of Zila® Tolonium Chloride drug
substance, the active ingredient in the OraTest® product, in inventory at our
manufacturing facility in Phoenix, AZ. We intend to realize the value of this
inventory through sales in the U.S., once final approval for the OraTest®
products are received from the FDA, and in Europe and Asia, after utilizing
approximately $126,000 of OraTest® finished product located in the U.K. prior
to the date we expect sales in the United States. The drug substance inventory
currently has expiration dates in 2003 and 2004, which is prior to the date we
expect sales in the United States. Previous testing indicates that the drug
substance product is stable and we expect to be able to extend the expiration
dates of the entire drug substance inventory through the date we expect sales
in the United States. However, no assurance can be given that such future
testing efforts will be successful. In addition, should FDA approval not be
granted or be significantly delayed, it may not be possible for us to recover
the value of this drug substance inventory.

During the third quarter of fiscal 2002, we determined that completion of
the OraTest® Phase III clinical trial will require a substantial number of
additional patients and have been evaluating the number of patients required to
complete the study. The requirement for the larger number of patients is
related to the tumor formation rate within the study population and not to the
efficacy of the OraTest® product Factors that affect the cost and timing of
completion of these milestone dates include but are not limited to: (i) patient
enrollment rates, (ii) tumor formation rate within the study population (iii)
compliance with the study protocol and related monitoring, (iv) level of
funding throughout the study, and (v) protocol modifications.

We have decided to transition the trial from ILEX Oncology Services, Inc.
to a new global contract research organization (CRO). We requested proposals
from several of the largest, highest quality and most prominent CROs with
worldwide capabilities, and received fee quotations back from each. Each CRO
agreed that the current study could be transitioned successfully without
compromising any of our current study data. Based on the foregoing, we are
currently in negotiations

22



---



##### Table of Contents



with a prospective CRO, although the definitive agreement has not yet been
finalized.

In order to support the larger number of patients needed to complete the
study, we intend to increase the rate of funding for the study and the number
of clinical sites, with the aid of a larger, more experienced CRO with access
to clinical sites in high-density oral cancer regions around the world. This
effort is currently underway and we believe that we will have sufficient funds
for the clinical trial for the remainder of the fiscal year. We will, however,
require additional funds to support the OraTest® clinical trial, regulatory,
manufacturing and marketing costs extending beyond fiscal year 2003. We are
currently considering possible financing sources such as strategic partners and
are pursuing funding strategies that if completed would provide significant
funding for the clinical trial. We are also considering the possible
liquidation of certain Zila assets outside our areas of core competency as part
of Zilas new focus on core strengths and objectives. These sales could also
provide significant funding for the clinical trial. There is no assurance that
such funds will be available on terms acceptable to us.

We believe that cash generated from our operations, our investing
activities and the availability of cash under our line of credit are sufficient
to finance our level of operations, the OraTest® clinical trial, anticipated
capital expenditures and the stock repurchase program through fiscal year 2003.
We will require additional funds to support the production and future OraTest®
clinical, regulatory, manufacturing and marketing costs. There can be no
assurances that such funds will be available on terms acceptable to us. If such
funds do not become available on terms acceptable to us, we believe we could
continue to fund the OraTest® clinical trial beyond fiscal year 2003, but at a
slower rate than planned. If the pace of the clinical trial is slowed, it may
result in a reduction of the carrying value of OraTest® related assets. As
stated above, we are considering the possible liquidation of certain Zila
assets outside our areas of core competency as part of Zilas new focus on core
strengths and objectives. These sales could provide significant funding for
the clinical trial.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk primarily from interest rates and from
changes in foreign currency exchange rates.

We have a revolving line of credit with a variable interest rate equal to
three-quarters of one (0.75%) percent per annum in excess of the prime rate
announced by First Union Bank (4.75% at October 31, 2002). At October 31, 2002,
we had borrowings outstanding under this line of credit of $648,000. The impact
of a 10% proportional increase in average interest rates would not be expected
to have a material effect on us since average outstanding balances on the line
are not expected to be significant. We also have long-term debt associated with
the Industrial Development Revenue Bonds that carry a variable interest rate.
The rates are set weekly by Bank One Capital Markets and fluctuate based on
market conditions and were 2.1% and 2.0% at October 31, 2002. A 10%
proportional increase in the average interest rate on the bonds would increase
annual interest expense by less than $10,000.




Item 4. Controls and Procedures

During the 90-day period
prior to the date of the filing of this report, an evaluation was performed
under the supervision and with the participation of our management, including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as
defined in Rule 13a-14 of the Securities Exchange Act of 1934. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective and sufficient
to ensure that we record, process, summarize and report information required to
be disclosed by us in our periodic reports filed under the
Securities Exchange Act of 1934 within the time periods specified by the
Securities and Exchange Commission's rules and forms. Prior to this evaluation and in view of (i) the restatement described in Note 11 to the
Notes to Consolidated Financial Statements (Unaudited), and (ii) the internal control
deficiencies noted by our independent auditors in connection with the annual audit of our financial statements, the Chief Executive
Officer and Chief Financial Officer directed that steps be taken to enhance the understanding
and implementation of our controls and procedures. We intend to continue to examine, refine
and formalize our disclosure and internal controls and procedures.

There have
been no changes in our internal controls or in other factors known to
us that could significantly affect these
controls subsequent to their evaluation.

23



---



##### Table of Contents






Part II  Other Information




ITEM 1.- Legal Proceedings

In connection with the acquisition of patent rights in 1980, the Company
agreed to pay to Dr. James E. Tinnell (Tinnell), the inventor of one of the
Companys treatment compositions, a royalty of 5% of gross sales of the
invention disclosed in his then pending patent application.

In September 2000, counsel advised the Company that its obligation to pay
royalties to Tinnell under the 1980 agreement ceased as of August 25, 1998 when
the patents on the invention expired. In September 2000, the Company gave
notice to Tinnell that the Company would not continue paying such royalties and
requested reimbursement of royalties paid since August 1998. After attempts to
settle the matter failed, the Company 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 has advised the Company that, based on
their investigations and discovery to date, (i) the counterclaim for royalties
is without merit and (ii) the additional counterclaims are meritless and, in
any event, are time-barred by the applicable statutes of limitation. Both Zila
and Tinnell have filed motions for summary judgment, which have been denied.
The Company currently intends to complete pretrial procedures and proceed to
trial.

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 actions will not materially affect the
Companys financial position or results of operations.

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

24



---



##### Table of Contents



ITEM 5. OTHER INFORMATION

Not Applicable




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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

|               |  |                                                                                                                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                        
|               |  |                                                                                                                                                                                                                                                    
|10.1           |  | Severance Agreement
dated as of October 11, 2002 by and between Zila, Inc. and
Joseph and Nancy Hines.*                                                                                                                                            
|10.2           |  | Severance Agreement
dated as of October 11, 2002 by and between Zila, Inc. and
Janice Backus.*                                                                                                                                                     
|99.1           |  | Third amendment dated December 13, 2002 to the Loan and
Security Agreement dated August 17, 2001 by and between Congress
Financial Corporation and Zila, Inc., Zila Pharmaceuticals, Inc.
Ryker Dental of Kentucky, Inc. and Inter-Cal Corporation.
|               |  |                                                                                                                                                                                                                                                    
|99.2           |  | Sarbanes-Oxley Section 906 Certification of the Chief
Executive Officer                                                                                                                                                                            
|               |  |                                                                                                                                                                                                                                                    
|99.3           |  | Sarbanes-Oxley Section 906 Certification of the Chief
Financial Officer
*Incorporated by reference to the Company's Annual Report on
Form 10-K for fiscal year ended July 31, 2002 (as amended
by Form 10-K/A)                                     



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

25



---



##### Table of Contents






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 16, 2002 |  | By:/s/Douglas D. Burkett Ph.D.                                                                           
|      |  |                   |  |                                                                                                          
|      |  |                   |  | Douglas D. Burkett Ph.D.
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)

26



---



##### Table of Contents






CERTIFICATIONS

I, Douglas D. Burkett, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Zila, Incorporated;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3.      Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
|
| | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                                                  |  | 
|------------------------------------------------- |  | 
|Date: December 16, 2002                           |  | 
|                                                  |  | 
|/s/ Douglas D. Burkett Ph. D.                     |  | 
|Douglas D. Burkett Ph. D.
Chief Executive Officer |  | 

27



---



##### Table of Contents



I, Bradley C. Anderson, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Zila,
Incorporated;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
|
| | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                                            |  | 
|------------------------------------------- |  | 
|Date: December 16, 2002                     |  | 
|                                            |  | 
|/s/ Bradley C. Anderson                     |  | 
|Bradley C. Anderson
Chief Financial Officer |  | 

28



---



##### Table of Contents






Exhibit Index

|               |  |                                                                                                                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                        
|               |  |                                                                                                                                                                                                                                                    
|99.1           |  | Third amendment dated December 13, 2002 to the Loan and
Security Agreement dated August 17, 2001 by and between Congress
Financial Corporation and Zila, Inc., Zila Pharmaceuticals, Inc.
Ryker Dental of Kentucky, Inc. and Inter-Cal Corporation.
|               |  |                                                                                                                                                                                                                                                    
|99.2           |  | Sarbanes-Oxley Section 906 Certification of the Chief
Executive Officer                                                                                                                                                                            
|               |  |                                                                                                                                                                                                                                                    
|99.3           |  | Sarbanes-Oxley Section 906 Certification of the Chief
Financial Officer                                                                                                                                                                            

29