SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2003

OR

For the transaction period from _______ to ________

Commission File No. 0-27646

MATRIXX INITIATIVES, INC.

4742 N. 24^th Street
Suite 455
Phoenix, AZ 85016
602-385-8888
(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:

     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 þ NO o

     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. o

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

     As of March 1, 2004, 9,479,601 shares of the Registrant’s Common Stock were outstanding. As of March 1, 2004, 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 $95 million.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s definitive proxy statement prepared in connection with the Registrant’s 2004 annual meeting of stockholders are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.

     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.

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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 10 different products under the Zicam® brand: Zicam Cold Remedy nasal gel, a patented, homeopathic remedy that has been clinically proven to 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; three homeopathic oral delivery cold remedy products – Zicam Cold Remedy Chewables, Zicam Cold Remedy RapidMelts and Zicam Cold Remedy Oral Mist; 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., in which we owned 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 were relocated in February 2004 to 4742 N. 24^th Street, Suite 455, Phoenix, AZ 85016 and our telephone number has changed to (602) 385-8888.

Markets and Company Products

     All 10 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 remedy and/or provide relief to cold, allergy and sinus congestion sufferers. The largest sub-segment of the cough and cold 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, compared to cold sufferers, are more likely to require medication for a much longer period of time to relieve allergy symptoms.

     Our biggest selling product, Zicam Cold Remedy, which accounted for approximately 40% of net sales during 2003 is a homeopathic nasal gel product based on our patented zincum gluconicum delivery system. The original product in a nasal pump bottle was introduced in 1999. Sales of Zicam Cold Remedy have grown steadily since its introduction as customer awareness of the product has increased as

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a result of our marketing and public relations efforts, and word-of-mouth experience by consumers. 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 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 two other products in the cough and cold category (including competing generic copies of that product) are able to make a similar claim.

     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 experienced a backlog in orders in late December 2002 and again in December 2003. As a result of the manufacturer’s inability to meet our swab production requirements in 2002 and higher costs imposed unilaterally by the manufacturer, we developed a new swab product in 2003 that is produced by a different manufacturer. We began shipping the new swab product to retailers in February 2004. We will continue to receive shipments of the old product design until the expiration of the manufacturing contract on March 31, 2004. Because of the time required for start-up, deliveries of the new swab did not alleviate the most recent backlog until early March 2004. The kid’s size swab product has not been in a back-order situation. We expect that the manufacturer of the new swab design will be able to meet our future requirements in the next cold season, but we intend to build inventory of swab products prior to the next cold season to further ensure our ability to meet future demand for the swab products. The two swab products accounted for approximately 25% of net sales for 2003.

     We introduced three oral delivery forms of Zicam Cold Remedy products in late 2003 – Zicam Cold Remedy Chewables, Zicam Cold Remedy RapidMelts, and Zicam Cold Remedy Oral Mist. These products were designed to meet the needs of customers who dislike nasal applications. All three rapidly deliver a dose of ionic zinc to the oral mucosa in contrast with zinc lozenges which require approximately 15-20 minutes to dissolve. We believe that this feature allows the consumer to avoid much or all of the stomach upset that has been associated with the zinc lozenges on the market. We expect future distribution of these three products will increase significantly, as initially most major national retailers sold only one or two of these new products. These three products accounted for almost 15% of our net sales in 2003.

     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 on the market due to the absence of side effects such as drowsiness or jitters. Zicam Allergy Relief accounted for almost 10% of net sales for 2003.

     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

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gel matrix to help ensure constant, soothing relief for irritated nasal membranes. While greater retail distribution opportunities exist, these three products contributed approximately 10% of total 2003 net sales. We believe 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 unique or novel 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.

     Pursuing Additional Delivery Systems: Our success in expanding consumer acceptance of our nasal gel delivery system and growing the Zicam franchise confirms our belief 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 and are specifically targeting product concepts in the analgesic and oral care markets as well as the cough and cold market category in which we currently operate.

     Extending Sales Into New Markets: 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. However, we do not expect any revenue or net 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. Zicam Cold Remedy nasal pump, Zicam Cold Remedy Swabs – Adult Size and Zicam Allergy Relief are sold in virtually every major retail outlet in the country. Our seven other Zicam products have not achieved the same level of distribution, though two national retailers currently carry all 10 Zicam products. We are highly dependent on a small group of large national retailers for our product distribution, such that our top fifteen customers accounted for more than 80% of our net sales in 2003,

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and two customers, Wal-Mart and Walgreens, each accounted for more than 10% of our net sales in 2003. Our agreements with our customers generally provide for their ability to return unsaleable merchandise, including damaged product 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 excess production of Zicam Cold Remedy in late 1999 and early 2000 in connection with the original introduction of the product, which resulted in out-of-date products two years later. 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 and financial results would be negatively impacted.

Manufacturing and Distribution

     Our 10 products are manufactured by six contract manufacturers. Each of the 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. With the exception of a contract with Innovative Swab Technologies for the old swab design, which expires on March 31, 2004, we rely on individual production orders to meet our needs from these suppliers. However, we are in the process of negotiating contracts with certain manufacturers at this time. We have some flexibility in securing other manufacturers to produce our products, however, we may be limited in our alternatives due to proprietary technologies that are utilized in some of the 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. We also ship the nasal gel formula in bulk containers to our swab product manufacturers for production of the swab products. Generally, finished products are shipped to independent warehouses in Arizona and Indiana for storage prior to shipment to our customers.

     At December 31, 2003 and December 31, 2002, we had a backlog of swab orders of approximately $0.4 million and $1.3 million, respectively. The backlog in 2002 was not alleviated until the end of the cold season in late March 2003. The backlog in December 2003 was eliminated in early March 2004 due to the additional supply of swab products which became available through the production of the new swab design. The backorder situation that occurred in December 2003 was due to the inability of our original swab product manufacturer, Innovative Swab Technologies, to increase production, and the extreme demand for the product that was experienced in December 2003 as a result of the severe cold season. We believe we should be able to meet our anticipated higher demand for this product in the 2004-2005 cold season by building inventories throughout the year. In addition, we possess a license for the new swab design from DEKA development, which allows us to control the production of the new swab product. We incurred

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approximately $100,000 in fines from retailers as a result of our failure to meet their order requirements in December 2002. It is possible that additional fines may be incurred in 2004 as a result of the back order in late 2003 that continued into early 2004, though none have as yet been assessed.

Research and Development

     Research and development is an important part of our business. Expenditures in 2003 reflect costs associated with the three new products that we introduced in 2003, costs associated with developing the new swab design and expenditures on products that we intend to introduce in 2004 and future years. We expect to continue to commit 6% of net sales on research and development in 2004 and subsequent years in order to develop a pipeline of new products to be introduced in the future to meet our sales growth targets.

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. All of our Zicam Cold Remedy products, the three new oral delivery products, and Zicam Allergy Relief, are further subject to the requirements of the Homeopathic Pharmacopeia of the United States. 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 the 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. It has been reported in the press that the FDA is looking into customer complaints about our Cold Remedy nasal products, although we have not been advised by the FDA of such an inquiry.

Environmental Matters

     Compliance with environmental rules and regulations did not significantly affect our earnings or competitive position during 2003. All of our Zicam product manufacturing and warehousing operations 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.

Trademarks, Trade Names, and Proprietary Rights

     We have been issued two patents (#6,080,783 and #6,365,624 B1) from the U.S. Patent and Trademark Office for the Zicam Cold Remedy nasal 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,

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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 or that the Company’s products will not be found to infringe on intellectual property of others. 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, 2003 we employed 15 people in our Phoenix, Arizona headquarters office. The 15 employees consist of six executive officers and individuals responsible for administrative, operations, marketing, sales, research and development, regulatory compliance, investor relations and accounting.

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 we commit to retailers and by their inventory management practices.

Backlog

     Except as described above regarding the backlog we experienced in 2002 and again experienced in December 2003 with respect to our swab products, we did not experience any product backlog in 2003. As of each of year-end 2003 and 2002, the backlog was $0.4 million and $1.3 million, respectively for our swab product.

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 two other products in the category (including competing generic copies) are able to make a similar claim.

ITEM 2. DESCRIPTION OF PROPERTY

     Prior to February 2004, we leased office space at 2375 E. Camelback Road in Phoenix, Arizona for our corporate offices. In February 2004 we vacated our Camelback Road offices and commenced leasing office space at 4742 N. 24th Street in Phoenix, Arizona for a period of four years. The new offices will provide needed space for the additional personnel we intend to hire in 2004 while reducing our monthly rental expense. Warehouse storage and shipping of our finished goods are provided by contract

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warehouses in Phoenix, Arizona and Plainfield, Indiana through month to month agreements. We consider our existing facilities to be adequate and suitable for their intended use.

ITEM 3. LEGAL PROCEEDINGS

     The Company is subject, from time to time, to legal proceedings and claims regarding adverse reactions to its products. From December 2003 through early March 2004, we were sued by over seventy individuals in six different lawsuits (including one lawsuit which has not yet been served on the Company) generally alleging that our Zicam Cold Remedy nasal pump product caused damage to the sense of smell and/or taste. The cases are Christensen et al. vs. Matrixx Initiatives, Inc. et al, filed October 13, 2003 in the United States District Court, Western District of Michigan, Southern Division, Case No. 4:03DV0146; Sutherland vs. Matrixx Initiative, Inc. et al., filed December 18, 2003 in the Circuit Court of Etowah, Alabama, Case No. CV-2003-1635-WHR (moved to United States District Court for the Northern District of Alabama, Middle Division); Nelson vs. Matrixx Initiatives, Inc. et al., filed December 8, 2003 in the Los Angeles Superior Court, Case No. YC048136; Bentley et al. vs. Matrixx Initiatives, Inc. et al., filed January 23, 2004 in the Superior Court of Arizona (Maricopa County), Case No. CV2004-001338; Ringbauer et al. vs. Matrixx Initiatives, Inc. et al., filed February 11, 2004 in the Superior Court of Arizona (Maricopa County), Case No. CV2004-002822 (moved to United States District Court for the District of Arizona, Case No. 04-CV-513); and Abramsen et al. vs. Matrixx Initiatives, Inc. et al., filed March 8, 2004 in the Superior Court of Arizona (Maricopa County), Case No. CV2004-04415. An investigative news report by a national network program that was subsequently featured by several local stations across the country, which suggested the possibility of Zicam Cold Remedy negatively impacting a person’s sense of smell and/or taste seemed to be related to the filing of the lawsuits. Also, to our knowledge, at least two plaintiffs’ law firms are actively soliciting potential claimants through the internet and other media. As a result, additional lawsuits may be filed against the Company. It is very early in the discovery phase of the six lawsuits so it is unlikely than any of the cases will proceed to trial before the first quarter of 2005. It appears that each of the lawsuits, as well as the news media reports, is based on research and allegations regarding a connection between zinc sulfate and loss of sense of smell. Zicam Cold Remedy contains zinc gluconate, not zinc sulfate, which has very different properties than zinc sulfate. We believe the allegations relating to Zicam Cold Remedy are inappropriate and misleading. Zicam Cold Remedy has been studied in two independent, placebo-control studies. In those studies, there was no statistically significant difference in adverse events between the placebo and non-placebo group, and there were no indications in either group of an impairment to sense of smell. Further, the incidence of smell disorders is reported at 1-2% of the population on average, and is very common in those over age 50. Upper respiratory infections are among the most common cause of impairment to sense of smell. Therefore, any product such as Zicam Cold Remedy designed to treat upper respiratory illnesses may be mistakenly associated with distortion of sense of smell. The rate of reported complaints of distortion of sense of smell associated with Zicam Cold Remedy is well below these national incidence levels. We have submitted all six lawsuits to our insurance carrier. We cannot predict the outcome of the litigation, but we will defend ourselves vigorously. If any liability were to result from one or more of these or future lawsuits, we believe our financial results could be materially impacted to the extent that such liability is not covered by insurance, as well as by the adverse publicity that may result.

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 2003, 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 or her successor is appointed and qualified or until such earlier time as such officer may resign or be removed by the board.

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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 then 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.

     As of March 1, 2004, we had approximately 7,300 record and beneficial stockholders.

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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, 2003, 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 following this date reflect our former chewing gum operations as discontinued operations. On December 5, 2001, we acquired the remaining 40% interest in 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.

*    Earnings for 2002 include the one-time recording of a deferred tax asset of approximately $3.4 million. Earnings per share for 2002 exclusive of this one-time accrual were $.14 per share.

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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% interest of Gel Tech, making it a wholly-owned subsidiary of Matrixx. In July 2002, the name 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 in 2002, improved package graphics for the entire Zicam product line and engaged a new sales team to represent our products to retailers. We continued to expand the Zicam product line in 2003 by introducing three Zicam Cold Remedy oral products – Chewables, RapidMelts and Oral Mist.

Executive Summary

     Net sales for 2003 increased to approximately $43.5 million, or 85% above net sales in 2002. Approximately one-half of the increase was attributable to increased sales of Zicam Cold Remedy nasal gel products and approximately 35% of the increase was attributable to the three new Zicam Cold Remedy oral products introduced in September 2003. Net sales in 2003 were impacted by a severe cold season that peaked in December 2003. However, we expect this trend of increasing net sales to continue as we improve consumer awareness of our products, increase distribution of our products, and introduce new products.

     Net income for 2003 was approximately $3.3 million. Net income in 2002 was $4.8 million including a one-time tax benefit of approximately $3.4 million. Net income 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 in 2004 than the amounts incurred in the same periods in earlier years. We expect that advertising expenses will be highest in the fourth and first quarters in conjunction with the cough and cold season.

     The Company’s management reviews several key performance indicators. First, we compare our annual sales and net income performance against our stated goal of 30% annual growth for each. For 2003, we exceeded both goals (ignoring the one-time tax benefit in 2002). We also monitor our share of the cough and cold market. For the twelve months ended December 28, 2003, sales of our products achieved a share of about 1.3% of the entire cough and cold market compared to a share of 0.8% a year ago. We also measure our ability to maintain strong gross margins on our products. During 2003, our products averaged a gross margin of 69%, which was slightly below our target minimum of 70% due to the higher cost of the old swab product. In 2002, our gross margin averaged 71%. In addition, we evaluate our operating performance by reviewing, over time, our ability to decrease administrative and general costs as a percentage of net sales. In 2003, our administrative and general costs were 50% of our net sales compared to 66% for 2002. Finally, we review the distribution of our products by key national

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retailers. In 2003, our 15 largest customers carried, on average, six of our 10 Zicam products compared to three of our seven products in 2002. We expect to expand the distribution of our existing products among these retailers during the next year.

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, accounting for returns and allowances associated with our products and accounting for legal contingencies.

     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. The goodwill was recently evaluated in the third quarter of 2003 by an independent valuation firm and no impairment was found.

     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 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 2003, we recorded income tax expense based on our estimated effective income tax rate for the year and will continue to do so in future periods. 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.

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     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 excess production during the introduction of Zicam Cold Remedy in the 1999-2000 cold season, which resulted in out-of-date product two years later. Currently, we are recording a provision of 3% of gross sales for the seven Zicam products introduced in 2002 or earlier for potential returns and allowances. In establishing the appropriate reserve level for the three new Zicam products introduced in the third quarter of 2003, we reviewed the similarities and differences of the three products relative to the seven Zicam products for which we now have several 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.

     Legal contingencies: We are subject to lawsuits, investigations and claims arising out of the normal conduct of our business. While the outcome of legal proceedings cannot be predicted with certainty, loss provisions arising from such matters will be recorded when a loss outcome is probable and can be reasonably estimated, to the extent not provided for through insurance or otherwise. At present, we have not been able to determine the probability of a loss outcome in any of the litigation to which we are currently subject. Accordingly, we have not recorded any loss provisions related to such litigation.

Results Of Operations For The Year Ended December 31, 2003 Compared To The Year Ended December 31, 2002

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

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Net Sales.

     Net sales for 2003 increased to approximately $43.5 million, or 85% above net sales in 2002. Approximately one-half of the $19.9 million increase in net sales was attributable to increases in sales of Zicam Cold Remedy nasal gel products, particularly the swab products; approximately 35% of the increase was due to the three new Zicam Cold Remedy oral products introduced in 2003; and the remainder of the increase was due to increased sales of Zicam Extreme Congestion Relief. Sales of Zicam Cold Remedy nasal swab products increased due to the greater distribution and availability of supply in 2003 and a severe cold season. Zicam Extreme Congestion Relief sales increased due to greater retail distribution of the product in 2003. Sales of all of the products increased due to greater brand awareness resulting from our increased marketing efforts.

     On average, our top 15 customers, which account for approximately 85% of our sales, carried six of our 10 products in 2003 compared to three of our seven products in 2002. We expect to expand the distribution of our existing products in 2004. Our principal sales focus is to secure additional retail acceptance, particularly among the major national drug, food and mass market retailers of all 10 of our products. We expect sales increases in future periods from continued, albeit lower, growth rates for our existing 10 products and from the sale of new products that we plan to introduce in 2004 and future years.

     We ended the year with a backlog in orders of $0.4 million for our adult swab product. In anticipation of year end demand, we built inventory of adult swab products starting in April 2003, but it was not sufficient as demand for all of our products, including the swab products, spiked in December 2003 due to the severe cold season. In February 2004, we began shipping our new swab product, while we also continued to ship our old swab product. As a result, we have eliminated the backlog for our adult swab product that existed in December 2003 and continued through February 2004. We will continue to ship the old swab product through the end of March 2004. We believe the new swab product can be produced at a higher rate than was possible for the old swab product and consequently we anticipate being able to avoid swab backlog issues in the 2004-2005 cold season.

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Cost of Sales

     The cost of sales for 2003 increased approximately $6.7 million or 99% over 2002. The increase was primarily due to an 80% increase in unit sales. The higher per unit cost of the swab products, including the higher cost agreed to in our previously announced settlement with Innovative Swab Technologies, the manufacturer of the old swab product, contributed to the increase in cost of sales. We expect that the cost of the new swab product that we introduced in the first quarter of 2004 will result in a lower per unit cost of that product in the future.

Gross Profit

     Gross profit for 2003 increased to approximately $30.0 million, or 79% above the 2002 level, due to the higher sales level. Offsetting the higher sales was the higher unit cost of sales, primarily due to the higher cost of the swab products, which is reflected in a decrease in gross profit percentage of sales to 69% in 2003 from 71% in 2002.

Operating Expenses

     Operating expenses increased from approximately $15.5 million in 2002 to $21.6 million in 2003. The increase is largely due to higher advertising expense ($11.7 million in 2003 compared to $7.7 million in 2002), higher sales commission expense of $1.4 million related to the increase in sales, and higher labor costs of $0.8 million. 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. Also, as a result of the recent litigation against the Company described in more detail in Item 3 of this Annual Report on Form 10-K, we expect our insurance costs will increase when our product liability insurance policy is up for renewal in April 2004.

Research and Development

     Research and development expense amounted to $2.6 million for 2003 compared to $294,000 for 2002, reflecting costs associated with the three new Zicam products that were introduced in 2003, development cost of the new swab product, and research expense of product concepts that we expect to introduce in 2004 and beyond. We expect to continue to invest approximately 6% of net sales in research and development activities in order to continue to introduce new products in the future.

Interest and Other Income - Net

     Interest and other income for 2003 amounted to approximately $175,000 or approximately $506,000 less than the 2002 level. Approximately $300,000 of the decrease is due to a decline in royalty income associated with a gum product marketed by Wrigley and $200,000 is due to a decrease in interest income from a lower invested cash balance.

Interest Expense

     Interest expense decreased to approximately $247,000 for 2003 from approximately $592,000 in 2002. The decrease is entirely attributable to the repayment of the debt incurred with our acquisition of the 40% interest in Zicam, LLC in December 2001. We currently have no debt outstanding.

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Income (Loss) From Continuing Operations Before Income Tax and Minority Interest

     Our income before income taxes and minority interest in 2003 was approximately $5.8 million, an increase of approximately $4.7 million from the $1.0 million reported for 2002. The increase is due to a higher gross profit resulting from higher net sales. We expect that net income in future periods will be significantly impacted by the success of our 10 current products, new product introductions (including new products that we plan to introduce in 2004) 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. The income tax expense in 2003 reflects a full provision for income tax expenses at our combined federal and state tax rates.

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:

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

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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. The swab products in December 2002 were 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.

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 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.

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.

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.

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

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     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.

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.

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.

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.

Liquidity and Capital Resources

     Our working capital increased $7.4 million to approximately $17.6 million at December 31, 2003 from approximately $10.2 million at December 31, 2002, due primarily to cash provided from operations.

     During 2003, we experienced an increase in cash from operations of $4.5 million due to an increase in net income of $3.3 million, and various non-cash charges to income of $2.9 million including $2.2 million of deferred income tax expense. Also contributing to the increase in cash from operations was an increase in accounts payable of $3.8 million and sales returns and allowances of $0.7 million. These increases in cash were offset by an increase in accounts receivable of $4.4 million and inventories of $1.7 million.

     Cash flows from investing activities used $0.4 million of cash due principally to tooling costs and prepayment for production of our new swab product. Cash flows from financing activities used $5.5 million due to the repayment of our outstanding debt.

     We have very little capital expenditures since we rely on contract manufacturers to produce our products. Therefore, to the extent our operations are profitable, our business is cash flow positive. Additionally, due to our sizeable tax loss carryforward, we are able to avoid sizeable income tax payments. We expect that this ability to avoid large tax payments should continue through 2004 and 2005. We do have working capital requirements arising from the increase of inventory and accounts

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receivable in excess of the increase in accounts payable, but these vary throughout the year reflecting the seasonal nature of our business.

     Currently, we do not have any debt outstanding and do not have plans to incur additional debt in the future. We have a $2.5 million credit facility in place with Comerica Bank which was renewed for a two-year term in May 2003. 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 working capital requirements. We are in compliance with the earnings and financial covenants contained in our credit agreement.

     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.

Contractual Obligations

     We have entered into certain long-term contractual obligations that will require various payments over future periods as follows:

Recently Issued Accounting Standards

In July 2002, the Financial Accounting Standards Board (“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 adopted SFAS No. 146 on January 1, 2003. This did not result in any impact on the Company’s financial position or results of operations.

In November 2002, the FASB issued Financial Interpretation No. (FIN) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Among other things, the Interpretation requires guarantors to recognize, at fair value, their obligations to stand ready to perform under certain guarantees. FIN 45 became effective for guarantees issued or modified on or after January 1, 2003 and had no effect on the Company’s financial position or results of operations.

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In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. In general, a variable entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to transactions entered into prior to February 1, 2003 in the first fiscal year or interim period beginning after June 15, 2003, which was subsequently delayed until the fourth quarter of 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of the interpretation did not have any impact on the Company’s financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The Statement is effective (with certain exceptions) for contracts entered into or modified after June 30, 2003. The adoption of this Statement had no effect on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period after June 15, 2003. The adoption of SFAS No. 150 on July 1, 2003 had no effect on the Company’s financial position or results of operations.

In December 2003, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition. SAB No. 104 revises or rescinds portions of the interpretive guidance related to revenue recognitions included in Topic 13 of the codification of the staff accounting bulletins. SAB No. 104 became effective when issued, and adoption by the Company did not have a material impact on its financial position or results of operations.

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 documents incorporated by reference herein include, but are not limited to statements regarding:

•

our expectation that the manufacturer of the new swab design will be able to meet our requirements for the next cold season;

•

our intention to build inventory of swab products in 2004;

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•

our expectation that future distribution of our three new products will increase significantly;

•

our belief that continued growth of our Extreme Congestion Relief, Sinus Relief, and Nasal Moisturizer products depends on achieving wider retail distribution;

•

our intention to further develop and expand our marketing efforts to expand the market presence of our existing Zicam products and our belief that such efforts will build brand awareness, trial and sales;

•

our intention to develop additional gel delivery system products and other new products;

•

our expectation of committing 6% of net sales to research and development efforts in 2004 and subsequent years;

•

anticipated expansion into international markets for our Zicam products and our expectations that such international markets will not provide any sales or revenue impact in the near future;

•

our expectation that net income in future periods will be significantly impacted by the success of our 10 current products, our future products, and year over year changes in our advertising and research and development budgets;

•

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 the trend of increasing net sales will continue;

•

our belief that future Company expense levels will be primarily affected by advertising and new product development costs and that advertising expenses will be highest in the fourth and first quarters;

•

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

•

our intention to vigorously defend the lawsuits that have been recently filed against us based on claims of loss of or damage to sense of smell and/or taste and our belief that any liability resulting from these or other lawsuits, including any related publicity, could materially impact our financial results;

•

our expectation that the cost of the new swab product will result in a lower per unit cost of the product in the future;

•

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

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•

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 or safety of our current and future products or regulatory actions involving our 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, 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 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

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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 we believe that each of our products, and in particular our Zicam Cold Remedy nasal products, offer unique benefits to consumers, we cannot be certain that any of these products will achieve widespread acceptance by the market. In addition, given their recent introduction in late 2003, our three new oral Zicam products have not yet reached the level of market recognition achieved by the original Zicam Cold Remedy nasal gel pump or swab products. While we are working to increase the market presence of all of our products, we cannot be certain that demand for these products will grow. If any unanticipated problem arises concerning the efficacy or safety of any of our products, or if any of our 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.

     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 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 or FTC in support of claims regarding our Zicam products, we have obtained scientific data for our products. We cannot be certain, however, that the scientific data we have obtained in support of our claims will be deemed acceptable to

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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 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

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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, we cannot be sure 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. In such regard, we may be required to structure self-insurance against product liability claims. Any substantial increase in insurance premiums and/or the costs of any such self-insurance program would have a material adverse effect on our results of operations and financial condition. A product liability claim, such as those described above in this Report on Form 10-K, even if 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 occurred with our old 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 fiscal 2002, we had approximately $1.3 million in backlog of swab orders and at the end of fiscal 2003, we had approximately $0.4 million in backlog of swab orders. We have undertaken significant measures to remedy the manufacturing problems that led to our backlog in 2002 and 2003, including replacing our swab manufacturer and redesigning our swab product to permit higher volume production. We also intend to build a substantial inventory of swab products to reduce the likelihood of any backlog of swab products occurring in the 2004-2005 cough and cold season. However, we cannot be certain that these measures 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 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:

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•

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. These fluctuations have particularly affected the market prices of equity securities of small capitalization companies, like Matrixx. 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. In addition, we believe our stock price has been impacted by a sizeable short position and resulting covering by investors with a short position in our stock.

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 December 31, 2003, 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 consistent 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, 2003, we did not participate in any market risk-sensitive commodity instruments for which fair value disclosure would be required under Statement of Financial Accounting

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Standards No. 107. We presently hold approximately $4.5 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 2003) 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.

ITEM 9A. CONTROLS AND PROCEDURES

     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, as of the end of the period covered by this report, 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.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

     The information required by this Item for our executive officers is set forth in Part I of this Form 10-K under the heading “Executive Officers of Matrixx”. The information required by this Item for our directors is set forth in our Proxy Statement relating to our 2004 annual meeting of stockholders to be held on April 28, 2004 (the “2004 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.

     We have adopted a Code of Ethics which applies to our principal executive officer, our principal financial officer and our controller, as well as to all of our other employees. A copy of the Code of Ethics is attached as an exhibit to this Report on Form 10-K. We intend to make a copy of the Code of Ethics available for viewing on the Company’s internet website at www.matrixxinc.com. or www.zicam.com. If we make any substantive amendment to the Code of Ethics or grant any waiver, including any implicit waiver, we will disclose the nature of such amendment or waiver either on the Company’s internet web site or in a report on Form 8-K within five days after such amendment is made or such waiver is given.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this Item for our executive officers is set forth in the 2004 Proxy Statement, under the heading, “Executive Compensation”, and is incorporated herein by this reference as

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if set forth in full. The information set forth in the 2004 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 Item for certain of our beneficial owners is set forth in the 2004 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, 2003 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.

     The 50,000 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, and expire in September 2004;

•

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, and expire in September 2004; and,

•

30,000 shares issuable upon exercise of warrants issued to C.J.B. Consulting, Inc. and Next Millenium 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. 15,000 warrants held by Next Millennium Capital were exercised in January 2004.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item is set forth in the 2004 Proxy Statement, under the headings, “Compensation Committee Interlocks and Insider Participation” and “Certain Relationships and Related Transactions” and is incorporated herein by this reference as if set forth in full.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information required by this Item is set forth in the 2004 Proxy Statement, under the heading, “Accountant Fees and Services” and is incorporated herein by this reference as if set forth in full.

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

(a)1. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Shareholders of
Matrixx Initiatives, Inc.

We have audited the accompanying consolidated balance sheets of Matrixx Initiatives, Inc. and Subsidiary as of December 31, 2003 and 2002 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years 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 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, 2003 and 2002 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

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