Document:

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                                                                    EXHIBIT 10-5

                               SECOND EXTENSION TO
                        FIRST LOAN MODIFICATION AGREEMENT

         THIS SECOND EXTENSION TO FIRST LOAN MODIFICATION AGREEMENT ("SECOND
EXTENSION AGREEMENT"), dated effective as of the 29th day of June, 2001
("EFFECTIVE DATE"), is entered into by and among BANK ONE, ARIZONA, NA, a
national banking association ("BANK ONE"), ZILA, INC., a Delaware Corporation
("ZILA"), and each of the following subsidiary entities, directly or indirectly,
of Zila (collectively, the "SUBSIDIARIES"): (i) INTEGRATED DENTAL TECHNOLOGIES,
INC., a California corporation, (ii) RYKER DENTAL OF KENTUCKY, INC., a Kentucky
corporation, (iii) BIO-DENTAL TECHNOLOGIES CORPORATION, a California
corporation, (iv) ZILA PHARMACEUTICALS, INC., a Nevada corporation, (v) ZILA
TECHNOLOGIES, INC., an Arizona corporation, (vi) INTER-CAL CORPORATION, INC., an
Arizona corporation, (vii) OXYCAL LABORATORIES, INCORPORATED, an Arizona
corporation ("OXYCAL"), (viii) OXYCAL EXPORT, INC., a Virgin Islands
corporation, and (ix) ZILA SWAB TECHNOLOGIES, INC., an Arizona corporation. Zila
and the Subsidiaries are collectively referred to herein as the "DEBTORS".

                                    RECITALS:

         A.   Bank One and Zila have entered into the following credit
facilities (collectively, the "LOANS", as amended from time to time): (i) a
certain revolving line of credit in the maximum principal amount of $9,000,000
("LINE OF CREDIT LOAN") pursuant to the Loan Agreement between Zila and Bank One
dated December 1, 2000 ("LOC LOAN AGREEMENT") as evidenced by the Promissory
Note dated December 1, 2000, in the maximum principal amount of $9,000,000
executed by Zila in favor of Bank One ("LINE OF CREDIT PROMISSORY NOTE"); (ii) a
certain construction loan ("PROJECT LOAN"), as evidenced by a certain Project
Note executed by Oxycal in favor of Bank One in the principal amount of
$5,000,000 ("PROJECT NOTE"), in connection with those certain 1999A Bonds and
Taxable 1999B Bonds in the principal amount of $5,000,000 (collectively, the
"BONDS") issued pursuant to a certain Trust Indenture between The Industrial
Development Authority of the County of Yavapai, as Issuer, and Bank One, as
Trustee, dated March 1, 1999 ("BOND TRUST INDENTURE"), two Irrevocable Letters
of Credit (No. STI 13306 and No. STI 13307), each dated April 14, 1999, issued
by Bank One in favor of the owners of the Bonds in an aggregate amount of
$5,061,645.00 ("LETTERS OF CREDIT"), and a certain Reimbursement Agreement
between Bank One and Oxycal dated March 1, 1999 ("REIMBURSEMENT AGREEMENT"); and
(iii) a certain building loan in the initial principal amount of $450,000
("BUILDING LOAN"), as evidenced by a certain Promissory Note in the amount of
$450,000 executed by Zila in favor of Valley National Bank of Arizona (Bank One
was formerly known as Valley National Bank of Arizona), as subsequently amended
by a certain Modification Agreement between Zila and Bank One dated April 15,
1996, and as further amended by a certain Promissory Note Second Modification
Agreement between Zila and Bank One dated February 26, 1998 (as amended from
time to time, the "BUILDING PROMISSORY NOTE").

         B.   Bank One, Zila and the Subsidiaries have entered into a First Loan
Modification Agreement dated May 7, 2001 ("FIRST LOAN MODIFICATION AGREEMENT"),
which, in addition to other modifications with respect to the Loans, provided
for the following: (i) Bank One agreed to forbear from the date of the First
Loan Modification Agreement until May 31, 2001 ("INITIAL
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NONCOMPLIANCE PERIOD") in exercising any remedy with respect to certain covenant
defaults and/or non-compliance events under the Line of Credit Loan
("NONCOMPLIANCE EVENTS"), as set forth in more detail on Exhibit A to the First
Loan Modification Agreement; (ii) the maturity date of the Building Loan was
extended from April 1, 2001 to May 31, 2001; (iii) each of the Subsidiaries
executed documentation to provide Bank One with perfected security interests
that were intended to be provided at the time the LOC Loan Documents were
executed; (iv) the Line of Credit Loan, the Project Loan and the Building Loan
were cross-collateralized and cross-defaulted; and (v) the parties to the First
Loan Modification Agreement agreed to enter into a more comprehensive second
modification agreement to address additional issues and to provide additional
documentation for modifications set forth in the First Loan Modification
Agreement.

         C.   While the second modification agreement is being negotiated and
finalized, Bank One, Zila and each of the Subsidiaries previously entered into
an Extension to First Loan Modification Agreement dated as of May 31, 2001
("FIRST EXTENSION AGREEMENT"), which (i) extended until June 29, 2001 the
Initial Noncompliance Period in which Bank One will forbear in exercising any
remedy with respect to the Noncompliance Events, (ii) extended until June 29,
2001 the maturity date of the Building Loan, and (iii) amended the Loan
Documents in certain other respects as set forth in the First Extension
Agreement.

         D.   Zila and each of the Subsidiaries now desire to enter into a
second extension of the First Loan Modification Agreement (i) to further extend
until July 31, 2001 the Initial Noncompliance Period in which Bank One will
forbear in exercising any remedy with respect to the Noncompliance Events, (ii)
to further extend until July 31, 2001 the maturity date of the Building Loan,
and (iii) to amend the Loan Documents in certain other respects, and Bank One is
willing to agree to such forbearance, extension and amendments, subject to the
terms and conditions set forth in this Second Extension Agreement.

                                   AGREEMENT:

         NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants hereinafter stated, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:

1.  DEFINITIONS.  In addition to other defined terms as set forth in this Second
Extension Agreement, the following terms shall have the meanings set forth below
for purposes of this Second Extension Agreement:

         1.1  "BUILDING LOAN DOCUMENTS" means, collectively, the Building
Promissory Note and all of the other documents and instruments executed in
connection with the Building Loan, together with the First Loan Modification
Agreement, the First Extension Agreement, the Second Extension Agreement and the
documents and instruments executed in connection therewith, as amended from time
to time.

         1.2  "LOAN DOCUMENTS" means, collectively, the LOC Loan Documents, the
Project Loan Documents and the Building Loan Documents.

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         1.3  "LOANS" means, collectively, the Line of Credit Loan, the Project
Loan and the Building Loan, as amended from time to time.

         1.4  "LOC LOAN DOCUMENTS" means, collectively, the LOC Loan Agreement,
the Line of Credit Promissory Note and all of the other documents and
instruments executed in connection with the Line of Credit Loan, together with
the First Loan Modification Agreement, the First Extension Agreement, the Second
Extension Agreement and the documents and instruments executed in connection
therewith, as amended from time to time.

         1.5  "NONCOMPLIANCE PERIOD" means the period commencing on May 7, 2001
and ending on July 31, 2001.

         1.6  "OBLIGATIONS" means, collectively, the obligations of Zila and the
Subsidiaries under the Loan Documents.

         1.7  "PROJECT LOAN DOCUMENTS" means, collectively, the Bonds, the Bond
Trust Indenture, the Letters of Credit, the Reimbursement Agreement, the Project
Note and all of the other documents and instruments executed in connection with
the Project Loan, together with the First Loan Modification Agreement, the First
Extension Agreement, the Second Extension Agreement and the documents and
instruments executed in connection therewith, as amended from time to time.

For purposes of this Second Extension Agreement, all terms used with initial
capital letters, but not otherwise defined in this Second Extension Agreement,
shall have the same meanings given such terms in the First Extension Agreement,
or if not defined therein, in the First Loan Modification Agreement, or if not
defined therein, in the LOC Loan Agreement.

2.  DEBTORS' ACKNOWLEDGMENT OF EXISTING INDEBTEDNESS.

         2.1  Each of the Debtors acknowledges and agrees that the total
outstanding amounts of each of the Loans as of June 28, 2001 are as follows: (i)
an outstanding principal balance of $6,100,000.00 with respect to the Line of
Credit Loan ("LINE OF CREDIT LOAN BALANCE"), (ii) an outstanding obligation
amount of $4,631,404.47 under the Letters of Credit issued in connection with
the Project Loan ("PROJECT LOAN BALANCE"), (iii) an outstanding principal
balance of $278,626.64 with respect to the Building Loan ("BUILDING LOAN
BALANCE"), plus (iv) any accrued and unpaid interest or fees on each of the
Loans and any other costs and expenses of Bank One to the extent due and owing
under the Loan Documents.

         2.2  Each of the Debtors acknowledges that Zila (and Oxycal in the case
of the Project Loan) is truly and justly indebted to Bank One in the amount of
the Line of Credit Loan Balance, plus the Project Loan Balance, plus the
Building Loan Balance, plus accrued and unpaid interest and fees on each of the
Loans, plus all accrued and unpaid costs and expenses that are, under the Loan
Documents, properly chargeable to Zila (or Oxycal) and that have been and in the
future may be incurred by Bank One in connection with the Loans.

         2.3  Each of the Debtors acknowledges that, as of the date hereof, it
has (i) no defense, counterclaim, offsets, cross-complaint, claim or demand of
any nature whatsoever which can be asserted as a basis to seek affirmative
relief or damages from Bank One or to reduce or eliminate

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all or any part of its liability to repay the Loans, and (ii) no other claim
against Bank One with respect to any aspect of the transactions in respect of
which the Loans were made. If any such claims exist they are fully and
irrevocably released as provided in Section 10 hereof.

         2.4  Each of the Debtors agrees that Bank One has fully performed all
obligations that it may have had or now has to Zila and the Subsidiaries with
respect to the Loans, and that except as expressly set forth herein, Bank One's
obligation to make additional Advances under the Line of Credit Loan is
conditioned upon the satisfaction of all conditions precedent for such Advances
as set forth in the LOC Loan Agreement, as amended by the First Loan
Modification Agreement and as further amended by this Second Extension
Agreement.

3.  AMENDMENTS TO LOAN DOCUMENTS. Each of the parties hereto agrees that the
First Loan Modification Agreement, as amended by the First Extension Agreement,
is further amended as set forth below and that the other Loan Documents are
deemed amended in all respects to the extent necessary to accomplish the
following changes:

         3.1  Further Extension of Noncompliance Period. The definition of
"Noncompliance Period" in Section 1.5 of the First Loan Modification Agreement
is hereby amended in its entirety to read as follows:

              1.5  "NONCOMPLIANCE PERIOD" means the period commencing on May 7,
2001 and ending on July 31, 2001.

         3.2  Further Extension of Maturity Date of Building Loan. Section 4.1
of the First Loan Modification Agreement is hereby amended by substituting "July
31, 2001" for "June 29, 2001" ("May 31, 2001" in the First Loan Modification
Agreement prior to the execution of the First Extension Agreement) as the
maturity date of Building Loan.

         3.3  Committed Sum. Section 4.2(a) of the First Loan Modification
Agreement is hereby amended in its entirety to read as follows:

              (a)  The "Committed Sum" as defined in the LOC Loan Agreement
         shall be $7,250,000.00 beginning on May 31, 2001, and shall be reduced
         to $6,900,000.00 beginning on June 29, 2001.

4.  REAFFIRMATION OF EXISTING SECURITY INTERESTS. Each of the Debtors hereby
confirms and agrees that Bank One's security interests in the assets of Zila and
the Subsidiaries and all of the collateral previously pledged to Bank One
pursuant to the Loan Documents shall continue to secure the payment and
performance of all of the Obligations to Bank One.

5.  ADDITIONAL AGREEMENTS.  As material inducements to Bank One to enter into
this Second Extension Agreement, the parties hereto agree as follows:

         5.1  Bi-Weekly Borrowing Base Information. Zila and each of the
Subsidiaries agrees that, notwithstanding any other provision to the contrary
herein or in the other Loan Documents, by Wednesday of the week following each
two week period, Zila will deliver to Lender a bi-weekly borrowing base
certificate as of Friday of the prior week, such certificate to be in form and
detail satisfactory to Lender and executed by the chief financial officer of
Zila or other

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officer or person acceptable to Lender, together with such supporting
documentation as Lender may request. Such supporting documentation will include,
without limitation, an aging and listing of all accounts receivable, which
itemizes each account debtor by name, states the total amount payable to Zila
and the Subsidiaries and contains a breakdown indicating future amounts due and
when due, current amounts due, amounts 30-59 days past due, amounts 60-89 days
past due, and amounts 90 or more days past due, and reflecting any credit
adjustments, returns and allowances.

         5.2  Ratification of Loan Documents. All terms, conditions and
provisions of the First Loan Modification Agreement, as amended by the First
Extension Agreement, and the other Loan Documents, as previously amended, are
hereby reaffirmed, ratified and continued in full force and effect and shall
remain unaffected and unchanged except as specifically amended by this Second
Extension Agreement and any documents and instruments executed in connection
herewith.

6.  REPRESENTATIONS, WARRANTIES, ACKNOWLEDGEMENTS AND AGREEMENTS OF DEBTORS. As
material inducements to Bank One to enter into this Second Extension Agreement,
and acknowledging Bank One's reliance upon the truth and accuracy thereof, each
of the Debtors represents, warrants, acknowledges and agrees that:

         6.1  The recitals set forth above are true and correct.

         6.2  All financial statements and other information delivered to Bank
One by or on behalf of Zila or the Subsidiaries in connection with this Second
Extension Agreement were true and correct in all material respects as of the
respective dates thereof and as of the date of this Second Extension Agreement.

         6.3  The Loans are just and owing.

         6.4  The obligation of Zila to repay the Loans, together with all
accrued and unpaid interest thereon, and all other amounts properly chargeable
to the Debtors under the Loan Documents, is absolute and unconditional, each of
the guaranties of the Subsidiaries with respect to the indebtedness owed to Bank
One is absolute and unconditional, and there exists no claim, right of set off
or recoupment, counterclaim or defense of any nature whatsoever to the payment
and performance of the Obligations nor the Subsidiaries' guaranties with respect
to the Obligations. The Loan Documents, including, without limitation, the Line
of Credit Promissory Note, the Building Promissory Note, the Project Note, the
Reimbursement Agreement and the guaranties of the Subsidiaries, represent valid,
enforceable and collectible obligations of the Debtors, subject to general
principles of equity and bankruptcy, insolvency, reorganization, moratorium and
similar laws relating to or affecting the rights of creditors generally.

         6.5  To such Debtor's knowledge, the execution, delivery and
performance of this Second Extension Agreement (and the documents related
hereto) by the Debtors do not and will not (i) violate any law, rule, regulation
or court order to which any Debtor is subject, (ii) conflict with or result in a
breach of the articles of incorporation or bylaws of any Debtor or any agreement
or instrument to which any Debtor is a party or by which its properties are
bound, or (iii) result in the creation or imposition of any lien, security
interest or encumbrance on any property of any Debtor, whether now owned or
hereafter acquired, other than liens in favor of Bank One.

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         6.6  Such Debtor has consulted with counsel and with such other experts
and advisors as it has deemed necessary in connection with the negotiation,
execution and delivery of this Second Extension Agreement and the related
documents. This Second Extension Agreement and the related documents shall be
construed without regard to any presumption or rule requiring that it be
construed against the party causing this Second Extension Agreement or any part
hereof to be drafted.

7.       COSTS AND EXPENSES OF LOAN MODIFICATION.

         7.1  Zila agrees to pay to Bank One a modification fee in the amount of
Five Thousand Dollars ($5,000.00) ("MODIFICATION FEE"), such Modification Fee to
be paid to Lender contemporaneously with the closing of this Second Extension
Agreement.

         7.2  Zila agrees to pay to Bank One all costs and expenses incurred by
Bank One in connection with this Second Extension Agreement, including, without
limitation, reasonable attorneys' fees, recording fees, filing fees and all
other costs and expenses incurred.

         7.3  Zila agrees to pay to Bank One contemporaneously with the closing
of this Second Extension Agreement the legal fees and expenses of Bank One's
outside legal counsel in the amount of $19,709.00 incurred by Bank One in
connection with the documentation, execution and closing of the First Loan
Modification Agreement.

8.  CONDITIONS PRECEDENT TO EFFECTIVENESS.  The effectiveness of this Second
Extension Agreement is subject to full and complete satisfaction of all of the
following conditions precedent:

         8.1  Bank One shall have received this Second Extension Agreement duly
executed by each of the Debtors.

         8.2  Bank One shall have received payment of the Modification Fee
described in Section 7.1 above.

         8.3  Bank One shall have received payment of the legal fees and
expenses described in Section 7.3 above.

9.  NO WAIVER OF DEFAULTS. This Second Extension Agreement in no way acts as a
waiver of any default of any Debtor (other than the Noncompliance Events during
the Noncompliance Period) or as a release or relinquishment of any of the
existing liens, security interests, rights or remedies securing payment and
performance of the Obligations or the enforcement thereof. Such liens, security
interests, rights and remedies are hereby ratified, confirmed, preserved,
renewed and extended by each of the Debtors in all respects.

10. RELEASE OF ALL CLAIMS AND WAIVER. Each of the Debtors hereby releases,
remises, acquits and forever discharges Bank One and Bank One's employees,
agents, representatives, consultants, attorneys, fiduciaries, servants,
officers, directors, partners, predecessors, successors and assigns, subsidiary
corporations, parent corporations, and related corporate divisions (all of the
foregoing hereinafter called the "RELEASED PARTIES"), from any and all actions
and causes of action, judgments, executions, suits, debts, claims, demands,
liabilities, obligations, damages and

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expenses of any and every character, known or unknown, direct and/or indirect,
at law or in equity, of whatsoever kind or nature, whether heretofore or
hereafter arising, for or because of any matter or things done, omitted or
suffered to be done by any of the Released Parties prior to and including the
date and execution hereof, arising out of or in any way connected with the
Loans, this Second Extension Agreement or the other Loan Documents (all of the
foregoing hereinafter called the "RELEASED MATTERS"). Each of the Debtors
acknowledges that the agreements herein are intended to be in full satisfaction
of all or any alleged injuries or damages arising in connection with the
Released Matters. Each of the Debtors represents and warrants to Bank One that
it has not purported to transfer, assign or otherwise convey any of its right,
title or interest in any Released Matter to any other person and that the
foregoing constitutes a full and complete release of all Released Matters.

11. COMPLETE AGREEMENT;  NO FUTURE FORBEARANCE OR MODIFICATION GRANTED.

         11.1 Complete Agreement. Notwithstanding anything to the contrary
contained herein or in any other instrument executed by the parties and
notwithstanding any other action or conduct undertaken by the parties on or
before the date hereof, the agreements, covenants and provisions contained
herein and in the First Loan Modification Agreement, as amended by the First
Extension Agreement, shall constitute the only evidence of Bank One's agreement
to forbear or to modify the Loan Documents in connection with such forbearance.
Accordingly, no express or implied consent to any further forbearances or
modifications shall be inferred or implied by Bank One's execution of this
Second Extension Agreement. The Loan Documents, including, without limitation,
the First Loan Modification Agreement, the First Extension Agreement and this
Second Extension Agreement, together with any documents executed in connection
herewith, constitute the entire agreement and understanding among the parties
relating to the subject matter hereof, and supersedes all prior proposals,
negotiations, agreements and understandings relating to such subject matter. In
entering into this Second Extension Agreement, each of the Debtors acknowledges
that it is relying on no statement, representation, warranty, covenant or
agreement of any kind made by Bank One or any employee or agent of Bank One,
except for the agreements of Bank One set forth herein.

         11.2 No Future Forbearance or Modification Granted. Further, Bank One's
execution of this Second Extension Agreement shall not constitute a waiver
(either express or implied) of the requirement that any future forbearance under
or modification of any Loan Document shall require the express written approval
of Bank One. No such approval (either express or implied) has been given as of
the date hereof.

12. EFFECT AS A MODIFICATION AGREEMENT. Other than as specifically set forth
herein, the remaining terms of the Loan Documents shall remain in full force and
effect, including, without limitation, the First Loan Modification Agreement, as
amended by the First Extension Agreement, and all guaranties executed by the
Subsidiaries in favor of Bank One. Notwithstanding anything to the contrary
contained in the Loan Documents, in the event of a conflict between the terms of
this Second Extension Agreement (on the one hand) and any Loan Document (on the
other hand), the terms of this Second Extension Agreement shall control. Nothing
contained in this Second Extension Agreement is intended to or shall be
construed as relieving any person or entity, whether a party to this Second
Extension Agreement or not, of any of such person's or entity's obligations to
Bank One.

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13. CONSENT AND RATIFICATION BY GUARANTORS. Each of the Subsidiaries
acknowledges that, on or about December 1, 2000 (or subsequent thereto), it
executed and delivered to Bank One a Commercial Guaranty for the benefit of Bank
One pursuant to which it absolutely and unconditionally guaranteed payment of
all indebtedness of Zila to Bank One, whether then existing or later incurred or
created, and Oxycal acknowledges that on or about March 1, 1999, it executed and
delivered to Bank One an Unconditional Guarantee of Payment with respect to its
obligations under the Reimbursement Agreement. Each of the Subsidiaries
acknowledges, agrees and warrants that: (i) Bank One's rights under such
guaranties shall not be adversely affected by the execution of this Second
Extension Agreement or any other documents executed in connection herewith; (ii)
such guaranties shall remain in full force and effect, and all references in
such guaranties to the Loan Documents (regardless of the precise form of such
references) are deemed amended to refer to the Loan Documents as amended; and
(iii) such Subsidiary's guaranty, as amended, is hereby ratified and reaffirmed
by such Subsidiary.

14. FACSIMILE AND COUNTERPART EXECUTION. Any signature delivered by a party by
facsimile transmission shall be deemed an original signature hereto, and this
Second Extension Agreement may be executed in counterparts, all of which shall
constitute one agreement.

15. BENEFIT OF AGREEMENT. This Second Extension Agreement shall be binding upon
and inure to the benefit of and be enforceable by the parties hereto and their
respective successors and assigns. No other person or entity is entitled to
claim any right or benefit hereunder, including, without limitation, the status
of a third-party beneficiary of this Second Extension Agreement.

         IN WITNESS WHEREOF, the parties hereto have executed this Second
Extension Agreement effective as of the day, month and year first above written.

                        "ZILA":            ZILA, INC.,
                                           a Delaware corporation

                                           By: /s/ Joseph Hines
                                           Name: Joseph Hines
                                           Title: President

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<PAGE>   9
                        "SUBSIDIARIES":    Integrated Dental Technologies, Inc.,
                                           a California corporation

                                           By: /s/ Joseph Hines
                                           Name: Joseph Hines
                                           Title: Chairman

                                           Ryder Dental of Kentucky, Inc.,
                                           a Kentucky corporation

                                           By: /s/ Joseph Hines
                                           Name: Joseph Hines
                                           Title: Chairman

                                           Bio-Dental Technologies Corporation,
                                           a California corporation

                                           By: /s/ Joseph Hines
                                           Name: Joseph Hines
                                           Title: Chairman

                                           Zila Pharmaceuticals, Inc.,
                                           a Nevada corporation

                                           By: /s/ Joseph Hines
                                           Name: Joseph Hines
                                           Title: President

                                           Zila Technologies, Inc.,
                                           an Arizona corporation

                                           By: /s/ Joseph Hines
                                           Name: Joseph Hines
                                           Title: President

                                           Inter-Cal Corporation, Inc.,
                                           an Arizona corporation

                                           By: /s/ Joseph Hines
                                           Name: Joseph Hines
                                           Title: Chairman

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<PAGE>   10
                        "SUBSIDIARIES":    Oxycal Laboratories, Incorporated,
                            (Cont'd)       an Arizona corporation

                                           By: /s/ Joseph Hines
                                           Name: Joseph Hines
                                           Title: Chairman

                                           Oxycal Export, Inc.,
                                           a Virgin Islands corporation

                                           By: /s/ Joseph Hines
                                           Name: Joseph Hines
                                           Title: Chairman

                                           Zila Swab Technologies, Inc.,
                                           an Arizona corporation

                                           By: /s/ Joseph Hines
                                           Name: Joseph Hines
                                           Title: Chairman

                        "BANK ONE"         Bank One, Arizona, NA,
                                           a national banking association

                                           By: /s/ Vincent Orgeron
                                           Name: Vincent Orgeron
                                           Title: Vice President

10<PAGE>

                                                                   Exhibit 10.25

                                                    430 Ferguson Drive
                                                    Mountain View, CA 94043-5272
                                                    650.960.3000
[LOGO] OF CATALYTICA ENERGY SYSTEMS                 650.965.4345 fax
                                                    www.CatalyticaEnergy.com
--------------------------------------------------------------------------------

                         CONSULTING SERVICES AGREEMENT
                         -----------------------------

     This agreement made and entered into and effective as of the 1/st/ day of
January 2001, by and among John A. Urquhart,
hereinafter called "Consultant", Catalytic Energy Systems Inc, located at 430
Ferguson Drive, Mountain View, California, 94043;

                              W I T N E S S E T H :
                              - - - - - - - - - -

     WHEREAS, Catalytic Energy Systems Inc, (collectively referred to herein as
the "Clients", are desirous of retaining Consultant on the terms and conditions,
and for the consideration hereinafter set forth; and

     WHEREAS, Consultant is desirous of providing consulting services to the
Clients on such terms and conditions and for such consideration;

     NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties do hereby agree as follows:

     (1)  Term: This agreement will commence on January 1, 2001 and shall extend
          ----
          through December 31, 2001 (the "Term"). The Term of this Agreement may
          be extended by the written agreement of the parties.

     (2)  Position and Services:
          ---------------------

          A.   When requested by the Clients, Consultant will consult with
               senior officers of the Clients regarding the development and
               implementation of an integrated strategic business plan and
               regarding such other matters concerning the Clients' business and
               operations as they may request from time to time during the term
               of this Agreement.
               The services to be provided by Consultant pursuant to paragraph A
               of this Agreement are personal to Consultant and may not be
               assigned By Consultant.

     (3)  Compensation and Benefits:
          -------------------------

          A.   During the term of this Agreement, Consultant shall be paid a fee
               Of Twenty Five Thousand Dollars ($25,000.) to be paid on a
               quarterly basis at $6250.00 per quarter (ie; March, June,
               September, December.
          B.   Company shall pay Consultant for all reasonable travel and
               transportation expenses, actually incurred by Consultant in
               performance of services requested by the Clients under this
               Agreement, as authorized and approved in writing by the Chairman
               or the President of the Company.

                                                                 [LOGO OF XONON]

<PAGE>

Page Two

     (4)  Confidentiality of Clients' Business:  Consultant acknowledges that
          ------------------------------------
Clients' business is highly competitive and that Clients' books, records and
documents, clients' technical information concerning their products, equipment,
services, and processes, procurement procedures and pricing techniques, the
names of and other information (such as credit and financial data) concerning
Clients' customers and business affiliates, all comprise confidential business
information and trade secrets of the Clients which are valuable, special, and
unique proprietary assets of the Clients.  Consultant further acknowledges that
protection of Clients' confidential business information and trade secrets
against unauthorized disclosure and use is of critical importance to the Clients
in maintaining their competitive position.  Accordingly, Consultant hereby
agrees that consultant will not, at any time during or after the term of this
Agreement, make any unauthorized disclosure of any confidential business
information or trade secrets of the Clients, or make any use thereof, except for
the benefit of, and on behalf of, the Clients.  However, Consultant,s obligation
under this Section 4 shall not extend to information which is or becomes part of
the public domain or is available to the public by publication or otherwise than
through the Consultant, nor to information given through testimony under oath
that may be required by a court of law or pursuant to law.  The provisions of
this Section 4 shall survive the termination of this Agreement.

     (5)  Conflict of Interest:  Consultant agrees to use Consultant's best
          --------------------
          efforts, skill and abilities so long as Consultant's services are
          retained hereunder to promote the best interest of the Clients and
          their business. As part of the consideration for the compensation to
          be paid to Consultant hereunder, and as an additional incentive for
          the Clients to enter into this Agreement, the Clients and Consultant
          agree to the noncompetitive provisions of this Section (5). During the
          Term of this Agreement, Consultant agrees that, unless prior written
          approval of the Chairman of Company, or other officer of Company
          designated by the Chairman, is obtained, Consultant will not directly
          or indirectly for Consultant or for others;

          (i)  conduct, advise, counsel, or otherwise assist any competitor,
               customer or supplier of the Clients or any affiliate which, in
               any manner, would have, or is likely to have, an adverse effect
               upon the Clients or any affiliate:;

          (ii) consult, advise, counsel, or otherwise assist any Federal or
               State regulatory agency on any matter or in a regulatory
               proceeding which, in any manner, would have, or is likely to
               have, an adverse affect upon the Clients or any affiliates;

               Consultant understands that the foregoing restrictions may limit
          Consultants ability to engage in a business similar to Clients'
          business during the period provided for above, but acknowledges that
          Consultant will receive sufficiently high renumeration and other
          benefits from the Clients hereunder to justify such restriction. The
          Clients shall be entitled to enforce the provisions of this Section
          (5) by resorting to appropriate legal and equitable action.

                                       2
<PAGE>

Page Three

     (6)  Idemnification:
          --------------

          (A)  Consultant hereby indemnifies and agrees to protect, defend, and
               hold harmless the Clients, their directors, officers, and
               employees from and against all claims, suits, demands, damages,
               losses, costs and expenses brought by any person firm, or
               corporation for (i) injuries to or the death of Consultant, or
               employees and agents of the Consultant, or damage to or loss of
               property of Consultant, or employees and agents of Consultant
               arising from or in connection with Consultant's performance of
               services under this Agreement, including the sole or contributory
               negligence of the Clients, and (ii) injuries to or the death of
               third parties, or damage to or loss of property or third parties
               arising from or in accordance with Consultant's gross negligence
               or willful misconduct.

          (B)  The Clients hereby indemnify and agree to protect, defend, and
               hold harmless Consultant, Consultant's agents and employees from
               and against all claims, suits, demands, damages, losses, costs
               and expenses brought by any person, firm, or corporation for
               injuries to or the death of any employees of the Clients, or
               damage to or loss of property of the Clients arising from
               Clients' negligence, including the contributory negligence of
               Consultant.

     (7)  Independent Contractor:
          ----------------------

          (A)  The parties hereto agree that the services rendered by Consultant
               in the fulfillment of the terms and obligations of this Agreement
               shall be as an independent contractor and not as an employee, and
               with respect thereto, Consultant is not entitled to the benefits
               provided by Clients to their employees including, but not limited
               to, group insurance and participation in Client's employee
               benefit and pension plans.

          (B)  Consultant shall be responsible for payment of all taxes
               including Federal, State, and local taxes arising out of
               Consultant's activities in accordance with this contract,
               including by way of illustration but not limitation, Federal and
               State income tax, Social Security tax, Unemployment Insurance
               taxes, and any other taxes or business license fees as required.

<PAGE>

Page Four

     (8)  Notices:  Except as otherwise provided in this Agreement, all notices
          -------
required or permitted by the terms hereof shall be sent by Certified Mail to
following address if sent to the Clients, then to:

                        Catalytic Energy Systems, Inc.
                        430 Ferguson Drive
                        Mountain View, California, 94043

          and if sent to Consultant, to Consultant's address set forth at the
          beginning of this Agreement.

     (9)  Entire Agreement; Modifications:   This Agreement constitutes the
          -------------------------------
entire agreement of the parties with regard to the subject matter hereof,
supercedes any and all prior agreements with respect to Consultant's engagement
by Company and contains all of the covenants, promises, representations,
warranties and agreements between the parties with respect to Consultant's
engagement hereunder. Each party to this Agreement acknowledges that no
representation, inducement, promise or agreement, oral or written, has been made
by any party, which is not embodied herein, and that no agreement, statement, or
promise relating the engagement of Consultant hereunder, which is not contained
in this Agreement shall be valid or binding. Any modification of this Agreement
will be effective only if it is in writing and signed by each of the parties.

                                              JOHN A. URQUHART

                                              /s/ John A. Urquhart
                                              --------------------------------

                                              CATALYTIC ENERGY SERVICES, INC.

                                              By: /s/ Craig N. Kitchen
                                                 -----------------------------
                                              Name:
                                              Title:

<PAGE>

                              Employee Invention
                              ------------------

                                      and

                      Confidential Information Agreement
                      ----------------------------------

     IN CONSIDERATION of my employment by Catalytica, Inc. ("Catalytica)" and
the compensation to be paid to me in connection with such employment:

     1.  I will promptly disclose to Catalytica in writing all inventions
(including new contributions, concept ideas, developments, discoveries, and
improvements thereof of know-how related thereto, whether patentable or not)
conceived or made by me, alone or with others,while employed by Catalytica. I
will not disclose to Catalytica or induce Catalytica to use any inventions or
confidential information belonging to others, nor will I use, directly or
indirectly, inventions or confidential information belonging to others,
including any previous employer, in my performance of work for Catalytica.

     2.  I will assign and do hereby assign to Catalytica my entire rights to
each invention described in Paragraph 1, and I will assist Catalytica, at its
expense, to obtain, renew, and enforce patents for the inventions in all
countries and will execute, acknowledge, and deliver all documents necessary or
desirable for vesting in Catalytica all my rights, title and interest in and to
the inventions, and in and to Letters Patents of the United States and other
countries. Catalytica and I agree that this Paragraph 2 shall not apply to
inventions that qualify fully under the provisions of California Labor Code,
2870, a copy of which is attached to this Agreement and incorporated herein by
this reference.

     3.  Because of my employment by Catalytica, I may have access to and
acquire technologies, know-how, or other information of a confidential nature
concerning Catalytica experimental and development work, trade secrets, secret
procedures, business matters or affairs, including, but not limited to,
information relating to inventions, disclosures, processes, systems, methods,
formulas, patents, patent applications, machinery, materials, research
activities and plans, cost of production, contract forms, prices, volume of
sales, promotional methods, and lists of names or classes of customers. I will
not disclose any such information to any person or entity either during or
subsequent to my employment, without Catalytica's prior written consent, except
to such an extent as may be necessary in

                                                                Catalytica, Inc.
--------------------------------------------------------------------------------
<PAGE>

the ordinary course of performing my duties as an employee of Catalytica. I
understand that upon written request Catalytica will advise me in writing as to
whether any specific item of information is classified by Catalytica as being
confidential and, in the absence of such request, all such information shall be
deemed confidential. Information shall, for purposes of this Agreement, be
considered to be confidential if not known by the trade generally, even though
such information has been disclosed to one or more third parties pursuant to
distribution agreements, joint research agreements, or other agreements entered
into by Catalytica or any of its affiliates.

     4.   "Confidential Information" means information disclosed to me or known
to me as a consequence of or through my employment by Catalytica, whether or not
related to my duties at Catalytica, and includes trade secrets or any other
like information of value relating to the business and/or field of interest of
Catalytica or of any corporation, firm, or partnership directly or indirectly
controlled or by controlling Catalytica, or in which any the aforesaid have more
than twenty-five percent (25%) ownership interest.

          (a)  I shall use my best efforts and exercise utmost diligence to
protect and guard Confidential Information. Except, as required in my duties to
Catalytica, I will never directly, indirectly, or otherwise use, disseminate,
disclose, lecture upon, or publish articles concerning Confidential Information.

          (b)  I shall not, for my account or as an officer, member employee,
consultant, representative, or advisor of another, during my employment by
Catalytica and thereafter, for any reason whatsoever, use Confidential
Information in engineering, development, manufacture, research, or sales
relating to any compound, product, equipment, process, or material that is or
was involved in any performed at any time by me for Catalytica. However, the
foregoing provision shall not prohibit me from engaging in any work at any time
after leaving the employ of Catalytica provided that Confidential Information
will not be involved in such work. The provisions of this Paragraph 4(b) shall
not be construed as limited to any extent the continuing obligation of me
pursuant to the provisions of Paragraph 4(a).

     5.   I represent that to the best of my knowledge, there is no other
contract to assign inventions that is now in existence between myself and any
other person,

                                                                Catalytica, Inc.
--------------------------------------------------------------------------------

                                      -2-
<PAGE>

corporation, or partnership, unless I have so indicated on the back of this
Agreement and unless a copy of any such other contract is attached hereto.

     6.   Upon termination of employment with Catalytica for any reason, I will
turn over to Catalytica all notes, memoranda, records, reports, drawings,
blueprints, manuals, materials, and data containing Confidential Information of
Catalytica including all copies thereof, that I may then have in my possession
or under my control. I may retain any notes, memoranda, records, reports,
drawings, blueprints, manuals, materials, and data which belonged to me at the
time of commencement of my employment with Catalytica and, to the extent of
same, do not contain Confidential Information, any reprints, journal articles
and meeting proceedings accumulated by me while at Catalytica.

     7.   It is contemplated that ownership of certain inventions falling within
the scope of this Agreement may be deemed by Catalytica unnecessary to the
furtherance of its business. On notice in writing to this effect, designating
the invention signed by an officer of Catalytica, title to the designated
inventions shall revert to me; provided, however, that such invention, alienated
by Catalytica prior to the date of such notice , shall not be affected by such
reversion of title, and provided further that Catalytica and its successors in
business shall retain an irrevocable, non-exclusive, royalty-free right and
license to make, have made for it, sell, and use in connection with its own
business embodiments or practices of all such inventions as are designated by
Catalytica.

     8.   This Agreement shall be governed by the laws of the State of
California. Each covenant shall be independent and separable from all other
covenants, and the invalidity of a covenant shall not affect the enforceability
of any of the other covenants. For purposes of this Agreement, the business of
Catalytica shall include the business of any corporation, firm, or partnership,
directly or indirectly controlled by or controlling Catalytica or in which any
of the foregoing including Catalytica, have more than twenty-five percent (25%)
controlling interest. For any violation of these covenants, a restraining order
and/or an injunction may be issued against me in addition to any other rights
Catalytica may have. In the event Catalytica is successful in any suit or
proceeding brought or instituted by Catalytica against me to enforce any of
these covenants or on accounts of any damages sustained by Catalytica by reason
of my violation of any of these covenants, I will pay to Catalytica in addition
to other costs and damages,

                                                                Catalytica, Inc.
--------------------------------------------------------------------------------

                                      -8-

<PAGE>

reasonable attorneys' fees to be fixed by the Court. This Agreement shall inure
to benefit of any successor or assignee of Catalytica and shall be binding upon
my heirs, administrations, and representative.

     Signed this 15 day of January 2001, effective from and after the date of my
employment by Catalytica.

                                               EMPLOYEE

                                                 /s/ J A Urquhart
                                               -------------------------------
                                                   Signature

                                                     John A. Urquhart
                                               -------------------------------
                                                   Print Name

                                               _______________________________
                                                   Street, Apt, No.

                                               _______________________________
                                                   City, State, Zip Code

                                                                Catalytica, Inc.
--------------------------------------------------------------------------------

                                      -4-

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