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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004

----------

FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transaction period from _______ to ________

Commission File No. 0-27646

MATRIXX INITIATIVES, INC.
(Name of business issuer in its charter)

DELAWARE 87-0482806
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

2375 E. Camelback Road, Suite 500
Phoenix, AZ 85016
(602) 387-5353
(Address of principal executive offices,
Issuer's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
Common Stock, $.001 par value Nasdaq National Market

Indicate by check mark whether the Registrant (1) 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. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K, is not to be contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]

As of March 20, 2003, 9,441,651 shares of the Registrant's Common Stock
were outstanding. As of March 20, 2003, the market value of the Registrant's
Common Stock (based on the closing price of the shares on the Nasdaq National
Market), excluding shares held by affiliates, was approximately $71 million.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy statement prepared in
connection with the Registrant's 2003 annual meeting of stockholders are
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Form
10-K.

TABLE OF CONTENTS

PAGE

PART I ..................................................................... 1

ITEM 1. BUSINESS.......................................................... 1
ITEM 2. DESCRIPTION OF PROPERTY........................................... 6
ITEM 3. LEGAL PROCEEDINGS................................................. 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 6
EXECUTIVE OFFICERS OF MATRIXX............................................. 6

PART II .................................................................... 7

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......... 7
ITEM 6. SELECTED FINANCIAL DATA........................................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .......................................... 9
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS AND
RISK FACTORS ........................................................... 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ....................................... 22

PART III ................................................................... 22

ITEM 10. INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS.......... 22
ITEM 11. EXECUTIVE COMPENSATION........................................... 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 24
ITEM 14. CONTROLS AND PROCEDURES.......................................... 24
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.. 24

SIGNATURES ................................................................. 56

CERTIFICATIONS ............................................................. 57

Unless otherwise indicated in this Form 10-K, "Matrixx," "us," "we," "our",
"the Company" and similar terms refer to Matrixx Initiatives, Inc. and its
subsidiaries. "Zicam" is a registered trademark of our subsidiary, Zicam, LLC,
and the Matrixx name and logo are trademarks of the Company.

-i-

PART I

ITEM 1. BUSINESS

INTRODUCTION

We develop, produce, market and sell innovative, over-the-counter (OTC)
pharmaceutical products with an emphasis on those which utilize unique or novel
delivery systems. Through our subsidiary, Zicam, LLC, we produce, market and
sell seven different products under the Zicam(R) brand: Zicam Cold Remedy nasal
gel, a patented, homeopathic remedy that has been clinically proven to
significantly reduce the duration and severity of the common cold; two related
nasal swab cold remedy products - Zicam Cold Remedy Swabs and Zicam Cold Remedy
Swabs - Kids Size; Zicam Allergy Relief, a homeopathic nasal gel formula
designed to control allergy symptoms for sufferers of hay fever and other upper
respiratory allergies; Zicam Extreme Congestion Relief, a nasal gel formula
designed to provide fast-acting, long-lasting relief of nasal congestion; Zicam
Sinus Relief, a nasal gel formula that enhances the benefits of Extreme
Congestion Relief with menthol and eucalyptus for improved feeling of sinus
pressure relief; and Zicam Nasal Moisturizer, a non-medicated nasal moisturizer.

We were incorporated in Utah in 1991. Prior to July 2001, as Gum Tech
International, Inc., our principal business was the development, manufacture and
sale of nutritional and healthcare-related chewing gum products. In 1999, we
formed Gel Tech, L.L.C. with another company, with our ownership interest in Gel
Tech being 60%. The business of Gel Tech was to develop and produce homeopathic
nasal gel products based on a proprietary zincum gluconicum delivery system. In
July 2001, we exited the chewing gum business with the sale of substantially all
of our chewing gum assets and business to the Wm. Wrigley Jr. Company
("Wrigley"). In December 2001, we acquired the remaining 40% of Gel Tech and
changed its name to Zicam, LLC. On June 18, 2002, we reincorporated in Delaware
and changed our name from Gum Tech International, Inc. to Matrixx Initiatives,
Inc.

Our principal executive offices are located at 2375 E. Camelback Road,
Suite 500, Phoenix, Arizona 85016 and our telephone number is (602) 387-5353.

MARKETS AND COMPANY PRODUCTS

All seven of our Zicam products are targeted at the cough and cold market
category. That market, which is estimated at more than $3 billion annually in
retail sales in the United States, includes a wide variety of tablets, liquids,
nasal sprays and syrups that provide relief and/or remedy to cold, allergy and
sinus congestion sufferers. The largest sub-segment of that category includes
products formulated to relieve symptoms associated with the common cold. It is
estimated that more than one billion common colds occur in the United States
each year, with over 100 million of these colds resulting in lost days of school
or work, or some level of restricted activity. Colds are estimated to occur at a
rate of two to five per person (six to eight per child) each year. The market
for allergy relief products covers a much smaller segment of the population,
estimated at 35 million people in the United States. However, allergy sufferers
are more likely to require medication for a much longer period of time to
relieve allergy symptoms.

The most significant of our seven products, Zicam Cold Remedy, a
homeopathic nasal gel product, is based on our patented zincum gluconicum
delivery system. The original product in a nasal pump bottle was introduced in
1999. Together with two nasal swab versions of the product which were introduced
in 2002, Zicam Cold Remedy Swabs and Zicam Cold Remedy Swabs - Kids Size, Zicam
Cold Remedy accounted for more than 70% of our net sales in 2002. Zicam Cold
Remedy was formulated to reduce the duration and severity of the common cold. In
a study published in the October 2000 issue of the ENT- Ear, Nose & Throat
Journal, Zicam Cold Remedy was shown to reduce the duration of the common cold
when taken at the onset of symptoms. In a separate study published in the
January 2003 issue of QJM: An International Journal of Medicine, zincum
gluconicum nasal gel (Zicam Cold Remedy) was shown to reduce the duration and
symptoms of the common cold when treatment was started as late as the second day

of illness. We believe Zicam Cold Remedy is unique in the cough and cold market
category in which we compete due to the claims that we are able to make
regarding the product's ability to reduce the duration of the common cold. To
our knowledge, only one other product in the cough and cold category (including
competing generic copies of that product) is able to make a similar claim.

Sales of Zicam Cold Remedy have grown steadily since its introduction in
1999 as customer awareness of the product has increased as a result of our
marketing and public relations efforts, and word-of-mouth experience by
consumers. Zicam Cold Remedy Swabs and Zicam Cold Remedy Swabs - Kids Size
contain the same ingredients as Zicam Cold Remedy, and were introduced in late
2002 to appeal to consumers who dislike nasal sprays. Both of these swab
products have been well received by the retail trade, though we have been
limited in meeting consumer demand particularly for the adult swab product due
to production constraints of our supplier. We expect that our current backlog,
which is described below in further detail, will be alleviated within the next
few months as the demand from the current cold season decreases, which will
enable us to build up inventory prior to the 2003-2004 cold season.

Zicam Allergy Relief, also a homeopathic nasal gel formula, was introduced
in 2000. Zicam Allergy Relief is designed to control allergy symptoms for
sufferers of hay fever and other upper respiratory allergies. An initial
double-blind scientific study indicated that Zicam Allergy Relief reduced the
severity of symptoms resulting from these types of allergies. We believe Zicam
Allergy Relief is distinctive from most allergy products available in the market
due to the absence of side effects, such as drowsiness or jitters. Zicam Allergy
Relief contributed almost 20% of total net sales for 2002.

Three other Zicam nasal gel products were introduced in late 2002 --
Extreme Congestion Relief, Sinus Relief and Nasal Moisturizer. Zicam Extreme
Congestion Relief is a nasal gel that combines the active ingredient
oxymetazoline hydrochloride into our gel matrix and soothing aloe vera to
provide fast-acting, long-lasting relief of nasal congestion and sinus pressure.
Zicam Sinus Relief provides all of the benefits of the Extreme product with the
aromatic strength of a cooling menthol/eucalyptus blend. Zicam Nasal Moisturizer
is a non-medicated moisturizer that suspends aloe and eight other moisturizers
in the gel matrix to help ensure constant, soothing relief from irritated nasal
membranes. While greater retail distribution opportunities exist, these three
products contributed approximately 7% of total 2002 net sales. Continued growth
in sales from these three products is dependent on achieving much wider
distribution among retailers, and in particular, among large nation-wide food,
drug and mass marketers.

BUSINESS STRATEGY

Our objective is to become a recognized leader in providing OTC
pharmaceutical products which utilize innovative and proprietary alternative
delivery systems. To achieve our objective, the key elements of our business
strategy include the following:

EXPANDING MARKETING EFFORTS FOR EXISTING PRODUCTS: We intend to continue to
develop and refine our sales and marketing efforts to increase market
penetration of our Zicam products in U.S. households. Such efforts include
improving the timing and consistency of marketing activities compared to
previous years, executing effective trial generating programs, implementing
programs with retailers to enhance consumer awareness of our products and
seeking to increase recommendations from healthcare professionals. We are also
implementing new, creative advertising approaches and public relations efforts.
We believe these efforts will continue to build brand awareness, trial and sales
of our products.

CAPITALIZING ON OUR NASAL GEL TECHNOLOGY AND KNOW-HOW: We intend to
leverage our nasal gel technology and know-how to develop additional gel
delivery system product offerings that complement the current Zicam products.
Additional gel technology products may include over-the-counter pharmaceutical
ingredients that can be effectively delivered through our nasal gel delivery
system. We believe extending the Zicam product line in this way will bring
additional consumer awareness and expand our product presence and support from
retailers.

2

PURSUING ADDITIONAL DELIVERY SYSTEMS: Our success in expanding consumer
acceptance of our nasal gel delivery system and growing the Zicam franchise
indicates to us that opportunities exist to pursue development of other unique
and proprietary consumer healthcare product delivery systems. We are seeking to
identify, through internal research and development efforts and through
consideration of external opportunities, other growth opportunities for Matrixx.

EXTENDING SALES INTO NEW MARKETS: International markets represent an
important growth opportunity for Matrixx. We continue to explore expanding sales
into appropriate international markets where sales prospects are favorable.
Because of the complex and multiple regulatory environments, languages, customs,
logistics and working capital requirements involved in developing these markets,
we are exploring possible relationships with multi-national business
organizations and established international distributors capable of introducing
products and competing in international markets. We believe this approach could
provide significant sales growth opportunities for our current and future
products. However, we do not expect to be able to finalize any agreement soon
and do not anticipate any revenue or income impact in the near future.

CUSTOMERS

We sell our products directly to major food, drug, mass market (e.g.
Wal-Mart, Target) and wholesale warehouse retailers throughout the United
States, and to distributors that sell to smaller retail establishments. Although
Zicam Cold Remedy and Zicam Allergy Relief are sold in virtually every major
retail outlet in the country, the products we introduced in late 2002 have not
yet achieved that same level of distribution. We are highly dependent on a small
group of large national retailers for our product distribution, such that 10
customers accounted for more than 70% of our total sales in 2002, and two
customers, Wal-Mart and CVS, each accounted for more than 10% of our sales in
2002. Our agreements with our customers generally provide for their ability to
return unsaleable merchandise, including damaged product, excessive overstock or
out-of-date product. We provide in our financial results as an offset against
sales, an estimate for expected returns. Due to the continuing growth and
success of the Zicam products, we have not experienced unusual or excessive
amounts of product returns, other than that which occurred in connection with
the initial introduction of Zicam Cold Remedy in late 1999 and early 2000, which
resulted in overstock and out-of-date situations with a few retailers. To the
extent that any of our largest customers were to stop carrying our products for
any reason, or were to fail to pay us for our products, our sales or financial
results could be negatively impacted.

MANUFACTURING AND DISTRIBUTION

The original Zicam Cold Remedy and Zicam Allergy Relief products are
manufactured for us by Botanical Laboratories, Inc. ("Botanical") in Ferndale,
Washington. Zicam Cold Remedy swabs are manufactured by Innovative Swab
Technologies, Inc. ("IST") in Antioch, Illinois. Zicam Extreme Congestion
Relief, Sinus Relief and Nasal Moisturizer are manufactured by BioZone
Laboratories, Inc. in Pittsburgh, California. Each of these manufacturers is
registered with the federal Food and Drug Administration (FDA) and has confirmed
to us that it adheres to current Good Manufacturing Practices (cGMP's) in its
production processes and procedures. Each is responsible for sourcing all raw
materials used in its production of our products from third party suppliers,
which are widely available. We are currently operating under a contract with IST
that should supply our expected needs for swab products in 2003, but rely on
individual production orders to meet our needs from our two other suppliers. We
have identified other suppliers that we believe are capable of meeting our
current production requirements for each of our products. However, we may be
limited in our ability in securing an alternative supplier for the swab products
due to proprietary technology employed by IST in the manufacture of the swab
products.

We source all packaging materials, including the bottles and sprayers for
our pump products from third parties. Each manufacturer of our products is
responsible for all other aspects of the production process, including
formulating and producing product mixtures, filling bottles, assembling finished
product and packing finished product in master cases. Botanical supplies the
nasal gel formula in bulk containers to IST for the production of the swab

3

products. Generally, finished products are shipped to an independent warehouse
in Phoenix for storage prior to shipment to our customers. However, in order to
expedite shipments of swab products, we have been making direct shipments from
IST to our customers.

At the end of 2002, had an approximately $1.3 million backlog of swab
orders which has continued into the first quarter of 2003. We expect this
backlog to continue until the end of the current cold season in late March or
early April 2003. The back order situation has affected us in many ways,
including higher production costs, higher freight costs to expedite shipment of
raw materials and finished goods, fines from certain retailers, cancelled orders
and lost opportunity costs. We are evaluating a variety of options to ensure
that we avoid a similar shortfall in the upcoming 2003-2004 cold season. We plan
to build an inventory of the swab products in coming months, which we were
unable to do prior to the current cold season due to our introduction of these
products late in 2002. We cannot be certain that IST, which manufactures the
swab products for us, will be able to produce the amount of inventory that we
are seeking to acquire before the commencement of the next cough and cold
season. Even if we are able to acquire this inventory, it is possible that
another backlog could occur in the next season as a result of unanticipated
factors, including higher than expected product demand.

Our current pricing with IST is fixed by contract until the end of fiscal
2003, at which time we will be required to review and negotiate new pricing
terms. In the first quarter of 2003, IST advised us of an increase in pricing
for the balance of 2003. We have advised IST of our opposition to this pricing
increase on the basis that it is not permitted by our contract, and we are
presently examining options to resolve this issue. In order to prevent a
suspension in swab production while this issue is being dealt with, we may elect
to pay this increased pricing under protest. If we are forced to accept this
increased pricing, our cost of sales will increase.

RESEARCH AND DEVELOPMENT

Research and development is an important part of our business. Expenditures
in 2002 reflect costs associated with the five products that we introduced in
that year. We expect to significantly increase our expenditures on research and
development in 2003 to approximately 6% of net sales in order to develop new
products and the support necessary for the products to be successful in the
marketplace.

FDA AND OTHER GOVERNMENT REGULATION

We are subject to various federal, state and local laws and regulations
affecting our business. All of our products are subject to regulation by the
FDA, including regulations with respect to the approval of manufacturing
processes and procedures, ingredients in the products, labeling and claims made.
The Zicam Cold Remedy products, including the two swab products, and Zicam
Allergy Relief, are further subject to the requirements of the Homeopathic
Pharmacopeia of the United States, and Zicam Extreme Congestion Relief and Zicam
Sinus Relief are subject to the requirements of the FDA as allopathic drugs. All
of our claims and advertising are subject to the rules of the Federal Trade
Commission (FTC). Although we believe that our products and claims comply in all
material respects with all regulatory requirements, if the FDA or FTC were to
determine that we are in violation of any such requirement, either agency could
restrict our ability to market the products, change the claims that we make or
cause us to remove the products from the market.

ENVIRONMENTAL MATTERS

Compliance with environmental rules and regulations did not significantly
affect our earnings or competitive position during 2002. All of our Zicam
product manufacturing and warehousing are currently outsourced to third party
contractors and as a result, we do not incur any direct expenses related to
environmental monitoring and regulatory compliance. With our continued
outsourcing of Zicam product manufacturing and storage, and no present plans to
return to direct manufacturing or storage of products, we expect these expenses
to remain low in the foreseeable future.

4

TRADEMARKS, TRADE NAMES, AND PROPRIETARY RIGHTS

We have been issued two patents (#6,080,783 and #6,365,624) from the U.S.
Patent and Trademark Office for the Zicam Cold Remedy technology. We believe
these patents, which are expected to be effective until 2018, afford significant
protection from competitors that may wish to sell similar cold remedy products.
We have filed applications for similar patents for Zicam Cold Remedy in several
other countries, including Canada, Mexico, the European Union, Hong Kong, Japan,
Korea, China, Brazil and India, as well as additional applications in the United
States. We have also filed applications for patents in the United States for
compositions and methods relating to Zicam Nasal Moisturizer, Zicam Extreme
Congestion Relief, Zicam Sinus Relief and Zicam products dispensed with the swab
system, while preserving our rights to file applications in other foreign
countries at a later date. We hold a registered trademark for "Zicam" in the
United States, the European Union, Japan and Australia and have applied for
similar trademark protection in other countries, including Mexico, China, Taiwan
and Brazil. We anticipate that we will continue to file for patent and trademark
protection for the other products that we expect to develop and introduce in the
future. There can be no assurance, however, that our existing patents, or any
additional patents that we may secure in the future, will be adequate to protect
the Company's intellectual property from a competitor's actions. Further, patent
litigation can be very time-consuming and costly. Even if we prevail in such
litigation, the cost of litigation could adversely affect our operating results
and financial condition.

EMPLOYEES

As of December 31, 2002, we employed 14 people in our Phoenix, Arizona
headquarters office. The 14 employees in Phoenix consist of two executive
officers and individuals responsible for administrative, operations, marketing,
sales, research and development, regulatory compliance, investor relations and
accounting. We closed our California office at the end of February 2002 and
moved the administrative and marketing functions previously handled in that
office to our Phoenix office.

SEASONALITY

Sales of Zicam products to end-use consumers are highly seasonal, with most
sales occurring during the cold and allergy seasons. The cold season generally
runs from September through April, while the allergy season runs from April
through October. Both of these seasons vary in intensity and duration from year
to year. Our sales to retailers generally mirror this pattern of consumer
demand, but are impacted by the level of promotional support that we commit to
with retailers and by their inventory management practices.

BACKLOG

Except as described above regarding the backlog we experienced in 2002 and
continue to experience in early 2003 in respect of our new swab products, we did
not experience any other product backlog in 2002. As of our 2001 fiscal
year-end, we had no product backlog.

COMPETITION

All of the Zicam products compete in the highly competitive cough and cold
and allergy markets with a vast number of well-established brands marketed by
large pharmaceutical and consumer products companies. Participants in the cough
and cold and allergy markets compete primarily on the basis of price, quality of
product and consumer awareness. Most of our competitors have substantially
greater financial, marketing and other resources, longer operating histories,
larger product portfolios and greater brand recognition than we do. With our
limited resources, we are aiming to succeed in this category by emphasizing the
unique claims regarding our products. Specifically, regarding Zicam Cold Remedy,
our flagship product, we emphasize its ability to reduce the duration and
severity of the common cold. Only one other product in the category (including
competing generic copies of that product) is able to make a similar claim.

5

ITEM 2. DESCRIPTION OF PROPERTY

We have leased office space at 2375 E. Camelback Road in Phoenix, Arizona
through February 2004 to house our corporate offices. We will be evaluating in
late 2003, whether to extend our current lease. Warehouse storage of our
finished goods, including shipping services, is provided by a contract warehouse
in Phoenix through a month to month agreement. We consider our existing
facilities to be adequate and suitable for their intended use.

ITEM 3. LEGAL PROCEEDINGS

On June 2, 1999, we filed a complaint in the Superior Court of Maricopa
County, Arizona against DJ Ltd. ("DJ"). Our complaint sought a declaratory
judgment that DJ was not owed any fee under an agreement entered into between us
pursuant to which DJ was to act as our financial advisor. DJ removed the case to
the United States District Court for the District of Arizona and filed a
counterclaim. In its counterclaim, DJ alleged that we breached the contract and
that we had been unjustly enriched. DJ sought damages in the amount of $480,000,
plus costs, expenses and warrants to purchase 50,000 shares of our common stock,
which an expert valued at an additional $200,000- $400,000. DJ also sought a
declaratory judgment confirming its version of its rights under the agreement.
In order to avoid the significant cost of pursuing the litigation and the
potential liability associated with an adverse jury decision, we entered into a
settlement with DJ in early 2003 which provided for a payment to DJ at that time
of $250,000.

We are not involved as a party in any other legal proceeding other than
various claims and lawsuits arising in the normal course of business, none of
which, in the opinion of our management, is individually or collectively
material to our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of our security holders during the fourth
quarter of fiscal 2002, through the solicitation of proxies or otherwise.

EXECUTIVE OFFICERS OF MATRIXX

The names, ages, positions and business experience of each of our executive
officers are listed below. Each executive officer is appointed by our board of
directors to hold his office until his successor is appointed and qualified or
until such earlier time as such officer may resign or be removed by the board.

6

Carl J. Johnson, 54 Mr. Johnson joined Matrixx in July 2001 as
President and Chief President and Chief Executive Officer and as a
Executive Officer member of the board of directors. Mr. Johnson's
professional experience spans 20 years in the
product development, marketing, and sales arenas
with several large pharmaceutical and consumer
goods companies. From 1993 to 2001, Mr. Johnson
was Vice President, Commercial Development with
Perrigo Company, a public company and leading
manufacturer of over-the-counter pharmaceutical
and nutritional products for the store brand
market. In that capacity he was responsible for
procuring new products and technologies and
contract manufacturing services emphasizing
Abbreviated New Drug Applications (ANDA) products.
Mr. Johnson also worked at Johnson & Johnson from
1973 to 1989 where he held a number of high level
marketing and sales positions, including
responsibility for the national launch of the
Acuvue(R) disposable contact lens product. Mr.
Johnson also provided marketing leadership for a
special team tasked to re-engineer Johnson &
Johnson's sales, administrative and operational
functions. Mr. Johnson earned a Master of Business
Administration - Marketing from the Fairleigh
Dickinson University and a Bachelor of Science in
Economics from Wagner College.

William J. Hemelt, 49 Mr. Hemelt joined Matrixx in June 1998 as our
Executive Vice President, Chief Financial Officer, Treasurer, and Secretary.
Operations, Chief Financial The additional title of Executive Vice President,
Officer, Treasurer and Operations was added in 2001. From 1980 to 1997,
Secretary Mr. Hemelt held a variety of financial positions
with Arizona Public Service Company, Arizona's
largest utility, including six years as Treasurer
and four years as Controller. Mr. Hemelt earned a
Master of Business Administration and a Bachelor
of Science in Electrical Engineering from Lehigh
University.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has been quoted for trading on the Nasdaq National Market
since April 24, 1996. From this inception date until June 19, 2002, our stock
traded under the symbol "GUMM". Effective on June 20, 2002, in connection with
our name change to Matrixx Initiatives, Inc., our stock trading symbol changed
to "MTXX". The following table sets forth, for the quarters indicated, the range
of high and low closing prices of our common stock as reported by the Nasdaq
National Market.

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MARKET PRICE
-------------------
HIGH LOW
------- -------
FISCAL YEAR 2001
First Quarter ................................ $ 9.875 $6.9688
Second Quarter ............................... $ 9.70 $ 7.13
Third Quarter ................................ $ 8.25 $ 6.60
Fourth Quarter ............................... $ 7.99 $ 6.40

FISCAL YEAR 2002
First Quarter ................................ $ 8.64 $ 6.52
Second Quarter ............................... $ 10.55 $ 8.00
Third Quarter ................................ $ 10.66 $ 9.50
Fourth Quarter ............................... $ 10.00 $ 7.80

FISCAL YEAR 2003
First Quarter (through March 21, 2003) ....... $ 8.75 $ 6.56

As of March 21, 2003, we had approximately 4,600 record and beneficial
stockholders.

DIVIDEND POLICY

Since our initial public offering in 1996, we have not paid dividends on
our common stock and do not expect to pay dividends in the foreseeable future.
We intend to retain any earnings to fund the expansion of our business. The
amount of future dividends, if any, will be determined by the board of directors
based upon our earnings, financial condition, capital requirements and other
factors, including any contractual or statutory restrictions on our ability to
pay dividends. In addition, under the terms of our credit facility with Comerica
Bank-California, as long as we have any outstanding loan balance or other
obligations under the credit facility, we cannot pay any dividend without
Comerica Bank-California's consent.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data for
Matrixx for each of the years in the five-year period ended December 31, 2002,
and where appropriate reflects results on a continuing and discontinued
operations basis. The financial data presented below is derived from Matrixx's
financial statements audited by independent auditors. We report Matrixx's and
Zicam, LLC's financial results on a consolidated basis. On July 20, 2001, we
sold substantially all of our chewing gum assets and business to Wrigley. Our
financial results reflect our former chewing gum operations as discontinued
operations. On December 5, 2001, we acquired the remaining 40% of Gel Tech,
L.L.C., making it a wholly-owned subsidiary of Matrixx. (In July 2002, the name
of Gel Tech, L.L.C. was changed to Zicam, LLC). For additional information, see
the financial statements of Matrixx and the notes thereto included elsewhere in
this report. The following table should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is qualified by reference thereto and to Matrixx's financial
statements and notes thereto.

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(000's, except per share data) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------

Net sales $ 23,548 $ 16,072 $ 10,817 $ 9,593 $ 0
Net income (loss)
-- Continuing Operations $ 4,757 $ (4,799) $ (6,166) $ (172) $ 0
-- Discontinued Operations $ -- $ 17,412 $ (1,971) $ (601) $ (6,261)
Net income (loss) per basic and diluted
share of common stock
-- Continuing Operations $ .50 $ (0.52) $ (0.69) $ (0.06) $ 0
-- Discontinued Operations $ -- $ 1.88 $ (0.22) $ (0.08) $ (0.97)
Dividends per share $ 0 $ 0 $ 0 $ 0 $ 0
Shares outstanding at year end 9,441 9,432 9,047 8,321 6,858
Total assets $ 47,185 $ 42,507 $ 16,981 $ 20,028 $ 7,900
Long term obligations $ 0 $ 5,254 $ 0 $ 2,241 $ 2,380
Stockholders' equity $ 35,155 $ 24,369 $ 10,448 $ 12,702 $ 3,718


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

In Fiscal 2001 we undertook a significant change in our strategic plan and
related business operations by exiting the chewing gum business and refocusing
entirely on the development, production and sale of over-the-counter
pharmaceutical products. In July 2001, we sold substantially all of our assets
and business related to our chewing gum operations to Wrigley. In December 2001,
we acquired the remaining 40% of Gel Tech, making it a wholly-owned subsidiary
of Matrixx. (In July 2002, the name of Gel Tech, L.L.C. was changed to Zicam,
LLC). Our financial results reflect our former chewing gum operations as
discontinued operations, and consequently these operations are not reflected in
the following discussion and analysis. We report Zicam, LLC's financial results
on a consolidated basis. We owned 60% of Zicam prior to December 5, 2001 and
100% on and subsequent to that date.

Our restructuring process continued in 2002 as we reincorporated in
Delaware, changed our name to Matrixx Initiatives, Inc. and consolidated our
operations in our Phoenix office. Moreover, as part of our focus on
over-the-counter pharmaceutical products, we introduced five new Zicam nasal gel
products during the year, improved package graphics for the entire Zicam product
line and engaged a new sales team to represent our products to retailers.

Earnings in future periods will be significantly affected by the level of
sales, and the timing and amount of our advertising and research and development
expenses. Expenditures for advertising and research and development will vary by
quarter throughout the year and could be significantly different from amounts in
the same periods in earlier years. For 2003, we anticipate spending
substantially more for both of these items in the first quarter, compared to the
first quarter of 2002.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2001

Certain information is set forth below for our operations expressed in
dollars and as a percentage of net sales for the periods indicated:

9

YEARS ENDED DECEMBER 31,
-------------------------------------------
2002 2001
------------------- --------------------
Net sales $ 23,548 100% $ 16,072 100%
Cost of sales 6,752 29 4,215 26
-------- -------- -------- --------

Gross profit 16,796 71 11,857 74
Operating expenses 15,544 66 16,964 106
Research and development 294 1 716 4
-------- -------- -------- --------

Income (loss) from operations 958 4 (5,823) (36)
Interest and other income - net 681 3 174 1
Interest expense 592 3 163 1
-------- -------- -------- --------

Income (loss) from continuing
operations before income tax
and minority interest $ 1,047 4% $ (5,812) (36)%
======== ======== ======== ========

NET SALES

Net sales for 2002 increased to approximately $23.5 million, or 47% above
the 2001 sales level. Approximately one third of the $7.5 million increase in
net sales is attributable to increases in sales of Zicam Cold Remedy and Allergy
Relief, and the remaining two-thirds to sales of the five new Zicam products
introduced in late 2002. Sales of Zicam Cold Remedy and Allergy Relief increased
due primarily to increased sales to end-use customers, and additionally, with
respect to sales of the Cold Remedy product, to the addition of sales to two
major club warehouse outlets.

We introduced five new Zicam products in the third quarter of 2002: Cold
Remedy Swabs, Cold Remedy Swabs - Kids Size, Extreme Congestion Relief, Sinus
Relief and Nasal Moisturizer. Although we are generally pleased with the retail
and consumer acceptance of these new products, the retail distribution has yet
to achieve levels comparable to our original Zicam products. Our principal sales
focus is to secure additional retail acceptance, particularly among the major
national drug, food and mass market retailers of all five of these new products.
The swab products have been in a back order situation due to the inability of
our supplier to increase production, and to higher than expected demand for the
adult swab product. We estimate the swab back order at the end of 2002 to be
greater than $1.0 million in net sales. We expect the back order to continue
until the end of the current cold season (late March or early April 2003) when
the normal seasonal reduction in demand from customers will allow us to build
inventory of the swab products. We are evaluating a variety of options to ensure
that we avoid a similar shortfall in the upcoming 2003-2004 cold season. We plan
to build an inventory of the swab products in coming months, which we were
unable to do prior to the current cold season due to our introduction of these
products late in 2002. We cannot be certain that our supplier will be able to
produce the amount of inventory that we are seeking to acquire before the
commencement of the next cough and cold season. Even if we are able to acquire
this inventory, it is possible that another backlog could occur in the next
season as a result of unanticipated factors, including higher than expected
product demand.

We expect sales increases in future periods from continued, albeit lower,
growth rates for our original Zicam Cold Remedy and Zicam Allergy Relief
products, and from increased sales of our five new products due to increased
retail distribution, greater customer acceptance and the planned elimination of
the swab product back order. We plan on introducing additional products in late
2003 which we believe will further add to our sales increases.

COST OF SALES

The cost of sales for 2002 increased approximately $2.5 million or 60% over
2001. The increase was primarily due to a 45% increase in unit sales. The higher
per unit cost of the swab products and premium production cost associated with

10

the two swab products contributed to the increase in cost of sales. A decrease
in manufacturing costs of Zicam Cold Remedy and Zicam Allergy Relief partially
offset this increase from the swab products.

Our current pricing with our swab product supplier, IST, is fixed by
contract until the end of fiscal 2003, at which time we will be required to
review and negotiate new pricing terms. In the first quarter of 2003, IST
advised us of an increase in pricing for the balance of 2003. We have advised
IST of our opposition to this pricing increase on the basis that it is not
permitted by our contract, and we are presently examining options to resolve
this issue. In order to prevent a suspension in swab production while this issue
is being dealt with, we may elect to pay this increased pricing under protest.
If we are forced to accept this increased pricing, our cost of sales will
increase and our results of operations for 2003 will be negatively impacted.

Assuming we are able to negotiate a new supply contract with IST at the end
of 2003, we expect that this new contract may provide for higher product costs
than those provided for under our current contract with IST. We cannot be
certain, however, that we will be able to agree with IST on terms for a new
contract, nor can we determine at this time what the increased costs in any new
contract would entail.

GROSS PROFIT

Gross profit for 2002 increased to approximately $16.8 million, or 42%
above the 2001 level, due to the higher sales level. Offsetting the higher sales
was the higher unit cost of sales, primarily due to the new swab products, which
is reflected in a decrease in gross profit percentage of sales to 71% in 2002
from 74% in 2001.

OPERATING EXPENSES

Operating expenses decreased from approximately $17.0 million in 2001 to
$15.5 million in 2002. The decrease is largely due to the settlement and legal
expenses of $2.0 million that we incurred in 2001 related to a patent
infringement lawsuit filed against the Company by The Quigley Corporation. Our
royalty obligations to Quigley, which formed part of the settlement, ended in
March 2002. A decrease in advertising and public relations expenses of
approximately $0.6 million between the two years also contributed to our lower
operating expenses in 2002. Offsetting these decreases were increased sales
commission expense of $252,000 related to the higher level of sales, an increase
of quality control expenses primarily due to the new product analysis, an
increase in total labor expense of $223,000, higher rent expense of $169,000
reflecting a full year at our new corporate office location and higher
depreciation and amortization of $141,000. We believe that expense levels in
future periods will be primarily affected by the timing and amount of
advertising expenses and costs associated with new product introductions.

RESEARCH AND DEVELOPMENT

Research and development expense amounted to $294,000 for 2002, reflecting
costs associated with the five new Zicam products that were introduced in the
year. Expenses in 2001 primarily reflect costs associated with our nicotine gum
development which we undertook in conjunction with Swedish Match AB ("Swedish
Match"). This development was terminated in the third quarter of 2001 following
our exit from the gum business. We expect to increase our research and
development expenses significantly in 2003 to approximately 6% of net sales as
we undertake further work on our Zicam products, including additional product
line extensions, and explore other product opportunities.

INTEREST AND OTHER INCOME - NET

Interest and other income for 2002 amounted to approximately $681,000 or
approximately $507,000 above 2001. Approximately $391,000 of the 2002 amount is
royalty income and the remainder is largely interest income on our invested
cash. Virtually all of the 2001 income was interest income reduced by a $250,000

11

write-down of an investment in a company that Matrixx had evaluated and rejected
as a possible acquisition candidate.

Our interest income is largely due to the Company's invested cash position
arising from the sale of our gum business in July 2001 to Wrigley, reduced in
2002 by payments made in conjunction with our acquisition of the remaining 40%
interest in Zicam, LLC.

Royalty income is from a dental gum product sold by Wrigley. We entered
into the royalty agreement with Wrigley in conjunction with the sale of our gum
assets in July 2001. We are unable to predict the success or future sales of the
Wrigley gum product, and therefore, cannot estimate the amount or timing of any
future royalty payments.

INTEREST EXPENSE

Interest expense increased to approximately $592,000 for 2002 from
approximately $163,000 in 2001. The increase is entirely attributable to imputed
interest accrued under the note that we issued to Zensano, Inc. (now Zengen,
Inc.) in connection with our acquisition of Zensano's 40% interest in Zicam, LLC
in December 2001. Two additional payments of $2.75 million each are due under
the note in late June and late November 2003.

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX AND MINORITY INTEREST

Our income before income taxes and minority interest in 2002 was
approximately $1.0 million, an increase of more than $6.8 million from the net
loss of $5.8 million reported for 2001. The increase is due to a higher gross
profit resulting from higher net sales and a decrease in operating expenses. We
expect that earnings in future periods will be significantly impacted by the
success of our seven current products, new product introductions (including new
products that we plan to introduce in 2003) and year-over-year changes in our
advertising and research and development budgets.

PROVISION FOR INCOME TAX EXPENSE

Due to the income we recorded in 2002 and our expectation of net income in
future periods, we concluded that, more likely than not, we will be able to
utilize the accumulated tax loss carry-forward that had been generated in prior
years but not reflected as an asset. Based on this determination, we recorded a
decrease in the provision for income taxes of almost $3.4 million in 2002.
Income tax expense was further reduced in the period by an income tax refund of
approximately $325,000 related to a change in tax laws in 2002.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2000

Certain information is set forth below for our operations expressed in
dollars and as a percentage of net sales for the periods indicated:

12

YEARS ENDED DECEMBER 31,
--------------------------------------------
2001 2000
------------------- --------------------
Net sales $ 16,072 100% $ 10,817 100%
Cost of sales 4,215 26 3,411 32
-------- ------- -------- --------

Gross profit 11,857 74 7,406 68
Operating expenses 16,964 106 15,657 145
Research and development 716 4 433 4
-------- ------- -------- --------

Income (loss) from operations (5,823) (36) (8,684) (81)
Interest and other income - net 174 1 284 3
Interest expense 163 1 433 4
-------- ------- -------- --------

Income (loss) from continuing
operations before income tax
and minority interest $ (5,812) (36)% $ (8,833) (82)%
======== ======= ======== ========

NET SALES

For 2001, net sales of Zicam Cold Remedy and Zicam Allergy Relief increased
to $16.1 million or approximately 49% above the 2000 level. Unit sales of Zicam
Cold Remedy in 2001 increased more than 60% over the prior year due primarily to
increased sales to end-use consumers due to increased consumer awareness of the
product and the introduction in 2001 of a twin-pack Cold Remedy product, which
was well received in the marketplace. Sales of Zicam Cold Remedy accounted for
approximately 70% of net sales in 2001. The sales comparison to 2000 is also
affected by relatively low sales in 2000 due to a high level of inventory held
by retailers at the start of the 2000-2001 cold season as a result of initial
purchases made in connection with introduction of the product in the prior year.

Zicam Allergy Relief was introduced in March 2000. Unit sales of Zicam
Allergy Relief increased more than 30% in 2001 over the prior year due to
increased sales to end-use customers and a greater level of retail distribution.

COST OF SALES

Cost of sales increased in 2001 from the prior year by approximately
$800,000, reflecting the higher level of sales, but decreased as a percentage of
sales from 32% in 2000 to 26% in 2001 due to higher freight costs experienced in
early 2000 during the introduction of Zicam Cold Remedy and a decrease in
manufacturing costs in 2001.

GROSS PROFIT

Gross profit increased from $7.4 million in 2000 to $11.9 million in 2001
as a result of the higher sales level and decreases in the cost of sales.

OPERATING EXPENSES

Operating expenses increased from $15.7 million in 2000 to $17.0 million in
2001 due to the amount of the settlement that we paid and legal expenses that we
incurred in connection with The Quigley Corporation's lawsuit against the
Company. The combined settlement amount and expenses amounted to nearly $2.5
million. That increase was partially offset by a small decrease in marketing
expenses between the two periods.

13

RESEARCH AND DEVELOPMENT

The increase in research and development expense in 2001 was attributable
to costs associated with our nicotine gum project that were incurred subsequent
to the termination of our joint venture with Swedish Match. After termination of
the joint venture, Swedish Match no longer reimbursed us for research and
development expenses related to nicotine gum. We terminated the nicotine gum
project in the third quarter of 2001.

INTEREST AND OTHER INCOME - NET

Interest and other income principally reflects interest income on our cash
investments. We invested our cash, which increased significantly as a result of
receipt of the proceeds from the sale of substantially all of our chewing gum
business assets and 200,000 shares of our common stock to Wrigley in July 2001,
in relatively low yielding U.S. Treasury securities. Offsetting this income in
2001, was a write-down in the amount of $250,000 for an investment in a company
that Matrixx had evaluated and rejected as a possible acquisition candidate.

INTEREST EXPENSE

Interest expense decreased from $433,000 in 2000 to $163,000 in 2001 due to
our repayment in early 2000 of debt and lease financings.

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX AND MINORITY INTEREST

The loss from continuing operations before income taxes and minority
interest improved in 2001 by approximately $3.0 million over 2000 due to the
higher sales levels, offset in part by the higher expenses resulting from the
Quigley lawsuit.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital decreased $3.2 million to approximately $10.2 million
at December 31, 2002 from approximately $13.4 million at December 31, 2001, due
primarily to the reclassification of our $5.3 million note obligations incurred
in connection with our acquisition of the remaining 40% of Zicam, LLC. from
long-term debt to current debt. The impact of this reclassification on working
capital was offset by our profitability in 2002 and the recognition of a current
deferred tax asset.

During 2002, we experienced an increase in cash from operations of $339,000
due to an increase in net income of $1.4 million (net of deferred income tax
expense), a decrease in restricted cash of $1.5 million, amortization of
interest on notes payable of $0.6 million and other non-cash charges to income
of $0.5 million. These increases to cash were offset by an increase in accounts
receivable of $2.8 million and a decrease in accounts payable of $0.8 million.

Investing activities provided cash of approximately $10.3 million due
largely to the maturity of marketable securities that were reinvested in
securities that are classified as cash equivalents of $10.7 million, offset in
part by capital expenditures of approximately $0.6 million for a new corporate
information system.

Cash flows from financing activities used $5.9 million of cash due to our
payments of $5.5 million to Zengen, Inc. under the above-described note, and the
repayment in February 2002 of borrowings under our $1.0 million bank credit
facility. We expanded our bank credit arrangement in May 2002 with Comerica Bank
- - California to provide for an increase in our direct borrowing capacity to $2.5
million with more favorable borrowing rates and terms. We do not currently have
any borrowings outstanding under the facility and, due to our cash position, do
not anticipate borrowing under the facility to meet our immediate working
capital requirements. We are in compliance with the earnings and financial
covenants contained in our credit agreement.

14

We believe that our existing capital resources and our credit line are
sufficient to fund our operations and capital requirements for the next twelve
months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements and accompanying notes have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods.

We regularly evaluate the accounting policies and estimates that we use to
prepare our consolidated financial statements. In general, management's
estimates are based on historical experience, on information from third party
professionals and on various other assumptions that are believed to be
reasonable under the facts and circumstances. Actual results could differ from
those estimates made by management.

We believe that our critical accounting policies and estimates include the
accounting for intangible assets and goodwill, accounting for income taxes, and
accounting for returns and allowances associated with our products.

INTANGIBLE ASSETS AND GOODWILL: We recorded approximately $15.0 million in
goodwill in connection with the 40% Zicam, LLC interest that we acquired from
Zensano, Inc. in December 2001. Under SFAS 142, goodwill must be tested annually
to identify a potential impairment and the amount of any impairment loss.
Factors that could affect this analysis would be significant loss of market
share, a general decline in Zicam product sales, higher than expected increases
in expenses and various other matters. Any change in key assumptions about the
business or prospects of Zicam, LLC, or any change in market conditions or other
externalities affecting Zicam, LLC, could result in an impairment charge, and
such a charge could have a material adverse effect on our financial condition
and results of operations.

ACCOUNTING FOR INCOME TAXES: Due to our significant operating losses prior
to 2001, we possess a sizeable tax loss carry-forward which can be used to
reduce our taxable income in future periods. Due to our history of operating
losses, we recorded a deferred tax valuation allowance in 2001 and prior years
to offset the entire deferred tax asset arising from our tax loss carry-forward.
However, due to the significant improvement in our net income in 2002, together
with our expectation of continuing profitability in future years, we have
determined that we are more likely than not to realize the tax benefit
associated with our tax loss carry-forward. Consequently, we reduced the
deferred tax valuation allowance and recorded a large portion of the deferred
tax asset in 2002. The effect of this change was a decrease in our income tax
expense of approximately $3.4 million in 2002. In future periods, we will record
income tax expense based on our estimated effective income tax rate for each
period. In addition, we will continue to evaluate the deferred tax valuation
allowance regularly and adjust the amount to reflect our expectation of our
ability to realize the tax benefit arising from our tax loss carry-forward on a
quarterly basis. Should there be a significant change in our expectations of
future income, the impact of adjusting the deferred tax valuation allowance
could be significant which would negatively impact our earnings.

ACCOUNTING FOR CUSTOMER RETURNS AND ALLOWANCES. We recognize revenues on
the sale of our products when they are shipped from our warehouse facility, and
at that time record a provision for estimated product returns. The estimate for
product returns is based on our historical experience of sales to retailers and
is reviewed regularly to ensure that it reflects the liability associated with
product returns. To date, our sales returns experience has been consistent with
our estimate for returns, except for returns of outdated products arising from
excessive production during the introduction of Zicam Cold Remedy in the
1999-2000 cold season. Currently, we are recording a provision of 3% of gross
sales for our original Zicam Cold Remedy and Zicam Allergy Relief products for
potential returns and allowances. In establishing the appropriate reserve level

15

for the five new Zicam products introduced in the third quarter of 2002, we
reviewed the similarities and differences of the five products relative to Zicam
Cold Remedy and Zicam Allergy Relief for which we now have almost three years of
product return experience. Based on that review, we are recording a 7% provision
of gross sales for these products. We will review the return provision regularly
and adjust these reserve amounts as actual product return experience continues
to develop. Should the actual level of product returns vary significantly from
our estimates, our operating and financial results would be materially affected.
In addition, we expect that a higher sales returns allowance will be recorded in
the future for any other new products that we introduce until such products
achieve market acceptance.

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS AND RISK FACTORS

FORWARD LOOKING STATEMENTS

This Form 10-K, including documents incorporated herein by reference,
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The words "believe", "expect", "estimate",
"anticipate", "intend", "may", "might", "will", "would", "could", "project" and
"predict", or similar words and phrases generally identify forward-looking
statements. Forward looking statements contained herein and in document
incorporated by reference herein include, but are not limited to statements
regarding:

* our ability and intention to further develop and expand the market
presence of our existing Zicam products, and our plans to bring new
products to market, including our belief that the development of such
new products will provide us with growth opportunities and increase
our sales;

* our plan to significantly increase our research and development, and
anticipated expenditures related to such activities;

* market acceptance and profitability of, and future consumer and
retailer demand for, our products;

* anticipated expansion into international markets for our Zicam
products and our belief that such international markets could provide
significant sales growth opportunities;

* our expectation that we will not be able to finalize any arrangement
for international expansion soon, and that there will not be any
revenue or income impact on the Company in the near future;

* our belief that our expansion of the Zicam product line will expand
our support from retailers;

* our belief that our marketing efforts will continue to build brand
awareness and increase product sales;

* our expectation that sales will increase as a result of our new
products;

* our belief that future Company expense levels will be primarily
affected by advertising and new product introduction costs;

* our expectation that environmental compliance-related expenses will
remain low for the foreseeable future;

16

* our expectation as to the future expiration dates for our two United
States patents, and our intention to continue to file patent and
trademark applications in the United States and in jurisdictions
outside the United States to protect the Company's products;

* our belief that a moderate interest rate increase will not have a
material adverse impact on the Company;

* our ongoing relationship with our product suppliers including, their
ability to meet our production needs in the future;

* our plans to resolve our pricing dispute with our swab product
supplier, IST, and our intention to negotiate a new supply contract
with IST at the end of 2003.

* our plan to build our swab product inventory, and our expectations
regarding the removal of the swab product backlog and that no other
product backlog will occur in 2003;

* our having no plans to directly manufacture and store our products;

* our expectation of net income in future periods;

* the effects of interest rate changes on our financial position;

* our expectation that we will not pay dividends in the foreseeable
future;

* our belief that we will not need to borrow on our credit facility; and

* our belief that our current capital resources and credit line are
sufficient to fund the Company for the next 12 months.

We may make additional written or oral forward-looking statements from time
to time in filings with the Securities and Exchange Commission or in public news
releases. Such additional statements may include, but not be limited to,
projections of revenues, income or loss, capital expenditures, acquisitions,
plans for future operations, financing needs or plans, the impact of inflation
and plans relating to our products or services, as well as assumptions relating
to the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying our forward-looking statements.

Statements in this Form 10-K, including those set forth in the sections
entitled "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and under the subheading below entitled
"Risk Factors", describe factors that could contribute to or cause actual
results to differ materially from our expectations. Other such factors include
(i) less than anticipated demand for our current and future products, (ii) lack
of market acceptance for or uncertainties concerning the efficacy of our current
and future products, (iii) difficulties in increasing production or maintaining
sufficient inventories to meet unexpectedly high demand in the short term,
including our inability to resolve product backlog and product pricing issues,
(iv) financial difficulties encountered by one or more of our principal
customers, (v) difficulties in obtaining additional capital for marketing,
research and development, and other expenses, (vi) oversupply of product
inventory to retailers resulting in unsold product returns, and (vii) material
litigation involving patent and contractual claims, product liabilities and
consumer issues.

Forward-looking statements contained in this Form 10-K speak only as of the
date of this Form 10-K or, in the case of any document incorporated by
reference, the date of that document. We do not undertake, and we specifically
disclaim any obligation, to publicly update or revise any forward-looking
statement contained in this Form 10-K or in any document incorporated herein by

17

reference to reflect changed assumptions, the occurrence of unanticipated events
or changes to future operating results over time.

RISK FACTORS

OUR NEW BUSINESS FOCUS MEANS WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO
ASSESS OUR CURRENT AND PROSPECTIVE PERFORMANCE

Although we have been in operations for a number of years, the significant
change of direction and focus in our business that we made in 2001 by exiting
the chewing gum business and refocusing entirely on the development, production
and sale of over-the-counter pharmaceutical products presents a limited
operating history upon which you may evaluate our current and prospective
performance. The possibility of our future success must be considered relative
to the problems, challenges, complications and delays frequently encountered in
connection with the development and operation of a new business, and the
development and marketing of relatively new products such as the Zicam products.

IF OUR ZICAM PRODUCTS DO NOT GAIN WIDESPREAD MARKET ACCEPTANCE, OUR ANTICIPATED
SALES AND RESULTS OF OPERATIONS WILL SUFFER

Although studies have indicated that Zicam Cold Remedy can significantly
reduce the duration and severity of the common cold, we cannot be certain that
this product (including our new swab formats) will achieve widespread acceptance
by the market. To date, Zicam Allergy Relief has not achieved the market success
presently enjoyed by Zicam Cold Remedy. In addition, given their recent
introduction in late 2002, our five new Zicam products have not yet reached the
level of market recognition achieved by the original Zicam Cold Remedy. While we
are working to increase the market presence of Zicam Allergy Relief and our five
new Zicam products, we cannot be certain that demand for these products will
grow. If any unanticipated problem arises concerning the efficacy of Zicam Cold
Remedy, Zicam Allergy Relief or any of our other new products, or if any of
these products fails to achieve widespread market acceptance for any other
reason, our operating results and prospects would be materially adversely
affected.

UNANTICIPATED PROBLEMS ASSOCIATED WITH PRODUCT DEVELOPMENT AND COMMERCIALIZATION
COULD ADVERSELY AFFECT OUR OPERATING RESULTS

Our successful development of existing and new products is subject to the
risks of failure and delay inherent in the development and commercialization of
products based on innovative technologies. These risks include the possibilities
that:

* we may experience unanticipated or otherwise negative research and
development results;

* existing or proposed products may be found to be ineffective or
unsafe, or may otherwise fail to receive required regulatory
clearances or approvals;

* we may find that existing or proposed products, while effective, are
uneconomical to commercialize or market;

* we may be unable to produce sufficient product inventories to meet
customer demand;

* existing or proposed products do not achieve broad market acceptance;
or

* proprietary rights held by third parties preclude us from developing
or marketing existing or proposed products.

18

Our inability to develop and commercialize our existing products or any new
products on a timely basis and within our financial budgets could have a
material adverse effect on our operating results and future prospects.

OUR INABILITY TO PROVIDE SCIENTIFIC PROOF FOR PRODUCT CLAIMS MAY ADVERSELY
AFFECT OUR SALES

The marketing of our Zicam products involves claims that these products
assist in reducing the duration and severity of the common cold (in the case of
Zicam Cold Remedy and the related Zicam swab products) and controlling allergy
symptoms (in the case of Zicam Allergy Relief). Under FDA and FTC rules, we are
required to obtain scientific data to support any health claims we make
concerning our products. Although we have neither provided nor been requested to
provide any scientific data to the FDA in support of claims regarding our Zicam
products, we have obtained scientific data for all of our products. We cannot be
certain, however, that the scientific data we have obtained in support of our
claims will be deemed acceptable to the FDA or FTC, should either agency request
any such data in the future. If the FDA or the FTC requests any supporting
information, and we are unable to provide support that is acceptable to the FDA
or the FTC, either agency could force us to stop making the claims in question
or restrict us from selling the affected products.

FDA AND OTHER GOVERNMENT REGULATION MAY RESTRICT OUR ABILITY TO SELL OUR
PRODUCTS

We are subject to various federal, state and local laws and regulations
affecting our business. Our Zicam products are subject to regulation by the FDA,
including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. If we do not comply with these regulations, the FDA could
force us to stop selling the affected products or require us to incur
substantial costs in adopting measures to maintain compliance with these
regulations. Our advertising claims regarding our products are subject to the
jurisdiction of the FTC as well as the FDA. In both cases we are required to
obtain scientific data to support any advertising or labeling health claims we
make concerning our products, although no pre-clearance or filing is required to
be made with either agency. If we are unable to provide the required support for
such claims, the FTC may stop us from making such claims or require us to stop
selling the affected products.

WE MAY FAIL TO COMPETE EFFECTIVELY, PARTICULARLY AGAINST LARGER, MORE
ESTABLISHED PHARMACEUTICAL AND HEALTH PRODUCTS COMPANIES, CAUSING OUR BUSINESS
AND OPERATING RESULTS TO SUFFER

The consumer health products industry is highly competitive. We compete
with companies in the United States and abroad that are engaged in the
development of both traditional and innovative healthcare products. Many of
these companies have much greater financial and technical resources and
production and marketing capabilities than we do. As well, many of these
companies have already achieved significant product acceptance and brand
recognition with respect to products that compete directly with our Zicam
products. Our competitors may successfully develop and market superior or less
expensive products which could render our Zicam and other future products less
valuable or unmarketable.

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR IF WE INFRINGE THE
INTELLECTUAL PROPERTY OF OTHERS, OUR FINANCIAL CONDITION AND FUTURE PROSPECTS
COULD BE MATERIALLY HARMED

We rely significantly on the protections afforded by patent and trademark
registrations that we routinely seek from the U.S. Patent and Trademark Office
("USPTO") and from similar agencies in foreign countries. We cannot be certain
that any patent or trademark application that we file will be approved by the
USPTO or other foreign agencies. In addition, we cannot be certain that we will
be able to successfully defend any trademark, trade name or patent that we hold
against claims from, or use by, competitors or other third parties. No
consistent policy has emerged from the USPTO or the courts regarding the breadth
of claims allowed or the degree of protection afforded under biotechnology and
similar patents. Our future success will depend on our ability to prevent others
from infringing on our proprietary rights, as well as our ability to operate
without infringing upon the proprietary rights of others. We may be required at

19

times to take legal action to protect our proprietary rights and, despite our
best efforts, we may be sued for infringing on the patent rights of others.
Patent litigation is costly and, even if we prevail, the cost of such litigation
could adversely affect our financial condition. If we do not prevail, in
addition to any damages we might have to pay, we could be required to stop the
infringing activity or obtain a license. We cannot be certain that any required
license would be available to us on acceptable terms, or at all. If we fail to
obtain a license, our business might be materially adversely affected. In
addition to seeking patent protection, we rely upon a combination of
non-disclosure agreements, other contractual restrictions and trade secrecy laws
to protect proprietary information. There can be no assurance that these steps
will be adequate to prevent misappropriation of our proprietary information or
that our competitors will not independently develop technology or trade secrets
that compete with our proprietary information.

WE MAY INCUR SIGNIFICANT COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS

We are subject to significant liability should use or consumption of our
products cause injury, illness or death. Although we carry product liability
insurance, there can be no assurance that our insurance will be adequate to
protect us against product liability claims or that insurance coverage will
continue to be available on reasonable terms. A product liability claim, even
one without merit or for which we have substantial coverage, could result in
significant legal defense costs, thereby increasing our expenses and lowering
our earnings. Such a claim, whether or not proven to be valid, could have a
material adverse effect on our product branding and goodwill, resulting in
reduced market acceptance of our products. This in turn could materially
adversely affect our results of operations and financial condition.

WE DO NOT HAVE MANUFACTURING CAPABILITIES OF OUR OWN

We currently do not have the physical or human resources to independently
manufacture our Zicam products or any other products that we may develop. We
currently outsource all of our product manufacturing and packaging operations
and intend to continue this outsourcing for the foreseeable future. If we are
unable to enter into cost-effective or otherwise suitable arrangements for
manufacturing of our Zicam products or any other products, or if our third party
contractors fail to adequately perform their manufacturing operations (as has
occurred to date with our new swab products), our sales and related financial
results could be materially adversely affected. If, in the future, we decide to
establish our own manufacturing facilities, we will require substantial
additional funds and significant additional personnel to undertake such
operations. We cannot be certain that such funding or a sufficient number of
such qualified persons will be available for such an undertaking.

WE MAY CONTINUE TO EXPERIENCE PRODUCT BACKLOGS

At the end of 2002, we had approximately $1.3 million in backlog of swab
orders. We expect this backlog to continue until the end of the current cold
season in late March or early April 2003. While we have plans in place to
build-up our swab product inventory at the end of the current cold season in
order to prevent future backlogs of these products, we cannot be certain that
these plans, even if executed properly, will be sufficient to prevent future
backlog of these products or that other product backlogs will not occur in the
future. Any such future backlogs will potentially result in higher production
costs, higher freight costs to expedite shipment of raw materials and finished
goods, fines from certain retailers, cancelled orders and lost opportunity
costs. These in turn could materially affect our results of operations and
financial condition.

OUR PRICING DISPUTE WITH IST COULD HARM OUR SWAB PRODUCT SALES

Our current pricing with our swab product supplier, IST, is fixed by
contract until the end of fiscal 2003, at which time we will be required to
review and negotiate new pricing terms. In the first quarter of 2003, IST
advised us of an increase in pricing for the balance of 2003. We have advised
IST of our opposition to this pricing increase on the basis that it is not

20

permitted by our contract, and we are presently examining options to resolve
this issue. While we intend to act in a manner that will not trigger an
interruption in IST's supply to us of the swab products, which may include our
paying the disputed price increase under protest pending resolution of this
issue, it is possible that IST could suspend or terminate swab production, or
threaten to do so, in an effort to force our acceptance of its new terms. Any
such suspension or termination of swab production would have a material adverse
effect on our product sales and, accordingly, our results of operations and
financial condition.

THE LARGE NUMBER OF SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALES MAY DEPRESS
THE PRICE OF OUR STOCK

Sales of substantial amounts of our common stock in the open market or the
availability of a large number of additional shares for sale could adversely
affect the market price of our common stock. Substantially all of our
outstanding shares of common stock, as well as the shares underlying vested but
as yet unexercised warrants and options, have either been registered for public
sale or may be sold under Rule 144 promulgated under the Securities Act of 1933,
as amended. Therefore, all of these shares may be immediately sold by the
holders. A substantial increase in sales of our common stock could depress the
price of our common stock.

OUR BOARD OF DIRECTORS IS AUTHORIZED TO ISSUE SHARES OF PREFERRED STOCK THAT
COULD HAVE RIGHTS SUPERIOR TO OUR OUTSTANDING SHARES OF COMMON STOCK, AND, IF
ISSUED, COULD ADVERSELY IMPACT THE VALUE OF OUR COMMON STOCK

Our certificate of incorporation permits our board of directors, in its
sole discretion, to issue up to 2,000,000 shares of authorized but unissued
preferred stock. These shares may be issued by our board without further action
by our shareholders, and may include any of the following rights (among others)
as our board may determine, which rights may be superior to the rights of our
outstanding common stock:

* voting rights, including the right to vote as a class on particular
matters;

* preferences as to dividends and liquidation rights;

* conversion rights;

* anti-dilution protections; and

* redemption rights.

Since our board of directors has the authority to determine, from time to
time, the terms of our authorized preferred stock, there is no limit on the
amount of common stock that could be issuable upon conversion of any future
series of preferred stock that may be issued. The rights of holders of our
common stock will be subject to, and may be adversely affected by, the rights of
the holders of any series of preferred stock that may be issued in the future.
In addition, the market price of our common stock may be adversely affected by
the issuance of any series of preferred stock with voting or other rights
superior to those of our common stock. The issuance of any series of preferred
stock could also have the effect of making it more difficult for a third party
to acquire a majority of our outstanding common stock.

THE PRICE OF OUR STOCK MAY CONTINUE TO BE VOLATILE

The market price of our common stock, which is quoted for trading on
the Nasdaq National Market, has been highly volatile and may continue to be
volatile in the future. Any or a combination of the following factors could
cause the market value of our common stock to decline quickly: Operating results
that differ from market expectations, negative or other unanticipated results of
clinical trials or other testing, delays in product development, technological
innovations or commercial product introductions by our competitors, changes in
government regulations, developments concerning proprietary rights, including
pending or threatened patent litigation, public concerns regarding the safety of
any of our products and general economic and stock market conditions. Since the

21

Spring of 2000, the stock market has experienced, and it may continue to
experience, significant price and volume fluctuations. These fluctuations have
particularly affected the market prices of equity securities of many small
capitalization companies, like Matrixx, that are not yet profitable or that
experience low or inconsistent earnings. Often, the effect on the price of such
securities is disproportionate to the operating performance of such companies.
In our case, such broad market fluctuations may adversely affect our
stockholders' ability to dispose of their shares of Matrixx at a price equal to
or above the price at which they purchased such shares.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk exposure relates to our variable rate revolving
line of credit with Comerica Bank-California, which is described in the notes to
our consolidated financial statements contained in this Form 10-K. As of the
fiscal year ended December 31, 2002, we did not have any outstanding balance
against this line of credit. During fiscal 2002, the average outstanding balance
on our prior line of credit on a daily basis was approximately $100,000.
Assuming future borrowings in line with our average borrowings in 2002, a
hypothetical interest rate change of 1% would increase our interest expense
approximately $1,000 per year from the expense levels that we experienced in
2002. Consequently, we believe that moderate interest rate increases will not
have a material adverse impact on our results of operations or financial
position in the foreseeable future.

As of December 31, 2002, we did not participate in any market
risk-sensitive commodity instruments for which fair value disclosure would be
required under Statement of Financial Accounting Standards No. 107. We presently
hold approximately $8.0 million in short-term U.S. treasury securities which are
not subject to material risk. We believe that we are not subject in any material
way to other forms of market risk, such as foreign currency exchange risk or
foreign customer purchases (of which there were none in 2002) or commodity price
risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Independent Auditors' Report and Consolidated Financial Statements of
Matrixx, including the Notes to those statements, are included in Part III, Item
15 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

We have had no disagreements with our independent accountants with respect
to accounting and financial disclosure.

On November 12, 2002, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission regarding a change of our independent auditor
and certifying accountant from Angell & Deering, Certified Public Accountants to
Mayer Hoffman McCann P.C.

PART III

ITEM 10. INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS

The information required by this Item for our directors and executive
officers is set forth in Part I of this Form 10-K under the heading "Executive
Officers of Matrixx" and in our Proxy Statement relating to our 2003 annual
meeting of stockholders to be held on April 30, 2003 (the "2003 Proxy
Statement"), under the headings, "Proposal No. 1 - Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance", and is incorporated
herein by this reference as if set forth in full.

22

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item for our executive officers is set
forth in the 2003 Proxy Statement, under the heading, "Executive Compensation",
and is incorporated herein by this reference as if set forth in full. The
information set forth in the 2003 Proxy Statement under the headings, "Report of
the Audit Committee" and "Report of the Compensation Committee" is not
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this section of this Item for certain of
our beneficial owners is set forth in the 2003 Proxy Statement, under the
heading, "Security Ownership of Certain Beneficial Owners", and is incorporated
herein by this reference as if set forth in full.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth information as of December 31, 2002 with
respect to our compensation plans and individual compensation arrangements under
which our equity securities were authorized for issuance to directors, officers,
employees, consultants and certain other persons and entities in exchange for
the provision to us of goods or services.




NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EXERCISE AVAILABLE FOR FUTURE ISSUANCE
BE ISSUED UPON EXERCISE PRICE OF OUTSTANDING UNDER EQUITY COMPENSATION
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND PLANS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS REFLECTED IN COLUMN (A))
------------- ------------------- ------ ------------------------
(a) (b) (c)

Equity compensation
plans approved by
security holders 402,800 $ 9.70 1,046,950

Equity compensation
plans not approved by
security holders 145,000 $11.37 0

Total 547,800 $10.14 1,046,950


The 145,000 securities (all of which are shares of our common stock)
referred to in column (a) of the above table were issuable as of December 31,
2002 under the following individual compensation arrangements:

* 10,000 shares issuable upon exercise of stock options issued to Edward
E. Faber in September 2000 as board member compensation, with an
exercise price of $14.31 per share;

* 10,000 shares issuable upon exercise of stock options issued to Edward
J. Walsh in September 2000 as board member compensation, with an
exercise price of $14.31 per share;

* 30,000 shares issuable upon exercise of warrants issued to C.J.B.
Consulting, Inc. and Next Millennium Capital Holdings, LLC in June
1999 in connection with financing activities undertaken by the Company
at that time, which warrants have an exercise price of $15.00 per
share and expire in June 2004; and

23

* 95,000 shares issuable upon exercise of options issued to two of
Zicam, LLC's former principal founders in January 1999, which options
have an exercise price of $9.61 per share and expire in March 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is set forth in the 2003 Proxy
Statement, under the headings, "Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related Transactions" and is
incorporated herein by this referenced as if set forth in full.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of filing of this annual report, we
carried out an evaluation, under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company and required to be included in our
periodic SEC filings. There were no significant changes in our internal controls
or other factors that could significantly affect these controls subsequent to
the date of their evaluation and there were no corrective actions taken with
regard to significant deficiencies or material weaknesses in our controls.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS PAGE
- -------------------- ----

Independent Auditors' Report 25

Consolidated Balance Sheets as of December 31,
2002 and 2001 27

Consolidated Statements of Operations for the
years ended December 31, 2002, 2001 and 2000 29

Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2002, 2001
and 2000 31

Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 33

Notes To Consolidated Financial Statements 35

24

INDEPENDENT AUDITORS' REPORT



To the Board of Directors
Matrixx Initiatives, Inc.

We have audited the accompanying consolidated balance sheet of Matrixx
Initiatives, Inc. (formerly Gum Tech International, Inc.) and Subsidiary as of
December 31, 2002 and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Matrixx Initiatives, Inc. and
Subsidiary as of December 31, 2002 and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.


Mayer Hoffman McCann P.C.
Certified Public Accountants

Phoenix, Arizona
January 24, 2003

25

INDEPENDENT AUDITORS' REPORT



To the Board of Directors
Matrixx Initiatives, Inc.

We have audited the accompanying consolidated balance sheet of Matrixx
Initiatives, Inc. (formerly Gum Tech International, Inc.) and Subsidiary as of
December 31, 2001 and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for the years ended December 31, 2001 and
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Matrixx Initiatives, Inc. and
Subsidiary as of December 31, 2001 and the results of their operations and their
cash flows for the years ended December 31, 2001 and 2000 in conformity with
accounting principles generally accepted in the United States of America.


Angell & Deering
Certified Public Accountants

Denver, Colorado
February 8, 2002

26

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001

ASSETS



2002 2001
------------ ------------

Current Assets:
Cash and cash equivalents $ 12,010,091 $ 7,342,985
Restricted cash -- 1,503,150
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $647,280 and $468,389 7,037,596 4,461,156
Inventories 1,573,034 1,580,912
Marketable securities -- 10,656,380
Prepaid expenses 523,829 508,462
Notes receivable -- 200,000
Deferred tax asset 1,073,765 --
------------ ------------

Total Current Assets 22,218,315 26,253,045
------------ ------------

Property and Equipment, at cost:
Office furniture and equipment 588,395 94,277
Leasehold improvements 39,314 2,112
------------ ------------
627,709 96,389
Less accumulated depreciation (89,795) (33,245)
------------ ------------

Net Property and Equipment 537,914 63,144
------------ ------------

Other Assets:
Deposits 37,697 32,400
Debt issuance costs, net of accumulated amortization
of $20,417 14,583 --
Deferred tax asset 8,284,720 --
Patents, net of accumulated amortization of $71,700
and $4,619 1,051,900 1,118,981
Goodwill 15,039,836 15,039,836
------------ ------------

Total Other Assets 24,428,736 16,191,217
------------ ------------

Total Assets $ 47,184,965 $ 42,507,406
============ ============


The accompanying notes are an integral
part of these consolidated financial statements.

27

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(CONTINUED)


LIABILITIES AND STOCKHOLDERS' EQUITY



2002 2001
------------ ------------

Current Liabilities:
Accounts payable and accrued expenses $ 5,771,407 $ 5,928,985
Sales returns and allowances 1,004,713 1,031,897
Notes payable -- 1,000,000
Current portion of long-term debt 5,253,643 4,923,882
------------ ------------

Total Current Liabilities 12,029,763 12,884,764
------------ ------------

Long-Term Debt, net of current portion above:
Financial institutions and other 5,253,643 10,177,525
Less current portion above (5,253,643) (4,923,882)
------------ ------------

Total Long-Term Debt -- 5,253,643
------------ ------------

Commitments and Contingencies -- --

Stockholders' Equity:
Preferred stock: $.001 par value, 2,000,000 shares
authorized, none issued or outstanding -- --
Common stock: $.001 par value, 30,000,000 shares
authorized, 9,441,451 and 9,432,251 shares
issued and outstanding 9,442 9,432
Additional paid in capital 41,524,921 35,485,963
Accumulated deficit (6,317,305) (11,073,960)
------------ ------------
35,217,058 24,421,435
Less common stock held in treasury, at cost
(9,600 and 8,100 shares) (61,856) (52,436)
------------ ------------

Total Stockholders' Equity 35,155,202 24,368,999
------------ ------------

Total Liabilities and Stockholders' Equity $ 47,184,965 $ 42,507,406
============ ============


The accompanying notes are an integral
part of these consolidated financial statements.

28

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000



2002 2001 2000
------------ ------------ ------------

Net sales $ 23,547,636 $ 16,072,162 $ 10,817,286
Cost of sales 6,752,041 4,214,812 3,410,904
------------ ------------ ------------

Gross Profit 16,795,595 11,857,350 7,406,382

Operating expenses 15,543,890 16,963,958 15,656,697
Research and development 293,486 716,390 433,560
------------ ------------ ------------

Income (Loss) From Operations 958,219 (5,822,998) (8,683,875)
------------ ------------ ------------

Other Income (Expense):
Interest and other income, net 680,544 174,023 283,504
Interest expense (592,055) (162,882) (433,237)
------------ ------------ ------------

Total Other Income (Expense) 88,489 11,141 (149,733)
------------ ------------ ------------

Income (Loss) Before Provision (Benefit) For
Income Taxes and Minority Interest 1,046,708 (5,811,857) (8,833,608)

Provision (benefit) for income taxes (3,709,947) -- --
Minority interest in earnings of
consolidated affiliate -- 1,012,543 2,667,165
------------ ------------ ------------

Net Income (Loss) From Continuing Operations 4,756,655 (4,799,314) (6,166,443)
------------ ------------ ------------

Discontinued Operations:
Loss from discontinued operations -- (305,415) (1,970,637)
Gain on disposal of gum operations, net of
income taxes of $325,000 -- 17,717,362 --
------------ ------------ ------------

Total Gain (Loss) From Discontinued Operations -- 17,411,947 (1,970,637)
------------ ------------ ------------

Net Income (Loss) 4,756,655 12,612,633 (8,137,080)
Preferred stock dividends -- -- 12,005
------------ ------------ ------------

Net Income (Loss) Applicable to
Common Shareholders $ 4,756,655 $ 12,612,633 $ (8,149,085)
============ ============ ============


The accompanying notes are an integral
part of these consolidated financial statements.

29

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(CONTINUED)



2002 2001 2000
------------- ------------- -------------

Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares
Outstanding 9,422,873 9,284,234 8,906,635
Net Income (Loss) Per Share of Common Stock:
Continuing operations $ .50 $ (.52) $ (.69)
Discontinued operations -- 1.88 (.22)
------------- ------------- -------------

Net Income (Loss) $ .50 $ 1.36 $ (.91)
============= ============= =============

Diluted:
Weighted Average Number of Common Shares
Outstanding 9,455,403 9,284,234 8,906,635
Net Income (Loss) Per Share of Common Stock:
Continuing operations $ .50 $ (.52) $ (.69)
Discontinued operations -- 1.88 (.22)
------------- ------------- -------------

Net Income (Loss) $ .50 $ 1.36 $ (.91)
============= ============= =============


The accompanying notes are an integral
part of these consolidated financial statements.

30

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000



Series A
Preferred Stock Common Stock Additional
----------------- --------------- Paid In Treasury Accumulated
Shares Amount Shares Amount Capital Stock Deficit
------ ------ ------ ------ ------- ------ -------

Balance at December 31, 1999 1,000 $ 1,000,000 8,320,705 $8,321 $ 27,231,024 $ -- $(15,537,508)

Issuance of common stock upon exercise
of stock options and warrants -- -- 532,895 533 3,771,250 -- --

Issuance of common stock for repayment of
senior notes -- -- 145,395 145 1,999,855 -- --

Issuance of common stock for redemption of
Series A preferred stock (1,000) (1,000,000) 48,052 48 999,952 -- --

Compensation from issuance of stock options -- -- -- -- 123,933 -- --

Payment of Series A preferred stock dividends -- -- -- -- -- -- (12,005)

Net loss -- -- -- -- -- -- (8,137,080)
------ ----------- --------- ------ ------------ -------- ------------

Balance at December 31, 2000 -- -- 9,047,047 9,047 34,126,014 -- (23,686,593)

Issuance of common stock upon exercise of
stock options and warrants -- -- 185,204 185 1,159,228 -- --

Issuance of common stock for cash -- -- 200,000 200 1,501,676 -- --

Compensation from issuance of stock options -- -- -- -- 25,830 -- --

Repurchase shares of the Company's common
stock (8,100 shares) -- -- -- -- -- (52,436) --

Acquisition of subsidiary -- -- -- -- (1,326,785) -- --

Net income -- -- -- -- -- -- 12,612,633
------ ----------- --------- ------ ------------ -------- ------------

Balance at December 31, 2001 -- -- 9,432,251 9,432 35,485,963 (52,436) (11,073,960)


The accompanying notes are an integral
part of these consolidated financial statements.

31

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(CONTINUED)



Series A
Preferred Stock Common Stock Additional
----------------- --------------- Paid In Treasury Accumulated
Shares Amount Shares Amount Capital Stock Deficit
------ ------ ------ ------ ------- ------ -------

Issuance of common stock for services -- -- 700 -- 6,683 -- --

Repurchase shares of the Company's common
stock (1,500 shares) -- -- -- -- -- (9,420) --

Issuance of restricted stock pursuant to
the Company's restricted stock bonus
program -- -- 8,500 10 71,476 -- --

Income tax benefit from stock options -- -- -- -- 5,960,799 -- --

Net income -- -- -- -- -- -- 4,756,655
------ ----------- --------- ------ ------------ -------- ------------

Balance at December 31, 2002 -- $ -- 9,441,451 $9,442 $ 41,524,921 $(61,856) $ (6,317,305)
====== =========== ========= ====== ============ ======== ============


The accompanying notes are an integral
part of these consolidated financial statements.

32

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000



2002 2001 2000
------------ ------------ -----------

Cash Flows From Operating Activities:
Net income (loss) $ 4,756,655 $ 12,612,633 $(8,137,080)
Adjustments to reconcile net income (loss) to net
cash (used) by operating activities:
Depreciation 78,770 225,853 460,702
Amortization 87,498 4,619 160,659
Amortization of discount on notes payable 576,118 46,906 212,500
Provision for bad debts 209,912 450,115 448,645
Deferred income taxes (3,397,686) -- --
Loss on disposal of assets 20,104 530 8,017
Impairment of investment -- 250,000 --
Gain on disposal of gum operations -- (17,717,362) --
Compensation from forgiveness of note receivable -- -- 209,753
Compensation from issuance of stock options -- 25,830 123,933
Common stock issued for compensation 78,169 -- --
Minority interest in earnings of consolidated affiliate -- (1,012,543) (2,667,165)
Changes in assets and liabilities:
Restricted cash 1,503,150 (316,036) (916,236)
Accounts receivable (2,786,352) (712,540) 3,549,804
Employee receivables -- 911 55,326
Inventories 7,878 869,518 (1,089,963)
Prepaid expenses and other (15,367) (397,418) 35,566
Interest receivable -- (111,912) --
Accounts payable and accrued expenses (752,263) 2,148,721 1,701,906
Customer deposits -- (64,862) 54,362
Sales returns and allowances (27,184) 176,137 (346,340)
Deferred revenue -- (936,141) 936,141
------------ ------------ -----------

Net Cash Provided (Used) By Operating Activities 339,402 (4,457,041) (5,199,470)
------------ ------------ -----------

Cash Flows From Investing Activities:
Capital expenditures (573,679) (1,190,871) (1,050,449)
Proceeds from sale of gum operations -- 25,000,000 --
Costs of sale of gum operations -- (1,527,922) --
Notes receivable 200,000 (200,000) (359,753)
Cash paid for purchase of Zicam -- (6,239,512) --
Deposits and other (5,297) 661,698 (574,932)
Purchase of marketable securities -- (17,543,105) --
Maturity of marketable securities 10,656,380 6,998,637 --
Investment in corporation -- (250,000) --
------------ ------------ -----------

Net Cash Provided (Used) By Investing Activities 10,277,404 5,708,925 (1,985,134)
------------ ------------ -----------


The accompanying notes are an integral
part of these consolidated financial statements.

33

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(CONTINUED)



2002 2001 2000
------------ ------------ -----------

Cash Flows From Financing Activities:
Proceeds from borrowing $ -- $ 600,000 $ 1,000,000
Principal payments on notes payable (5,905,280) (602,956) (870,546)
Debt issuance costs (35,000) -- --
Issuance of common stock -- 2,661,289 3,771,783
Dividend distribution of subsidiary -- -- (814,499)
Capital contribution of minority interest -- -- 2,000,000
Dividends paid on preferred stock -- -- (12,005)
Purchase of treasury stock (9,420) (52,436) --
------------ ------------ -----------

Net Cash Provided (Used) By Financing Activities (5,949,700) 2,605,897 5,074,733
------------ ------------ -----------

Net Increase (Decrease) in Cash and Cash Equivalents 4,667,106 3,857,781 (2,109,871)

Cash and Cash Equivalents at Beginning of Year 7,342,985 3,485,204 5,595,075
------------ ------------ -----------

Cash and Cash Equivalents at End of Year $ 12,010,091 $ 7,342,985 $ 3,485,204
============ ============ ===========

Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 610,657 $ 136,492 $ 64,985
Income taxes 12,740 336,127 8,735

Supplemental Disclosure of Non-cash Investing
and Financing Activities:
Issuance of common stock to repay senior notes and
redeem preferred stock $ -- $ -- $ 3,000,000
Note payable incurred in connection with purchase
of 40% interest in Zicam -- 10,130,619 --


The accompanying notes are an integral
part of these consolidated financial statements.

34

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Gum Tech International, Inc. (the "Company") was incorporated in Utah on
February 4, 1991 to develop, market and distribute specialty chewing gum
products for branded and private label customers, as well as products
marketed under the Company's brand. The Company sold its gum operations in
July 2001 (Note 3). On June 18, 2002, the Company completed its previously
announced plans to reincorporate in Delaware and change its name to Matrixx
Initiatives, Inc. ("Matrixx" or the "Company"). The reincorporation and
name change, were effectuated through a merger of the Company (then Gum
Tech International, Inc.) with and into its wholly-owned Delaware
subsidiary, Matrixx Initiatives, Inc. The timing of the merger (including
the resulting reincorporation and name change) immediately followed the
receipt of approval of the Company's shareholders at its regularly
scheduled annual meeting held on such date. The authorized capital stock of
Matrixx consists of (i) 30,000,000 shares of common stock, $.001 par value,
("common stock") and (ii) 2,000,000 shares of preferred stock $.001 par
value. Upon the effectiveness of the merger, each share of Gum Tech
International, Inc. common stock issued and outstanding immediately before
the merger, was extinguished and converted into one issued and outstanding
share of Matrixx common stock. All dollar amounts have been retroactively
restated for the change in the capital structure.

The Company's sole business segment in 2001 and 2002 is developing,
marketing and selling over the counter products utilizing a nasal gel
technology through a wholly owned subsidiary, Gel Tech, L.L.C. ("Gel
Tech"). On July 12, 2002, Gel Tech changed its name to Zicam, LLC
("Zicam").

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its majority owned subsidiary, Zicam. All significant intercompany
accounts and transactions have been eliminated.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out pricing method.

MARKETABLE SECURITIES

Management determines the appropriate classification of its investments in
marketable debt and equity securities at the time of each purchase and
re-evaluates such determination at each balance sheet date. At December 31,
2001 the Company's investment portfolio consisted of marketable debt
securities classified as held-to-maturity and is carried at amortized cost,
which approximates fair value.

PROPERTY AND EQUIPMENT

Depreciation of the primary asset classifications is calculated based on
the following estimated useful lives using the straight-line method.

Classification Useful Life in Years
-------------- --------------------
Machinery and equipment 5-30
Office furniture and equipment 3-5
Leasehold improvements 2-10

Depreciation of property and equipment charged to operations was $78,770,
$225,853 and $460,702 for the years ended December 31, 2002, 2001 and 2000,
respectively.

35

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INTANGIBLE ASSETS

Debt issuance costs are being amortized using the straight-line method over
the term of the notes.

The patent is being amortized using the straight-line method over the
remaining term of the patent at the date of purchase of 16.75 years. The
estimated aggregate amortization expense for the Company's patent is
$67,081 on an annual basis for each of the next five years.

Goodwill is considered to have an indefinite life, and therefore, it is not
amortized, but instead is tested for impairment at least annually.

REVENUE RECOGNITION

The Company recognizes revenue from product sales when earned, that is,
when the risks and rewards of ownership have transferred to the customer,
which is considered to have occurred upon shipment of the finished project.
Sales incentives, and returns are estimated and recognized at the date of
shipment based upon historical activity and current agreements with
customers. The Company evaluates these estimates on a regular basis and
revises them as necessary.

STOCK-BASED COMPENSATION

The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
123, "Accounting for Stock-Based Compensation". The Company will continue
to measure compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based plans and does not recognize compensation
expense for its stock-based compensation plans other than for options
granted to non-employees. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
under its stock-based compensation plans consistent with the methodology
prescribed by SFAS No. 123, the Company's net income and earnings per share
would be reduced to the following pro forma amounts:



2002 2001 2000
------------ ------------ ------------

Net income (loss) applicable to common shareholders,
as reported $ 4,756,655 $ 12,612,633 $ (8,149,085)

Less stock based employee compensation expense
determined under fair value based methods for
all awards, net of tax 715,409 154,821 1,512,000
------------ ------------ ------------

Proforma net income (loss) $ 4,041,246 $ 12,457,812 $ (9,661,085)
============ ============ ============
Net income (loss) per share of common stock:
Basic:
As reported $ .50 $ 1.36 $ (.91)
Pro forma $ .43 $ 1.34 $ (1.08)

Diluted:
As reported $ .50 $ 1.36 $ (.91)
Pro forma $ .43 $ 1.34 $ (1.08)


The fair value for these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following assumptions for
the years ended December 31, 2002, 2001 and 2000.

2002 2001 2000
------- ------- -------
Risk-free interest rate 3.80% 4.22% 6.19%
Expected life 3.66 years 3.13 years 2.16 years
Expected volatility 63.80% 66.29% 69.96%
Expected dividend yield 0% 0% 0%

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in subjective input assumptions can materially
affect the fair value estimates, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock-based compensation plans.

LONG-LIVED ASSETS

When facts and circumstances indicate that the cost of long-lived assets
may be impaired, an evaluation of the recoverability is performed by
comparing the carrying value of the assets to the estimated undiscounted
future cash flows. A forecast showing lack of long-term profitability, a
significant decline in market share, and a current period operating or cash
flow loss combined with a history of operating or cash flow losses are
conditions, among others, that would trigger an impairment assessment of
the carrying amount of enterprise goodwill.

Upon indication that the carrying value of such assets may not be
recoverable, the Company recognizes an impairment loss by a charge against
current operations. If there is an impairment, an impairment charge would
be determined by comparing the carrying amount of the assets to the
applicable estimated future cash flows, discounted at a risk-adjusted rate
or market appraisals. In addition, the remaining amortization period for
the impaired asset would be reassessed and revised if necessary.

COMPREHENSIVE INCOME

Comprehensive income consists of net income (loss) and other gains and
losses affecting stockholders' equity that, under accounting principles
generally accepted in the United States of America are excluded from net
income (loss). Such items consist primarily of unrealized gains and losses
on marketable equity securities and foreign translation gains and losses.
The Company has not had any such items in the prior three years and,
consequently, net income (loss) and comprehensive income (loss) are the
same.

36

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SHIPPING AND HANDLING COSTS

The Company includes shipping and handling costs in cost of sales.

INCOME TAXES

Deferred income taxes are provided for temporary differences between the
financial reporting and tax basis of assets and liabilities using enacted
tax laws and rates for the years when the differences are expected to
reverse.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. Research and
development costs were $293,486, $974,447 and $782,383 for the years ended
December 31, 2002, 2001 and 2000, respectively. The portion of these costs
associated with the Company's gum operations that were sold, are included
in discontinued operations.

ADVERTISING

The Company advertises primarily through television, radio and print media.
The Company's policy is to expense advertising costs, including production
costs, as incurred. Advertising expense was $7,736,982, $8,867,239 and
$10,008,274 for the years ended December 31, 2002, 2001 and 2000,
respectively.

NET INCOME (LOSS) PER SHARE OF COMMON STOCK

Basic earnings per share is calculated using the average number of common
shares outstanding. Diluted earnings per share is computed on the basis of
the average number of common shares outstanding plus the dilutive effect of
outstanding stock options using the "treasury stock" method.

The basic and diluted earnings per share are the same for 2001 and 2000
since the Company had a net loss from continuing operations in 2001 and
2000 and the inclusion of stock options and other incremental shares would
be anti-dilutive. The schedule below summarizes the elements included in
the calculation of basic and diluted net income (loss) per common share for
the years ended December 31, 2002, 2001 and 2000. Options, warrants and
other incremental shares to purchase 389,500, 654,960 and 945,310 shares of
common stock at December 31, 2002, 2001 and 2000, respectively were
excluded from the computation of diluted earnings per share because their
effect would be anti-dilutive.



Year Ended December 31,
------------------------------------------
2002 2001 2000
---------- ----------- -----------

Net income (loss) applicable to
common shareholders $4,756,655 $12,612,633 $(8,149,805)
========== =========== ===========

Weighted average common shares
outstanding - Basic 9,422,873 9,284,234 8,906,635
Dilutive securities 32,530 -- --
---------- ----------- -----------

Weighted average common shares
outstanding - Diluted 9,455,403 9,284,234 8,906,635
========== =========== ===========

Net income (loss) per common share:
Basic $ .50 $ 1.36 $ (.91)
Diluted $ .50 $ 1.36 $ (.91)


37

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the
date of purchase to be cash equivalents.

ESTIMATES

The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company's management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting. It also specifies the types of acquired intangible assets that
are required to be recognized and reported separately from goodwill. SFAS
No. 142 requires that goodwill and certain intangibles no longer be
amortized, but instead tested for impairment at least annually. SFAS No.
142 is required to be applied starting with fiscal years beginning after
December 15, 2001. The Company adopted SFAS No. 142 on January 1, 2002
which did not result in any impairment of goodwill or other intangible
assets upon adoption.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 establishes accounting standards for
recognition and measurement of a liability for the costs of asset
retirement obligations. Under SFAS No. 143, the costs of retiring an asset
are recorded as a liability when the retirement obligation arises, and will
be amortized to expense over the life of the asset. The Company adopted
SFAS No. 143 on January 1, 2002 which did not result in any impact on the
Company's financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and discontinued operations. The Company adopted SFAS No.
144 on January 1, 2002 which did not result in any impact on the Company's
financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which replaces Emerging
Issues Task Force ("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 of this standard will have any
impact on the Company's financial position or results of operations.

38

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECLASSIFICATIONS

Certain prior period amounts have been reclassified to conform with the
current period presentation. The results of the Company's operations for
all periods presented have been restated for the discontinued operations of
the Company's gum operations.

2. ACQUISITION

On December 5, 2001 the Company entered into a Purchase Agreement (the
"Agreement") to acquire the 40% interest in Zicam previously owned by
Zensano. The Company now owns 100% of Zicam. The Company acquired the
remaining portion of Zicam so as to gain full operating and strategic
control of Zicam in order to develop and capitalize on the growth potential
that management believes is inherent in the Zicam products and product line
extensions. Under the terms of the Agreement, the Company paid $6,120,000
in cash at closing and will make four subsequent cash payments of
$2,750,000 each over a two year period, for a total cash purchase price of
$17,120,000 less the imputed interest on the note payable to Zensano of
$869,381 resulting in a net purchase price of $16,250,619. The Company also
incurred legal, accounting, appraisal and other costs of approximately
$119,512 in connection with the transaction.

The acquisition of the 40% interest by the Company is recorded as a
purchase. The cost of Zicam's assets and liabilities approximates fair
value except for the value assigned to Zicam's patent and goodwill.

The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.

Current assets $ 2,626,114
Property and equipment 8,788
Intangible assets 1,123,600
Goodwill 15,039,836
------------

Total Assets Acquired 18,798,338
------------

Current liabilities (2,428,207)
------------

Total Liabilities Assumed (2,428,207)
------------

Net Assets Acquired $ 16,370,131
============

The $1,123,600 assigned to patents is amortized over the remaining life of
the patent of 16.75 years. The $15,039,836 of goodwill is expected to be
deductible for tax purposes.

39

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3. DISCONTINUED OPERATIONS

SALE OF GUM OPERATIONS

On July 20, 2001, the Company sold substantially all of its assets related
to its gum operations to Wm. Wrigley Jr. Company ("Wrigley"), for
$25,000,000 in cash and other consideration. The Company retained certain
assets, including cash, accounts receivable, its 60% interest in Zicam and
its 49% interest in a joint venture with Swedish Match AB. In addition,
Wrigley purchased 200,000 shares of the Company's common stock at a price
of $7.50938 per share, or approximately $1,501,876.

The results of operations for all periods presented have been restated for
the discontinued gum operations, which are summarized below. In addition,
the Company recorded an after-tax gain of approximately $17,717,362 as a
result of the asset sale in 2001.

Summary of Operating Results of Discontinued Operations:

Year Ended December 31,
----------------------------
2001 2000
----------- -----------
Net sales $ 2,064,457 $ 2,560,603
Cost of sales 2,233,272 3,740,999
----------- -----------

Gross profit (168,815) (1,180,396)
Operating expenses 814,684 1,105,054
Research and development 258,057 348,823
----------- -----------

Income (loss) from operations (1,241,556) (2,634,273)
Other income (expense) 936,141 663,636
----------- -----------

Net Income (Loss) $ (305,415) $(1,970,637)
=========== ===========

4. RESTRICTED CASH

Cash of $1,503,150 at December 31, 2001, was held as collateral by a bank
for letters of credit issued to a vendor of the Company's advertising
campaign. The unused letter of credit at December 31, 2002 was $1,500,000.

5. INVENTORIES

Inventories consist of the following:

2002 2001
---------- ----------
Raw materials and packaging $ 506,823 $ 466,520
Finished goods 1,066,211 1,114,392
---------- ----------

Total $1,573,034 $1,580,912
========== ==========

40

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6. MARKETABLE SECURITIES

At December 31, 2001, all marketable debt securities were classified as
held-to-maturity and are carried at amortized cost. Investments consisted
entirely of U.S. government securities. At December 31, 2001, the estimated
fair value of each investment approximated its amortized cost and
therefore, there were no significant unrealized gains or losses.

7. CURRENT NOTES PAYABLE



BANK 2002 2001
---- ---------- -----------

$1,000,000 line of credit due in 2001 which was
extended until March 2002, with interest at 3%
above prime (or 7.75% at December 31, 2001),
collateralized by Zicam's accounts receivable,
inventory, property and equipment and intangible
assets. Advances under the line of credit are
limited to 50% of Zicam's eligible accounts
receivable plus cash on deposit with the bank. The
loan also contains various financial covenants
regarding liquidity percentages and Zicam, must
maintain a profit on a quarterly basis. The bank
waived the net income covenant of Zicam, on a
quarterly basis in 2001. $ -- $ 1,000,000

$2,500,000 line of credit due in 2003 with
interest at 1.5% above prime (or 5.75% at December
31, 2002), collateralized by accounts receivable,
inventory, property and equipment, intangible
assets and other assets of the Company. Advances
under the line of credit are limited to certain
percentages of the Company's eligible accounts
receivable and inventory. The loan also contains
various financial covenants regarding liquidity,
tangible net worth, and other financial ratios and
minimum amounts of net income or maximum amounts
of net loss on a quarterly basis. The bank waived
the net income covenant for the second quarter of
2002. The Company is also restricted from paying
dividends without the consent of the Company's
lender. -- --
---------- -----------

Total Current Notes Payable $ -- $ 1,000,000
========== ===========


8. LONG-TERM DEBT

Long-term debt consists of the following:



FINANCIAL INSTITUTIONS AND OTHER

Non-interest bearing installment note with imputed
interest at 6.5% due in 2003, payable in four
installments of $2,750,000 on June 30, 2002,
November 30, 2002, June 30, 2003 and November 30,
2003. Collateralized by forty percent ownership
interest in Zicam. $5,253,643 $10,177,525
---------- -----------


41

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8. LONG-TERM DEBT (CONTINUED)

2002 2001
---------- -----------
Total Long-Term Debt $ 5,253,643 $10,177,525

Less current portion of long-term debt (5,253,643) (4,923,882)
----------- -----------

Long-Term Debt $ -- $ 5,253,643
=========== ===========

Installments due on debt principal at December 31, 2002 are as follows:

Year Ending
December 31,
------------
2003 $5,253,643
----------

Total $5,253,643
==========

9. INCOME TAXES

The components of the provision (benefit) for income taxes are as follows:

2002 2001 2000
----------- ----------- -----
Current:
Federal $ (325,000) $ 325,000 $ --
State 12,740 -- --
----------- ----------- -----

Total (312,260) 325,000 --
----------- ----------- -----

Deferred:
Federal (3,208,806) -- --
State (188,881) -- --
----------- ----------- -----

Total (3,397,687) -- --
----------- ----------- -----

Total Provision (Benefit)
For Income Taxes $(3,709,947) $ 325,000 $ --
=========== =========== =====

The provision (benefit) for income taxes reconciles to the amount computed
by applying the federal statutory rate to income before the provision
(benefit) for income taxes as follows:

2002 2001 2000
---- ---- ----

Federal statutory rate 34% 34% (34)%
State income taxes, net of federal benefits 5 5 (5)
Valuation allowance (324) -- 39
Other (31) -- --
Net operating loss carryover (38) (39) --
---- ---- ----

Total (354)% --% --%
==== ==== ====

42

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9. INCOME TAXES (CONTINUED)

The following is a reconciliation of the provision (benefit) for income
taxes to income before provision for income taxes computed at the federal
statutory rate of 34%.



2002 2001 2000
----------- ----------- -----------

Income taxes at the federal statutory rate $ 355,881 $ 4,288,295 $(2,763,688)
State income taxes, net of federal benefits 52,335 630,632 (406,425)
Nondeductible expenses 2,836 4,231 4,465
Net operating loss carryover (398,312) (4,598,158) --
Other (325,000) -- --
Valuation allowance (3,397,687) -- 3,165,648
----------- ----------- -----------

Total $(3,709,947) $ 325,000 $ --
=========== =========== ===========


The income taxes for the year ended December 31, 2001 was comprised of
federal alternative minimum tax that was due as a result of the gain on the
sale of the Company's gum operations.

Significant components of deferred income taxes as of December 31, 2002 and
2001 are as follows:

2002 2001
------------ ------------
Net operating loss carryforwards $ 9,435,500 $ 10,115,000
Reserve for bad debts 265,200 192,000
Inventory valuation reserve 36,700 --
Reserves and accrued expenses 513,400 --
Other 29,300 --
Valuation allowance (400,100) (4,302,900)
------------ ------------

Total Deferred Tax Asset 9,880,000 6,004,100
------------ ------------

Amortization of intangible assets (448,900) (34,900)
Depreciation (72,600) (3,700)
Stock option compensation -- (5,965,500)
------------ ------------

Total Deferred Tax Liability (521,500) (6,004,100)
------------ ------------

Net Deferred Tax Asset $ 9,358,500 $ --
============ ============

The Company records a valuation allowance for certain temporary differences
for which it is more likely than not that it will not receive future tax
benefits. The Company assesses its past earnings history and trends, sales
backlog and projections of future net income. The Company recorded a
valuation allowance for the entire amount of the net deferred asset in 2000
and 2001 as it had determined that it was more likely than not that no
deferred tax assets would be realized. In 2002, the Company determined that
it is more likely than not that the deferred tax assets will be realized
and the valuation allowance has been reduced to $400,100. The net change in
the valuation allowance for deferred tax assets was a decrease of
$3,902,800. The Company will continue to review this valuation allowance on
a quarterly basis and make adjustments as appropriate.

43

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9. INCOME TAXES (CONTINUED)

The tax benefits associated with employee exercises of non-qualified stock
options and disqualifying dispositions of stock acquired with incentive
stock options reduces income taxes currently payable. However, no benefits
were recorded to additional paid in capital in 2000 and 2001 because their
realization was not more likely than not to occur and consequently, a
valuation allowance was recorded against the entire benefit. In 2002, the
Company determined that it is more likely than not that the amounts would
be realized and has recorded a benefit that is charged to additional paid
in capital of $5,960,799.

At December 31, 2002, the Company had federal and state net operating loss
carryforwards of approximately $23,000,000 and $22,000,000, respectively.
Such carryforwards expire in the years 2018 through 2020 and 2003 through
2005 for federal and state purposes, respectively.

10. PREFERRED STOCK

The authorized preferred stock of the Company consists of 2,000,000 shares,
$.001 par value. The preferred stock may be issued in separate series from
time to time as the Board of Directors of the Company may determine by
resolution, unless the nature of a particular transaction and applicable
statutes require shareholder approval. The rights, preferences and
limitations of each series of preferred stock may differ, including without
limitation, the rate of dividends, method and nature of payment of
dividends, terms of redemption, amounts payable on liquidation, sinking
fund provisions (if any), conversion rights (if any), and voting rights.

In June 1999, the Company designated a new class of preferred stock "Series
A Preferred Stock" and the number of shares constituting such series was
2,000 shares with no par value. The new series was authorized in connection
with a Securities Purchase Agreement for the sale of $4,000,000 of senior
notes and $2,000,000 of Series A preferred stock. Each preferred share
bears dividends at a rate of 14% per year, and are payable on a quarterly
basis. Redemptions of the preferred shares were accompanied by a repayment
of the Company's senior notes on a prorata basis of one third preferred
stock and two-thirds senior notes. Redemptions of the preferred stock prior
to June 2, 2001 were based on 95% of the average of the closing bid price
of the Company's common stock for the 20 days prior to the date of
redemption. The Company redeemed all of the outstanding preferred shares in
January and February 2000 through the issuance of common stock.

11. STOCKHOLDERS' EQUITY

STOCK REPURCHASE PLAN

In September 2001, the Company began acquiring shares of its common stock
in connection with its stock repurchase plan approved in August 2001 and
expired in August 2002. The plan authorizes the Company to repurchase up to
1,000,000 outstanding common shares. During 2001, the Company purchased
8,100 shares of common stock at an aggregate cost of $52,436. During 2002,
the Company purchased 1,500 shares of common stock at an aggregate cost of
$9,420.

In December 2002, the Company's Board of Directors authorized a Common
Stock Repurchase Program for up to 250,000 shares of the Company's common
stock. The common stock may be repurchased from time to time, at the
discretion of the Company, at any time until December 31, 2003.

44

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11. STOCKHOLDERS' EQUITY (CONTINUED)

STOCKHOLDER RIGHTS PLAN

On July 12, 2002, the Board of Directors of the Company adopted a
shareholder rights plan in the form of a Rights Agreement dated as of July
22, 2002 by and between the Company and Corporate Stock Transfer, Inc., as
Rights Agent (the "Rights Agreement"). On July 12, 2002, the Board of
Directors of the Company declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of common stock. The
dividend was paid on July 22, 2002 to the Company's stockholders of record
on that date. The Rights also apply to, and will be issued in the same
proportion in connection with, all future common stock issuances until the
Distribution Date (defined below) or the expiration or earlier redemption
or exchange of the Rights. Each Right permits the registered holder thereof
to purchase from the Company, at any time after the Distribution Date, one
one-thousandth of a share of the Company's Series A Junior Participating
Preferred Stock for a purchase price of $50.79 per such one one-thousandth
of a share, subject to certain possible adjustments provided for in the
Rights Agreement. The Board of Directors of the Company has authorized the
issuance of up to 20,000 shares of Series A Junior Participating Preferred
Stock upon the exercise of Rights.

Initially the Rights will be attached to all certificates representing
shares of common stock then outstanding, and no separate Rights
certificates will be distributed. The Rights will separate from the common
stock upon the earlier to occur of (i) 10 days after the public
announcement of a person's or group of affiliated or associated persons
having acquired beneficial ownership of 15% or more of the outstanding
common stock (such person or group being an "Acquiring Person"), or (ii) 10
business days (or such later date as the Company's Board may determine)
following the commencement of, or announcement of an intention to make, a
tender offer or exchange offer for the common stock, the consummation of
which would result in a person or group's becoming an Acquiring Person (the
earlier of such dates being the "Distribution Date"). The Rights are not
exercisable until the Distribution Date. If any person (or group of
persons) becomes an Acquiring Person, except in a tender or exchange offer
which is for all outstanding common stock at a price and on terms which a
majority of the Company's Board determines to be adequate and in the best
interests of the Company, its shareholders and other relevant
constituencies (other than such Acquiring Person, its affiliates and
associates), each holder of a Right will thereafter be entitled to acquire,
for each Right so held, one share of common stock for a purchase price
equal to 50% of the then current market price for such share of common
stock. All Rights beneficially owed by an Acquiring Person or any affiliate
or associate thereof will be null and void and not exercisable. The Rights
expire on July 22, 2012 provided that, prior to a person (or group of
persons) becoming an Acquiring Person, the Company may redeem the Rights
for $0.01 per Right. All of the provisions of the Rights Agreement may be
amended before the Distribution Date by the Board of Directors of the
Company for any reason it deems appropriate. After the Distribution Date,
the provisions of the Rights Agreement may be amended by the Board in order
to cure any ambiguity, defect or inconsistency, to make changes which do
not adversely affect the interest of Rights (excluding the interest of any
Acquiring Person) or, subject to certain limitations, to shorten or
lengthen any time period under the Rights Agreement.

45

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11. STOCKHOLDERS' EQUITY (CONTINUED)

DIRECTORS RESTRICTED STOCK PURCHASE PROGRAM

In 2002, the Company established a Director Restricted Stock Purchase
Program (the "Program"). Under the Program the number of shares to which
the Director will be entitled is equal to the cash portion of compensation
payable to him for Directors fees by the Company that he wishes to apply to
the purchase of shares under the Program divided by 80% of the closing
price of the Company's stock price on the date the cash consideration would
be paid. Shares issued under the Program are restricted until the first to
occur of (i) the expiration of three years from the date the shares are
issued, (ii) a change in control of the Company, and (iii) the Directors
death or disability.

12. STOCK OPTIONS AND WARRANTS

1995 STOCK OPTION PLAN

In March 1995, the Company adopted a stock option plan (the "1995 Plan")
which provides for the grant of both incentive stock options and
non-qualified options. A total of 2,000,000 shares of common stock have
been reserved for issuance under the 1995 Plan.

Options under the Company's 1995 Plan are issuable only to eligible
officers, directors, key employees and consultants of the Company. The 1995
Plan is administered by a committee selected by the Board of Directors,
which determines those individuals who shall receive options, the time
period during which the options may be exercised, the number of shares of
common stock that may be purchased under each option, and the option price.
Unless sooner terminated, the 1995 Plan shall remain in effect until
January 1, 2005.

The per share exercise price of the common stock may not be less than the
fair market value of the common stock on the date the option is granted.
The aggregate fair market value (determined as of the date the option is
granted) of the common stock that any employee may purchase in any calendar
year pursuant to the exercise of incentive stock options may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him, more than 10% of the total
combined voting power of all classes of stock of the Company shall be
eligible to receive any incentive stock options under the 1995 Plan unless
the option price is at least 110% of the fair market value of the common
stock subject to the option, determined on the date of grant.

All options granted under the 1995 Plan provide for the payment of the
exercise price in cash or, with the prior written consent of the Company,
by delivery to the Company of shares of common stock already owned by the
optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.

46

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12. STOCK OPTIONS AND WARRANTS (CONTINUED)

1995 STOCK OPTION PLAN (CONTINUED)

The following table contains information on the stock options under the
Company's 1995 Plan for the years ended December 31, 2000, 2001 and 2002.
The outstanding options expire from March 2003 to July 2006.

Number of Weighted Average
Shares Exercise Price
------ --------------
Options outstanding at December 31, 1999 664,500 $ 8.85
Granted 120,000 13.40
Exercised (148,000) 5.63
Cancelled (45,000) 12.00
-------- ------

Options outstanding at December 31, 2000 591,500 10.34
Granted 95,000 7.94
Exercised (158,500) 5.96
Cancelled (205,000) 11.43
-------- ------

Options outstanding at December 31, 2001 323,000 11.10
Granted -- --
Exercised -- --
Cancelled (111,000) 12.12
-------- ------

Options outstanding at December 31, 2002 212,000 $10.57
======== ======

2001 LONG-TERM INCENTIVE PLAN

In November 2001, the Company adopted the 2001 Long-Term Incentive Plan
(the "2001 Plan"). The 2001 Plan provides for the grant of incentive stock
options, non-qualified options, restricted common stock, performance based
awards, tandem awards and substitute awards. A total of 1,000,000 shares of
common stock have been reserved for issuance under the 2001 Plan.

The following table contains information on the stock options under the
Company's 2001 Plan for the years ended December 31, 2001 and 2002. The
outstanding options expire from March 2003 to December 2009.

Number of Weighted Average
Shares Exercise Price
------ --------------
Options outstanding at December 31, 2000 -- $ --
Granted 12,000 6.90
Exercised -- --
Cancelled -- --
------- -----

Options outstanding at December 31, 2001 12,000 6.90
Granted 178,800 8.86
Exercised -- --
Cancelled -- --
------- -----

Options outstanding at December 31, 2002 190,800 $8.74
======= =====

47

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12. STOCK OPTIONS AND WARRANTS (CONTINUED)

OTHER STOCK OPTIONS

The Company has granted non-qualified stock options to consultants,
distributors and other individuals. The outstanding options expire from
March 2003 to September 2004.

The following table contains information on all of the Company's non-plan
stock options for the years ended December 31, 2000, 2001 and 2002.

Number of Weighted Average
Shares Exercise Price
------ --------------
Options outstanding at December 31, 1999 240,000 $ 9.82
Granted 20,000 14.31
Exercised (77,314) 9.91
Cancelled (5,900) 9.61
-------- ------

Options outstanding at December 31, 2000 176,786 10.12
Granted 10,000 8.88
Exercised -- --
Cancelled (14,286) 11.44
-------- ------

Options outstanding at December 31, 2001 172,500 10.11
Granted -- --
Exercised -- --
Cancelled (57,500) 9.48
-------- ------

Options outstanding at December 31, 2002 115,000 $10.43
======== ======

48

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12. STOCK OPTIONS AND WARRANTS (CONTINUED)

OTHER STOCK OPTION INFORMATION

The weighted average fair value price of options granted was $4.14, $3.61
and $5.72 in 2002, 2001 and 2000, respectively.

The following table summarizes information about the Company's two
stock-based compensation plans outstanding at December 31, 2002:

Options Outstanding and Exercisable by Price Range as of December 31, 2002:



Options Outstanding Options Exercisable
------------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
------ ----------- ------------- ----- ----------- -----

$ 6.90-9.00 168,300 4.52 $ 7.68 72,300 $ 7.70
$9.01-16.13 234,500 2.52 $11.14 173,500 $11.73
----------- ------- ---- ------ ------- ------

$6.90-16.13 402,800 3.36 $ 9.70 245,800 $10.55
=========== ======= ==== ======= ======= ======


COMPENSATION EXPENSE

The Company recorded compensation expense of $--, $25,830, and $123,933 for
the years ended December 31, 2002, 2001 and 2000, respectively for the
value of certain options granted to non-employees of the Company. The
valuation of the options and warrants granted to employees is based on the
difference between the exercise price and the market value of the stock on
the measurement date. The valuation of the options granted to non-employees
is estimated using the Black-Scholes option pricing model.

49

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12. STOCK OPTIONS AND WARRANTS (CONTINUED)

COMPENSATION EXPENSE (CONTINUED)

The Company issued 8,500 shares of its restricted common stock to employees
in 2002 pursuant to the Company's restricted stock bonus program. The
Company recorded compensation expense of $71,486 for the value of the
shares issued. The weighted average fair value of the restricted common
stock at the date of grant was $8.41 per share.

FINANCING WARRANTS

In connection with the Company's Securities Purchase Agreement for the sale
of senior notes and Series A preferred stock in 1999, the Company issued
warrants to the lenders. The Company issued a total of 300,000 common stock
purchase warrants. Each warrant is exercisable to purchase one share of the
Company's common stock at $12.44 per share at anytime until June 1, 2002.
In 2000, 212,540 warrants were exercised and 87,460 warrants expired
unexercised in 2002.

The Company also issued a total of 60,000 common stock purchase warrants as
a finder's fee in connection with the financing. Each warrant is
exercisable to purchase one share of the Company's common stock, 30,000 at
$11.70 per share through June 1, 2002 and 30,000 at $15.00 per share
through June 1, 2004. As of December 31, 2002, 30,000 warrants are
outstanding and 30,000 warrants expired unexercised in 2002.

13. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases its office facilities under a long-term leasing
arrangement. The following is a schedule of future minimum lease payments
at December 31, 2002 under the Company's operating leases that have initial
or remaining noncancellable lease terms in excess of one year:

Year Ending
December 31, Facilities
------------ ----------
2003 $190,080
2004 15,840
--------

Total Minimum Lease Payments $205,920
========

Rental expense charged to operations was $256,804, $280,838 and $330,134
for the years ended December 31, 2002, 2001 and 2000, respectively.

LITIGATION

On November 9, 1999, The Quigley Corporation ("Quigley") commenced a civil
action against the Company in the United States District Court for the
Eastern District of Pennsylvania. The complaint alleged that Zicam(TM) Cold
Remedy infringed on a patent licensed to Quigley and sought compensatory
damages and injunctive relief.

Without admitting guilt, the Company agreed to settle the case in June 2001
to avoid the potential adverse consequences of an unfavorable outcome,
including potential damages that may have been awarded to Quigley or the
entry of an order for injunctive relief. The settlement provided for a
payment of $1,000,000 on August 1, 2001, $137,500 in four equal
installments through April 2002 and a royalty payment of 5.5% of net sales
of Zicam Cold Remedy, but not less than $500,000, for the period April 1,
2001 through March 5, 2002, payable on a quarterly basis.

50

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


13. COMMITMENTS AND CONTINGENCIES (CONTINUED)

LITIGATION (CONTINUED)

On June 2, 1999, the Company filed a complaint against DJ Ltd. ("DJ").
Following a private placement the Company completed in June 1999, DJ sent
the Company a letter demanding a placement fee based on an agreement
between the parties dated December 1996. The Company's complaint sought a
declaratory judgment that DJ was not owed any fee under the agreement. DJ
filed a counterclaim against the Company that alleged the Company breached
the contract between the parties and that the Company had been unjustly
enriched. DJ sought damages in the amount of $480,000, plus costs, expenses
and warrants to purchase 50,000 shares of the Company's common stock. The
Company and DJ agreed to settle the case in January 2003 for a payment by
the Company of $250,000. The amount is recorded as of December 31, 2002 as
a charge to operating expenses.

14. RELATED PARTY TRANSACTIONS

In 2000, the Company loaned $200,000 to its former Chairman of the Board
and $150,000 to the Company's former President. The notes included interest
at 10% per annum. The Company wrote off the note receivable from its former
Chairman of the Board of $209,753, which included $9,753 of accrued
interest in 2000. The $150,000 note receivable from the Company's former
President plus accrued interest of $8,671 was forgiven in 2001 in
connection with the sale of the Company's gum operations in 2001.

15. EMPLOYEE BENEFIT PLAN

Effective September 1, 1997, the Company adopted a Simple Retirement
Account Plan for employees. The Company shall make a matching contribution
for each employee in an amount equal to each employees' Salary Reduction
Contributions for the Plan year of up to 3% of the employees compensation
for the Plan year. The Company made matching contributions of $20,539,
$32,988 and $31,198 for the years ended December 31, 2002, 2001 and 2000,
respectively. Each employee shall be fully vested at all times in his
contribution and the Company's matching contributions.

16. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and accounts receivable. The Company places its cash
equivalents with high credit quality financial institutions and limits its
credit exposure with any one financial institution. The Company's cash in
its banks exceeds the federally insured limits. The Company provides credit
in the normal course of business to many of the nation's top drug stores
and mass merchandisers. The Company's accounts receivable are due from
customers located throughout the United States. The Company performs
periodic credit evaluations of its customers' financial condition and
generally requires no collateral. The Company maintains reserves for
potential credit losses, and such losses have not exceeded management's
expectations.

The Company's sales are from seven products marketed under the Zicam brand
name, with a majority of its sales attributable to its Cold Remedy product,
which subjects the Company to significant financial exposure. If future
sales of these products decrease, and in particular sales of its Cold
Remedy formula, the Company's operations could be materially adversely
affected.

The Company currently relies on three different manufacturers to produce
its seven products, but has identified alternative suppliers for each of
the products. However, the Company has not made any purchases from these
suppliers and its ability to secure supply of its swab products could be
limited by the proprietary technology possessed by the current
manufacturer.

51

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


16. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (CONTINUED)

Sales to major customers, which comprised 10% or more of net sales, for the
years ended December 31, 2002, 2001 and 2000 were as follows:

2002 2001 2000
---- ---- ----
Customer A 18.2% 10.6% *
Customer B *% 10.3% 13.0%
Customer C 11.0% * *

* Less than 10%

17. FAIR VALUE OF FINANCIAL INSTRUMENTS

Disclosures about Fair Value of Financial Instruments for the Company's
financial instruments are presented in the table below. These calculations
are subjective in nature and involve uncertainties and significant matters
of judgment and do not include income tax considerations. Therefore, the
results cannot be determined with precision and cannot be substantiated by
comparison to independent market values and may not be realized in actual
sale or settlement of the instruments. There may be inherent weaknesses in
any calculation technique, and changes in the underlying assumptions used
could significantly affect the results. The following table presents a
summary of the Company's financial instruments as of December 31, 2002 and
2001:



2002 2001
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------

Financial Assets:
Cash and cash equivalents $12,010,091 $12,010,091 $ 7,342,985 $ 7,342,985
Restricted cash -- -- 1,503,150 1,503,150
Marketable securities -- -- 10,656,380 10,656,380

Financial Liabilities:
Notes payable -- -- 1,000,000 1,000,000
Long-term debt 5,253,643 5,253,643 10,177,525 10,177,525


The carrying amounts for cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair value because of the short
maturities of these instruments. The fair value of marketable securities is
determined by the most recently traded price of each security at the
balance sheet date. The fair value of notes payable approximates fair value
because of the market rate of interest on the notes payable. The carrying
value of long-term debt approximates fair value because the note is
non-interest bearing and has been recorded by the Company on a discounted
basis using a market rate of interest.

52

MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Selected unaudited quarterly financial data for the years 2002 and 2001 are
summarized below:



Fiscal Year 2002 Quarters
-----------------------------------------------------------------
1st 2nd 3rd 4th Total
------------ ------------ ------------ ------------ ------------

Net sales $ 5,067,511 $ 1,825,696 $ 5,078,596 $ 11,575,833 $ 23,547,636
Gross profit 3,820,275 1,300,809 3,410,443 8,264,068 16,795,595

Net income (loss) from
continuing operations 928,863 (871,394) 1,022,734 3,676,452 4,756,655

Net income (loss) per
basic share from
continuing operations .10 (.09) .11 .39 .50

Net income (loss) per
diluted share from
continuing operations .10 (.09) .11 .39 .50


Net income (loss) 928,863 (871,394) 1,022,734 3,676,452 4,756,655


Fiscal Year 2001 Quarters
-----------------------------------------------------------------
1st 2nd 3rd 4th Total
------------ ------------ ------------ ------------ ------------
Net sales $ 6,472,190 $ 1,373,330 $ 2,718,194 $ 5,508,448 $ 16,072,162
Gross profit 4,858,870 890,959 1,966,792 4,140,729 11,857,350

Net income (loss) from
continuing operations 102,098 (1,934,022) (101,254) (2,866,136) (4,799,314)

Net income (loss) per
basic share from
continuing operations .01 (.21) (.01) (.30) (.52)

Net income (loss) per
diluted share from
continuing operations .01 (.21) (.01) (.30) (.52)


Net income (loss) 346,053 (2,302,029) 17,332,438 (2,763,829) 12,612,633


(1) Net income (loss) per common share is computed individually for each
of the quarters presented, therefore, the sum of the quarterly net
income (loss) per share may not necessarily equal the total for the
year.

(2) In the second quarter of 2001, the Company reflected the gum
operations, which was sold on July 20, 2001, as a discontinued
operation and recorded a gain on the disposal of such business of
$17,717,362. All prior periods presented have been restated for the
discontinued operations.

53

(a) 2. FINANCIAL STATEMENT SCHEDULES

Financial statement schedules have been omitted because either they are not
required or are not applicable, or because the information has been included in
the consolidated financial statements or notes thereto contained in this Form
10-K.

(a) 3. EXHIBITS

Exhibit No. Title
----------- -----

3.01 Articles of Incorporation and Amendments thereto of the
Registrant (1)

3.02 Bylaws of the Registrant (1)

4.01 Registration Rights Agreement dated July 20, 2001 by and
between the Registrant and Wm. Wrigley Jr. Company (2)

4.02 Rights Agreement dated as of July 22, 2002 by and between
the Registrant and Corporate Stock Transfer, Inc. (3)

10.01 Consulting Agreement between the Registrant and Gary S.
Kehoe (4)

10.02 *1995 Stock Option Plan (5)

10.03 *Amendment to 1995 Stock Option Plan (5)

10.04 Credit Agreement among the Registrant, Gel Tech, L.L.C. (now
Zicam, LLC) and Comerica Bank-California (6)

10.05 Asset Purchase Agreement between the Registrant and Wm.
Wrigley Jr. Company (10)

10.06 Purchase Agreement among the Registrant, Zensano, Inc. and
Zengen, Inc. for the Registrant's acquisition of 40%
interest in Gel Tech, L.L.C. (now Zicam, LLC) (7)

10.07 Security Agreement between the Registrant and Zensano, Inc.
(7)

10.08 Confidentiality and Non-Competition Agreement among the
Registrant, Gel Tech, L.L.C. (now Zicam, LLC), Zensano,
Inc., Zengen, Inc. and certain other individuals (7)

10.09 *Employment Agreement between the Registrant and Carl J.
Johnson (8)

10.10 *First Amendment to Employment Agreement between the
Registrant and Carl J. Johnson (2)

10.11 *2001 Stock Incentive Plan (9)

10.12 *Summary of Matrixx Initiatives, Inc. Director Restricted
Stock Purchase Program (6)

54

23.1 **Consent of Mayer Hoffman McCann P.C., independent auditor
of the Company

23.2 **Consent of Angell & Deering, Certified Public Accountants,
former independent auditor of the Company.

99.1 **Certification pursuant to 18 U.S.C. Section 1350.

99.2 **Certification pursuant to 18 U.S.C. Section 1350.

* Indicates management compensatory contract, plan or arrangement.

** Filed with this Form 10-K.

(1) Incorporated by reference to the Registrant's Amendment No.1 to Form 8-A,
file No. 000-27646, as filed on June 18, 2002.

(2) Incorporated by reference to the Registrants Report on Form 10-K for the
fiscal year ended December 31, 2001, file number 000-27646.

(3) Incorporated by reference to the Registrant's registration statement on
Form 8-A, filed July 23, 2002, file number 000-27646.

(4) Incorporated by reference to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 2000, file number 000-27646.

(5) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 declared effective by the Commission on April 24, 1996, file
number 333-870.

(6) Incorporated by reference to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 2002, file number 000-27646.

(7) Incorporated by reference to the Registrant's Report on Form 8-K filed
December 14, 2001, file number 000-27646.

(8) Incorporated by reference to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 2001, file number 000-27646.

(9) Incorporated by reference to the Registrant's definitive proxy statement on
Schedule 14A, filed October 17, 2001, file number 000-27646.

(10) Incorporated by reference to the Registrant's Report on Form 10-K/A, filed
June 7, 2001, file number 000-27646.

(b) REPORTS ON FORM 8-K

On November 12, 2002, we filed a Current Report on Form 8-K with the SEC
regarding a change of our independent auditor and certifying accountant from
Angell & Deering, Certified Public Accountants to Mayer Hoffman McCann P.C. This
change occurred solely as a result of the partners of Angell & Deering joining
Mayer Hoffman McCann P.C.

55

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in Phoenix, Arizona,
on March 26, 2003.


MATRIXX INITIATIVES, INC.


By: /s/ Carl J. Johnson
-------------------------------------
Carl J. Johnson
President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dated indicated:

Signature Title Date
- --------- ----- ----

/s/ Edward E. Faber Chairman of the Board of Directors March 26, 2003
- -----------------------
Edward E. Faber

/s/ Carl J. Johnson President, Chief Executive Officer March 26, 2003
- ----------------------- and Director
Carl J. Johnson

/s/ William C. Egan Director March 26, 2003
- -----------------------
William C. Egan

/s/ Edward J. Walsh Director March 26, 2003
- -----------------------
Edward J. Walsh

/s/ William A. Yuan Director March 26, 2003
- -----------------------
William A. Yuan

/s/ Michael A. Zeher Director March 26, 2003
- -----------------------
Michael A. Zeher

/s/ William J. Hemelt Executive Vice President, Chief March 26, 2003
- ----------------------- Financial Officer (Principal
William J. Hemelt Financial Officer & Principal
Accounting Officer), Treasurer
and Secretary

56

CERTIFICATIONS


I, Carl J. Johnson, President and Chief Executive Officer of Matrixx
Initiatives, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Matrixx Initiatives,
Inc.;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and

c) presented in this annual 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
annual 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: March 26, 2003

/s/ Carl J. Johnson
-------------------------------------
Carl J. Johnson
President and Chief Executive Officer

57

CERTIFICATIONS


I, William J. Hemelt, Executive Vice President, Chief Financial Officer,
Treasurer and Secretary of Matrixx Initiatives, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Matrixx
Initiatives, Inc.;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and

c) presented in this annual 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 annual 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: March 26, 2003

/s/ William J. Hemelt
-----------------------------------------
William J. Hemelt
Executive Vice President, Chief Financial
Officer, Treasurer & Secretary

58