“We are making every effort to conserve our cash,” said David Bethune, chairman and chief executive officer of Zila. “We have, among other things, continued salary reductions for a number of management personnel, further reduced headcount throughout the organization, eliminated the employee stock purchase plan and its associated costs, furloughed certain manufacturing production personnel, reduced the number of seminar programs and streamlined the cost structure of these programs, and reduced tradeshow expenditures. As a result of these cost cutting efforts, we substantially narrowed our operating loss, excluding a non-cash impairment charge for goodwill and other intangible assets recorded in the fiscal 2009 second quarter.”

Bethune continued: “In order to continue as an on-going business and fund our operations over the next twelve months, we will require additional funds and need to restructure our senior secured convertible notes. We have had discussions with a number of potential investors, all of whom have required, as a condition of their investment, that the senior secured convertible notes be repaid from the funds provided by the investor(s) and that this repayment be at a substantial discount from the $12.0 million principal outstanding to reflect what they believe to be the current market value of those notes.

“Our business and its value have, in some measure, deteriorated because of the lack of an agreement by the holders of the company’s senior secured convertible notes as to the value of the notes. In addition, we have been unable obtain their approval to pursue a working capital line of credit secured by our inventory and accounts receivable, even though the note agreements provide that such approval is ‘not to be unreasonably withheld.’”

Fiscal 2009 Second Quarter Financial Results

Sales of ViziLite Plus were $2.7 million, against $3.2 million for the second quarter of fiscal 2008. The company attributed the decline in revenues primarily to the global economic downturn and customer concern about our viability as an ongoing business.

Gross profit was $4.7 million, or 56% of net revenues, against $6.2 million, or 60% of net revenues, in the second quarter of fiscal 2008.

Marketing and selling expense decreased 36% to $3.3 million from $5.2 million in the second quarter of fiscal 2008.

General and administrative expense down 42% to $1.8 million from $3.1 million for the second quarter of fiscal 2008, primarily due to headcount and salary reductions, as well as the reduction, deferral or elimination of certain employee benefits and non-critical programs across the organization.

The company recorded a non-cash impairment of goodwill and other intangible assets charge of $23.2 million in connection with the company’s impairment analysis required under US Generally Accepted Accounting Principles and as more fully described in the company’s Form 10-Q for the quarterly period ended January 31, 2009.

Research and development (R&D) expense was $78,000, against $789,000 for the second quarter of fiscal 2008. The decrease in R&D is due to the curtailment of the OraTest regulatory program.

Including the non-cash impairment charge of $23.2 million, equal to $2.23 per share, net loss attributable to common stockholders was $25.3 million, or $2.43 per share, against $4.7 million, or $0.54 per share, for the second quarter of fiscal 2008.

Cash and cash equivalents at January 31, 2009 were $2.5 million against $4.5 million at July 31, 2008. The decrease primarily reflects cash used in operations of $1.5 million, of which $0.3 million resulted from working capital changes.

Recent Events

During the second quarter of fiscal 2009, the company completed the first phase of the global rollout of its proprietary oral cancer screening product, ViziLite Plus. Zila now markets ViziLite Plus in all 50 states of the US, as well as Puerto Rico and Canada. Since May 2008, the company expanded to Western Europe by forming strategic alliances to distribute ViziLite Plus in a number of European markets. Presently, the product is available in the UK, Ireland, Germany, Spain, Portugal, France and Greece. In the next phase of its expansion, the company has entered in distribution agreements in other international markets, including China, India, Russia and Belarus, where product registration is in process. These markets will form the bulk of the company’s continued global expansion for ViziLite Plus.

Six Months Ended January 31, 2009

Net revenues were $18.2 million , against $21.9 million for the first six months of fiscal 2008. Gross profit was $10.6 million, or 58% of net revenues, compared with $13.1 million, or 60% of net revenues, in the comparable period of fiscal 2008. Net loss attributable to common shareholders, which includes a non-cash impairment charge of $23.2 million, equal to $2.28 per share, was $28.1 million, or $2.76 per share, against $9.6 million, or $1.09 per share, in the year ago period.