During fiscal 2009, our revenues have been negatively impacted as a result of the severity of the global economic downturn and its impact on discretionary spending on our products. Our revenues have also been affected as a result of customer concern about our viability as an ongoing business. Concerns about our financial viability have also contributed to increased turnover in our field sales force and other key staff areas and have led to a reduction in our marketing effectiveness and our reach to new and existing customers. We would expect these factors to cause near term future operating results to be less favorable than our financial results for the fourth quarter of fiscal 2008 and those previously anticipated for fiscal 2009. To address the impact of this revenue decline, during fiscal 2009 we have (i) continued salary reductions for a number of management personnel; (ii) eliminated additional personnel, including an approximately 15% reduction of our field sales force as a result of the realignment of our sales territories; (iii) eliminated the employee stock purchase plan and its associated costs; (iv) furloughed certain manufacturing production personnel; (v) reduced the number of seminar programs and streamlined the cost structure of these programs; and (vi) reduced tradeshow expenditures. Excluding the effect of the $23.2 million non-cash impairment charge for goodwill and other intangible assets recognized during December 2008, these actions significantly narrowed our operating loss over the same periods in the prior year. The impairment loss is more fully described in Note 5, Goodwill and Other Intangible Assets. To address the impact of the economic downturn on our revenues, we continue to identify cost-reduction and working capital initiatives to reduce the impact on future cash flows from operations and results of operations.
While we have continued to execute a number of cost reduction strategies, the decline in our revenues has caused our cash utilization to exceed previously planned levels. As of April 30, 2009, we had approximately $3.1 million of cash and cash equivalents, compared to $2.5 million, $3.2 million and $4.5 million at January 31, 2009, October 31, 2008 and July 31, 2008, respectively. As a result of the reclassification of the Senior Secured Convertible Notes to a current liability, as of April 30, 2009 and January 31, 2009, we had working capital deficits of $5.3 million and $4.3 million, respectively, compared to positive working capital of $5.7 million and $6.6 million at October 31, 2008 and July 31, 2008, respectively. In order to continue as a going concern and fund our current level of operations over the next twelve months, we will require additional funding and need to restructure or retire our Senior Secured Convertible Notes. If we are unable to execute these strategies, we will likely be forced to file for protection under Chapter 11 of the Federal Bankruptcy Code or liquidate the Company under Chapter 7 of the Federal Bankruptcy Code. We have retained financial and legal advisors to assist us in our numerous continuing efforts to restructure our Senior Secured Convertible Notes, raise capital and explore possible strategic opportunities.
Our efforts to seek additional funding have included discussions with numerous potential financial and strategic investors as well as with the holders of the Senior Secured Convertible Notes. All potential investors with whom we have had discussions 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 the current market value of those notes. We are also engaged in discussions and negotiations with other parties regarding a variety of possible strategic transactions, including the possible sale of the Company or substantially all of its assets. One of those parties and the holders of the Senior Secured Convertible Notes have entered into an agreement (a "Note Purchase Agreement") whereby such party has the right, subject to certain conditions and for a limited period of time, to acquire all of the Senior Secured Convertible Notes from the current holders at a significant discount from the $12.0 million principal balance of these notes. The Company is not a party to the Note Purchase Agreement.
We are in compliance with the terms of the Senior Secured Convertible Notes, except for the quarterly interest payments due April 30, 2009 and January 31, 2009, which have not been made as of the date of this filing. The failures to make these payments are events of default under our Senior Secured Convertible Notes. Upon an event of default, the Senior Secured Convertible Notes bear interest at a default rate of 15.0% per annum. Although we have not received a notice of default or acceleration from the note holders as of the date of this filing, which is required prior to any of the principal amount becoming due and payable as a result of such default, we have reclassified the Senior Secured Convertible Notes to current liabilities. Pursuant to the Note Purchase Agreement, the holders of the Senior Secured Convertible Notes have agreed not to exercise their remedies under such notes unless and until the Note Purchase Agreement is terminated. However, there can be no assurance that the current or future note holders will not accelerate amounts due under the Senior Secured Convertible Notes and proceed against their collateral. In the event of acceleration, we would likely be forced to file for protection under Chapter 11 of the Federal Bankruptcy Code or liquidate the Company under Chapter 7 of the Federal Bankruptcy Code, which would likely result in our common stock becoming worthless.
We were unable to issue shares for the April 30, 2009 and January 31, 2009 interest payments because, due to our share price at such time, the number of shares to be issued would have required shareholder approval under applicable NASDAQ rules. Accordingly, as of April 30, 2009, there was approximately $0.7 million of unpaid accrued interest due the holders of the Senior Secured Convertible Notes. In addition, given our current level of cash and cash equivalents, the impact of the global economic downturn on our business and customer concern about our viability as an ongoing business, it is uncertain whether we will have sufficient cash available to pay our future quarterly interest payments due under the Senior Secured Convertible Notes.

As a result of the foregoing, there is substantial doubt about our ability to continue as a going concern. Accordingly, realization values may be substantially different from carrying values as shown, and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should we be unable to continue as a going concern.
Other Key Operating Initiatives
During May 2009, Zila and other experts on oral oncology and oral cancer diagnostics testified at a congressional hearing on innovative technology for Veterans. Legislators were urged to press the U.S. Department of Veterans Affairs to expand the use of ViziLite® Plus for Veterans, who are at a dramatically higher risk of oral cancer. In December 2007, the U.S. Department of Veterans Affairs awarded Zila a five-year contract to market ViziLite®Plus to 58 Veterans Administration dental clinics and 154 Department of Defense dental clinics; however, screens performed using our ViziLite® Plus product by these clinics have not been as numerous as expected since the time this contract was entered into. We believe ViziLite® Plus provides a significant opportunity for Veterans and the early detection of oral abnormalities that could lead to cancer. We believe there is also a significant opportunity for Zila should the clinics covered by the contract with the Department of Defense realize the benefits of ViziLite® Plus for Veterans who utilize these clinics and expand their screening with ViziLite® Plus.
During the second quarter of fiscal 2009, we completed the first phase of the global rollout of our proprietary oral cancer screening product, ViziLite® Plus. Beginning in North America and through our direct sales force, we now market ViziLite® Plus in all 50 states of the U.S., as well as Canada. Since May 2008, we have expanded to Western Europe by forming strategic alliances to distribute ViziLite® Plus in a number of European markets. ViziLite® Plus is now available in the United Kingdom, Ireland, Germany, Spain, Portugal, France and Greece. For the next phase of our expansion, we have formed distribution agreements in other international markets, including Russia and Belarus, where product registration is in process. During February 2009, we furthered this expansion initiative with the selection of Getwell Life Sciences to distribute ViziLite® Plus throughout India. We expect these markets and others in the Pacific Rim region, especially China and India, will form the bulk of our continued global expansion for ViziLite® Plus.
During October 2008, the U.K. Medicines and Healthcare products Regulatory Agency issued an indefinite renewal of the marketing authorization for OraTest®, our proprietary oral cancer diagnostic kit. Under the European Union's ("EU") mutual recognition process, we expect to receive renewal licenses for member states including Finland, Greece, Luxembourg, The Netherlands, Belgium, the U.K. and Portugal. We are seeking marketing partners in the seven EU countries. Adding OraTest® to our international product portfolio provides the opportunity to expand the potential market for our oral cancer screening and testing product franchise. The OraTest® diagnostic kit and ViziLite® Plus are complementary products with distinct indications, which will allow us to market to a more diverse group of healthcare professionals within the EU.
During November 2008, Essex Dental Benefits began offering coverage for ViziLite®Plus examinations. Essex Dental Benefits joins the growing list of premiere and national insurance plans that provide coverage for ViziLite® Plus, which also includes Humana, United Healthcare, Cigna, Guardian, SafeGuard, Northeast Delta Dental and a number of regional plans and self-insured employers. With the addition of Essex Dental Benefits, approximately 25 million lives are part of dental plans that cover oral cancer screening; however, not all dental professionals in these plans have made ViziLite® Plus available to their patients. We are actively working with several large dental plans to co-promote ViziLite® Plus to their national contracted dentist networks. Additionally, there has been an increased focus by Zila sales staff on dentists contracted with dental plans that offer coverage for ViziLite® Plus.

Results of Operations
   The following table summarizes our results of operations and related
statistical information for the three and nine months ended April 30, 2009 and
2008 (dollars in thousands):

                                                       For the Three Months Ended April 30,
                                                       % of                            % of             %
                                       2009          Revenue           2008          Revenue          Change

Net revenues                         $  8,467           100.0 %      $ 11,245           100.0 %        (24.7) %
Cost of products sold                   3,459            40.9           4,438            39.5           (22.1 )


Gross profit                            5,008            59.1           6,807            60.5           (26.4 )

Operating costs and expenses:
Marketing and selling                   3,165            37.4           6,046            53.8           (47.7 )
General and administrative              1,773            20.9           3,281            29.1           (46.0 )
Research and development                   90             1.1             247             2.2           (63.6 )
Depreciation and amortization             308             3.6             952             8.5           (67.6 )


Total operating costs and
expenses                                5,336            63.0          10,526            93.6           (49.3 )


Loss from operations                     (328 )          (3.9 )        (3,719 )         (33.1 )         (91.2 )
Other expense - net                    (1,121 )         (13.2 )          (758 )          (6.7 )          47.9


Loss from continuing operations
before income taxes                    (1,449 )         (17.1 )        (4,477 )         (39.8 )         (67.6 )
Income tax benefit (expense)              (32 )          (0.4 )            34             0.3          (194.1 )


Loss from continuing operations      $ (1,481 )        (17.5) %      $ (4,443 )        (39.5) %         (66.7 )




                                                         For the Nine Months Ended April 30,
                                                        % of                              % of             %
                                       2009            Revenue           2008           Revenue          Change

Net revenues                         $  26,620            100.0 %      $  33,176           100.0 %        (19.8) %
Cost of products sold                   11,006             41.3           13,264            40.0           (17.0 )


Gross profit                            15,614             58.7           19,912            60.0           (21.6 )

Operating costs and expenses:
Marketing and selling                   10,884             40.9           16,564            49.9           (34.3 )
General and administrative               5,810             21.9            9,883            29.8           (41.2 )
Impairment of goodwill and
other intangible assets                 23,193             87.1                -               -
Research and development                   335              1.3            2,237             6.7           (85.0 )
Depreciation and amortization            1,843              6.9            2,811             8.5           (34.4 )


Total operating costs and
expenses                                42,065            158.0           31,495            94.9            33.6


Loss from operations                   (26,451 )          (99.4 )        (11,583 )         (34.9 )         128.4
Other expense - net                     (3,012 )          (11.3 )         (2,155 )          (6.5 )          39.8


Loss from continuing operations
before income taxes                    (29,463 )         (110.7 )        (13,738 )         (41.4 )         114.5
Income tax benefit (expense)               (45 )           (0.1 )             23             0.1          (295.7 )


Loss from continuing operations      $ (29,508 )        (110.8) %      $ (13,715 )        (41.3) %         115.2

Net Revenues
Net revenues were $8.5 million and $11.2 million for the three months ended April 30, 2009 and 2008, respectively, a decrease of $2.7 million or 24.7%. Net revenues were $26.6 million and $33.2 million for the nine months ended April 30, 2009 and 2008, respectively, a decrease of $6.6 million or 19.8%. ViziLite® Plus net revenues decreased to $2.7 million and $8.5 million for the three and nine months ended April 30, 2009, a decrease of 25.5% and 13.1% from the same periods in the previous year, respectively. Also contributing to the decrease in net revenues were lower sales of our Rotadent® Professional Powered Brush and Pro-Select Platinum®ultrasonic scalers. Although we have recently been successful in increasing the utilization of ViziLite® Plus, expanding our international programs and driving increases in the number of insurance companies reimbursing for the ViziLite® Plus examination, the deepening of the global economic downturn and customer concern about our viability as an ongoing business have had a significant negative impact on our business. As discussed above, our business is sensitive to general economic conditions since our products are somewhat discretionary in nature. Gross Profit
Gross profit was $5.0 million and $6.8 million for the three months ended April 30, 2009 and 2008, respectively, a decrease of $1.8 million or 26.4%. Gross profit was $15.6 million and $19.9 million for the nine months ended April 30, 2009 and 2008, respectively, a decrease of $4.3 million or 21.6%. Gross profit as a percentage of net revenues was 59.1% and 60.5% for the three months ended April 30, 2009 and 2008, respectively, and 58.7% and 60.0% for the nine months ended April 30, 2009 and 2008, respectively. Our gross profit margin for the three and nine months ended April 30, 2009 was negatively impacted by selective discounting programs that were implemented in the first half of fiscal 2009 in an effort to stimulate sales and counteract the revenue declines discussed above. At times in fiscal 2009, we have also experienced product cost increases as a result of decreased purchasing volumes and the resulting impact on discounts for products purchased.
Marketing and Selling Expense
Marketing and selling expense was $3.2 million and $6.0 million for the three months ended April 30, 2009 and 2008, respectively, a decrease of $2.8 million or 47.7%. Marketing and selling expense was $10.9 million and $16.6 million for the nine months ended April 30, 2009 and 2008, respectively, a decrease of $5.7 million or 34.3%. The decline in marketing and selling expense for the three and nine months ended April 30, 2009 resulted from the reduction in the level of commissions and bonuses paid to the sales force as a result of reduced sales levels, reduced sales force personnel as a result of a realignment of our sales territories to gain efficiencies and reductions in expenditures in non-direct selling related expenses. Additionally, we have continued the temporary reduction of our marketing expenditures in connection with our profit enhancement initiatives, which include reductions in expenditure levels for tradeshows, seminars and other marketing activities. Concerns about our financial viability have also contributed to increased turnover in our field sales force and other key staff areas and have led to a reduction in our marketing effectiveness and our reach to new and existing customers. General and Administrative Expense
General and administrative expense was $1.8 million and $3.3 million for the three months ended April 30, 2009 and 2008, respectively, a decrease of $1.5 million or 46.0%. General and administrative expense was $5.8 million and $9.9 million for the nine months ended April 30, 2009 and 2008, respectively, a decrease of $4.1 million or 41.2%. The decrease in general and administrative expense primarily relates to profitability initiatives that were implemented during the second half of fiscal 2008 and the first part of fiscal 2009. These profitability initiatives included reducing personnel in our non-selling workforce by approximately 35% through the third quarter of fiscal 2009, the temporary reduction of the salaries of certain management employees, reducing certain other employee benefits and reducing, deferring or eliminating non-critical programs across the organization. Professional fees declined for the three and nine months ended April 30, 2009 as fees incurred in the prior-year for investment banking expenses to explore financing alternatives and Sarbanes Oxley compliance costs were lower in fiscal 2009, but were offset to some extent by increased professional fees associated with analysis of our impairment charge relative to goodwill and other intangible assets, which is described more fully below.

General and administrative expense consists of the following for the three and nine months ended April 30, 2009 and 2008 (in thousands):

                                                 Three Months Ended April 30,                Nine Months Ended April 30,
                                                  2009                  2008                 2009                  2008

Cash basis salaries and benefits              $         696         $       1,300        $       2,176         $       3,572
Audit, accounting and other professional
fees                                                    425                   718                1,302                 1,994
Investment banking fees and shareholder
related expense                                          86                    55                  433                   373
Legal and intellectual property related
fees                                                    147                   253                  477                   905
Insurance                                               113                   135                  338                   384
Non-cash stock-based compensation
expense                                                  65                   344                  246                 1,200
Other general and administrative expense                241                   476                  838                 1,455


Total general and administrative expense      $       1,773         $       3,281        $       5,810         $       9,883

Impairment of Goodwill and Other Intangible Assets We have historically assessed the impairment of goodwill annually in our fourth fiscal quarter, or whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. During fiscal 2009, our revenues have been negatively impacted as a result of the severity of the global economic downturn and its impact on discretionary spending on our products. Our revenues have also been affected as a result of customer concern about our viability as an ongoing business. We would expect these factors to cause near term future operating results to be less favorable than previously anticipated for fiscal 2009. We also experienced a decline in our stock price and a corresponding decline in our market capitalization and enterprise value throughout fiscal 2009. Finally, as of December 2008, we anticipated we would fail to make the interest payment due January 31, 2009 on our Senior Secured Convertible Notes, which is an event of default under such notes. As of the date . . .