##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission File Number: 0-17995
 ZIX CORPORATION
 (Exact Name of Registrant as Specified in its Charter)
 Texas
    
    75-2216818(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 2711 North Haskell Avenue
Suite 2200, LB 36
Dallas, Texas 75204-2960
(Address of Principal Executive Offices)
 (214) 370-2000
(Registrants Telephone Number, Including Area Code)
 Indicate by check mark whether the Registrant (1) has 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 whether the registrant is a large accelerated filer, an accelerated

filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated

filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
 o Large accelerated filer   

þ Accelerated filer
    o Non-accelerated filer
    o Smaller reporting company(Do not check if a smaller reporting company)
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
 Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
 Class
    
    Outstanding at May 2, 2008Common Stock, par value $0.01 per share
    
    62,832,243




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##### 



INDEX
 PageNumberPART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at March 31, 2008 (unaudited) and December 31, 2007 (audited)
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007
    
    
    4Condensed Consolidated Statement of Stockholders Deficit for the three months ended March 31, 2008
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II-OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    29Certification of Richard D. Spurr, Pursuant to Section 302Certification of Barry W. Wilson, Pursuant to Section 302Certification Pursuant to Section 906Order for Notice and Hearing
  2




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)
    
    
    (audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,585,000
    
    
    $
    10,524,000Marketable securities
    
    
    
    
    
    
    1,734,000Receivables, net
    
    
    932,000
    
    
    
    1,119,000Prepaid and other current assets
    
    
    1,193,000
    
    
    
    1,545,000Total current assets
    
    
    14,710,000
    
    
    
    14,922,000Restricted cash
    
    
    25,000
    
    
    
    25,000Property and equipment, net
    
    
    1,966,000
    
    
    
    2,297,000Goodwill
    
    
    2,161,000
    
    
    
    2,161,000Other assets
    
    
    66,000
    
    
    
    69,000Total assets
    
    $
    18,928,000
    
    
    $
    19,474,000LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    250,000
    
    
    $
    231,000Accrued expenses
    
    
    3,078,000
    
    
    
    3,064,000Deferred revenue
    
    
    12,456,000
    
    
    
    12,606,000Total current liabilities
    
    
    15,784,000
    
    
    
    15,901,000Long-term liabilities:Deferred revenue
    
    
    3,440,000
    
    
    
    3,497,000Deferred rent
    
    
    360,000
    
    
    
    365,000Total long-term liabilities
    
    
    3,800,000
    
    
    
    3,862,000Total liabilities
    
    
    19,584,000
    
    
    
    19,763,000Commitments and contingencies (see Note 13)Stockholders deficit:Preferred stock, $1 par value, 10,000,000 shares authorized; none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 175,000,000 shares authorized; 65,147,713 issued and
62,820,532 outstanding in 2008 and 64,959,649 issued and 62,632,468 outstanding in 2007
    
    
    652,000
    
    
    
    650,000Additional paid-in capital
    
    
    330,521,000
    
    
    
    329,186,000Treasury stock, at cost; 2,327,181 common shares in 2008 and 2007
    
    
    (11,507,000
    )
    
    
    (11,507,000
    )Accumulated deficit
    
    
    (320,322,000
    )
    
    
    (318,618,000
    )Total stockholders deficit
    
    
    (656,000
    )
    
    
    (289,000
    )Total liabilities and stockholders deficit
    
    $
    18,928,000
    
    
    $
    19,474,000
  3




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended March 31,2008
    
    
    2007Revenues
    
    $
    7,199,000
    
    
    $
    5,387,000Cost of revenues
    
    
    2,580,000
    
    
    
    2,853,000Gross margin
    
    
    4,619,000
    
    
    
    2,534,000Operating expenses:Research and development expenses
    
    
    1,545,000
    
    
    
    1,299,000Marketing expenses
    
    
    885,000
    
    
    
    919,000Sales expenses
    
    
    2,272,000
    
    
    
    2,310,000General and administrative expenses
    
    
    1,660,000
    
    
    
    1,571,000Customer deposit forfeiture
    
    
    
    
    
    
    (2,000,000
    )Total operating expenses
    
    
    6,362,000
    
    
    
    4,099,000Operating loss
    
    
    (1,743,000
    )
    
    
    (1,565,000
    )Other (expense) income:Investment and other income
    
    
    116,000
    
    
    
    155,000Interest expense
    
    
    
    
    
    
    (50,000
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (178,000
    )Total other (expense) income
    
    
    116,000
    
    
    
    (73,000
    )Loss before income taxes
    
    
    (1,627,000
    )
    
    
    (1,638,000
    )Income taxes
    
    
    (77,000
    )
    
    
    (3,000
    )Net loss
    
    $
    (1,704,000
    )
    
    $
    (1,641,000
    )Basic and diluted loss per common share
    
    $
    (0.03
    )
    
    $
    (0.03
    )Basic and diluted weighted average common shares outstanding
    
    
    62,703,846
    
    
    
    59,879,950
  4




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
  Stockholders EquityAdditional
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    DeficitBalance, January 1, 2008
    
    
    64,959,649
    
    
    $
    650,000
    
    
    $
    329,186,000
    
    
    $
    (11,507,000
    )
    
    $
    (318,618,000
    )
    
    $
    (289,000
    )Issuance of common
stock upon exercise
of stock options
    
    
    57,784
    
    
    
    1,000
    
    
    
    140,000
    
    
    
    
    
    
    
    
    
    
    
    141,000Common stock issued
to employees as
compensation in lieu
of cash
    
    
    130,280
    
    
    
    1,000
    
    
    
    539,000
    
    
    
    
    
    
    
    
    
    
    
    540,000Employee share-based
compensation costs
    
    
    
    
    
    
    
    
    
    
    634,000
    
    
    
    
    
    
    
    
    
    
    
    634,000Non-employee
share-based
compensation costs
    
    
    
    
    
    
    
    
    
    
    22,000
    
    
    
    
    
    
    
    
    
    
    
    22,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,704,000
    )
    
    
    (1,704,000
    )Balance, March 31, 2008
    
    
    65,147,713
    
    
    $
    652,000
    
    
    $
    330,521,000
    
    
    $
    (11,507,000
    )
    
    $
    (320,322,000
    )
    
    $
    (656,000
    )
  5




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three Months Ended March 31,2008
    
    
    2007Operating activities:Net loss
    
    $
    (1,704,000
    )
    
    $
    (1,641,000
    )Non-cash items in net loss:Depreciation and amortization
    
    
    328,000
    
    
    
    473,000Employee share-based compensation costs
    
    
    634,000
    
    
    
    483,000Non-employee share-based compensation costs
    
    
    22,000
    
    
    
    45,000Common stock issued to employees as compensation in lieu of cash
    
    
    118,000
    
    
    
    Loss on extinguishment of debt
    
    
    
    
    
    
    178,000Customer deposit forfeiture
    
    
    
    
    
    
    (2,000,000
    )Changes in deferred taxes
    
    
    3,000
    
    
    
    (17,000
    )Changes in operating assets and liabilities:Receivables
    
    
    187,000
    
    
    
    (16,000
    )Prepaid and other current assets
    
    
    357,000
    
    
    
    458,000Accounts payable
    
    
    88,000
    
    
    
    90,000Deferred revenue
    
    
    (207,000
    )
    
    
    2,131,000Accrued and other liabilities
    
    
    431,000
    
    
    
    (194,000
    )Net cash provided (used) by operating activities
    
    
    257,000
    
    
    
    (10,000
    )Investing activities:Purchases of property and equipment
    
    
    (71,000
    )
    
    
    (247,000
    )Restricted cash investments and marketable securities, net
    
    
    1,734,000
    
    
    
    (1,665,000
    )Net cash provided (used) by investing activities
    
    
    1,663,000
    
    
    
    (1,912,000
    )Financing activities:Proceeds from exercise of stock options
    
    
    141,000
    
    
    
    Payment of short-term notes payable
    
    
    
    
    
    
    (75,000
    )Net cash provided (used) by financing activities
    
    
    141,000
    
    
    
    (75,000
    )Increase (decrease) in cash and cash equivalents
    
    
    2,061,000
    
    
    
    (1,997,000
    )Cash and cash equivalents, beginning of period
    
    
    10,524,000
    
    
    
    12,783,000Cash and cash equivalents, end of period
    
    $
    12,585,000
    
    
    $
    10,786,000
  6




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ZIX CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. Basis of Presentation
  2. Recent Accounting Standards and Pronouncements
 Share-Based Payment.
 Business Combinations Non-controlling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
 3. Company Overview and Liquidity
     7




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4. Revenue and Significant Customers
 Software
Revenue Recognition, Modification of SOP 97-2, Software Revenue Recognition, With respect
to Certain Transactions, Revenue Arrangements with Multiple Deliverables, Revenue Recognition in
Financial Statements,
   8




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5. Segment Information
    Three Months Ended March 31, 2008
    
    
    Three Months Ended March 31, 2007Email
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EmailEncryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    Total
    
    
    Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    5,289,000
    
    
    $
    1,910,000
    
    
    $
    
    
    
    $
    7,199,000
    
    
    $
    3,934,000
    
    
    $
    1,453,000
    
    
    $
    
    
    
    $
    5,387,000Cost of revenues
    
    
    1,050,000
    
    
    
    1,530,000
    
    
    
    
    
    
    
    2,580,000
    
    
    
    1,195,000
    
    
    
    1,658,000
    
    
    
    
    
    
    
    2,853,000Gross margin (loss)
    
    
    4,239,000
    
    
    
    380,000
    
    
    
    
    
    
    
    4,619,000
    
    
    
    2,739,000
    
    
    
    (205,000
    )
    
    
    
    
    
    
    2,534,000Direct expenses
    
    
    2,867,000
    
    
    
    1,835,000
    
    
    
    
    
    
    
    4,702,000
    
    
    
    2,666,000
    
    
    
    1,857,000
    
    
    
    
    
    
    
    4,523,000Segment contribution (loss)
    
    
    1,372,000
    
    
    
    (1,455,000
    )
    
    
    
    
    
    
    (83,000
    )
    
    
    73,000
    
    
    
    (2,062,000
    )
    
    
    
    
    
    
    (1,989,000
    )Unallocated (expense) / incomeMarketing, general and 
administrative expense
    
    
    
    
    
    
    
    
    
    
    (1,660,000
    )
    
    
    (1,660,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,576,000
    )
    
    
    (1,576,000
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (178,000
    )
    
    
    (178,000
    )Customer deposit forfeiture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    2,000,000Investment and other income
    
    
    
    
    
    
    
    
    
    
    116,000
    
    
    
    116,000
    
    
    
    
    
    
    
    
    
    
    
    155,000
    
    
    
    155,000Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,000
    )
    
    
    (50,000
    )Total
    
    
    
    
    
    
    
    
    
    
    (1,544,000
    )
    
    
    (1,544,000
    )
    
    
    
    
    
    
    
    
    
    
    351,000
    
    
    
    351,000Income (loss) before income taxes
    
    $
    1,372,000
    
    
    $
    (1,455,000
    )
    
    $
    (1,544,000
    )
    
    $
    (1,627,000
    )
    
    $
    73,000
    
    
    $
    (2,062,000
    )
    
    $
    351,000
    
    
    $
    (1,638,000
    )
   9




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##### Table of Contents



March 31, 2008
    
    
    December 31, 2007Total assets:Email Encryption
    
    $
    3,535,000
    
    
    $
    3,730,000e-Prescribing
    
    
    960,000
    
    
    
    1,272,000Corporate
    
    
    14,433,000
    
    
    
    14,472,000Total assets
    
    $
    18,928,000
    
    
    $
    19,474,000
 6. Stock Options and Stock-based Employee Compensation
  Three Months Ended March 31,2008
    
    
    2007Cost of revenues
    
    $
    79,000
    
    
    $
    47,000Research and development expenses
    
    
    66,000
    
    
    
    33,000Selling, general and administrative expenses
    
    
    489,000
    
    
    
    403,000Stock-based compensation expense
    
    $
    634,000
    
    
    $
    483,000
  Stock Option Activity
  Weighted AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual Term
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    (Yrs)
    
    
    ValueOutstanding at December 31, 2007
    
    
    9,538,713
    
    
    $
    5.16Granted at market price
    
    
    300,464
    
    
    $
    4.31Granted above market price
    
    
    
    
    
    $
    Cancelled or expired
    
    
    (257,313
    )
    
    $
    12.55Exercised
    
    
    (57,784
    )
    
    $
    2.44Outstanding at March 31, 2008
    
    
    9,524,080
    
    
    $
    4.95
    
    
    
    6.87
    
    
    $
    6,480,000Options exercisable at March 31, 2008
    
    
    6,356,971
    
    
    $
    5.79
    
    
    
    6.03
    
    
    $
    3,230,000
  Common Stock Issued in Lieu of Cash
  10




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7. Supplemental Cash Flow Information
  Three Months Ended March 31,2008
    
    
    2007Cash paid for interest
    
    $
    
    
    
    $
    6,000Cash paid for income tax
    
    $
    53,000
    
    
    $
    25,000Noncash investing and financing activities:Issuance of common stock and warrants related to the
restructure of the prior promissory note payable
    
    $
    
    
    
    $
    1,393,000Issuance of a replacement promissory note payable
    
    $
    
    
    
    $
    1,477,000Accrued expenses related to fixed asset purchases
    
    $
    
    
    
    $
    33,000Assets sold to customers as part of their subscription service
    
    $
    5,000
    
    
    $
    Stock issued for accrued expenses
    
    $
    422,000
    
    
    $
    
 8. Fair Value Measurements
    9. Receivables, net
 March 31,
    
    
    December 31,2008
    
    
    2007Gross trade accounts receivable
    
    $
    5,184,000
    
    
    $
    4,513,000Allowance for returns and doubtful accounts
    
    
    (76,000
    )
    
    
    (66,000
    )Unpaid portion of deferred revenue
    
    
    (4,176,000
    )
    
    
    (3,328,000
    )Trade receivables, net
    
    
    932,000
    
    
    
    1,119,000Note receivable
    
    
    488,000
    
    
    
    488,000Allowance for note receivable
    
    
    (488,000
    )
    
    
    (488,000
    )Note receivables, net
    
    
    
    
    
    
    Total receivables, net
    
    $
    932,000
    
    
    $
    1,119,000
  11




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##### Table of Contents



10. Prepaid and other current assets
 March 31,
    
    
    December 31,2008
    
    
    2007Inventory
    
    $
    153,000
    
    
    $
    218,000Deferred cost of sales charges
    
    
    219,000
    
    
    
    301,000Prepaid insurance, maintenance and other
    
    
    821,000
    
    
    
    1,013,000Tax related
    
    
    
    
    
    
    13,000Prepaid and other current assets
    
    $
    1,193,000
    
    
    $
    1,545,000
 Inventory
 Deferred cost of sales charges
 Prepaid insurance, maintenance and other
 11. Notes Payable
  12




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12. Earnings Per Share and Potential Dilution
  March 31,2008
    
    
    2007Stock options
    
    
    9,524,080
    
    
    
    9,618,935Warrants issued in relation to debt and equity arrangements
    
    
    10,434,804
    
    
    
    13,547,193Total antidilutive securities excluded from EPS
calculation
    
    
    19,958,884
    
    
    
    23,166,128
  13. Commitments and contingencies
 Leases
  Payments Due by PeriodTotal
    
    1 Year
    
    2-3 Year
    
    > 3 YearsOperating leases
    
    $
    6,436,000
    
    
    $
    1,214,000
    
    
    $
    2,063,000
    
    
    $
    3,159,000
  Lawsuits
      13




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##### Table of Contents



ITEM 2.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
      
    
    Rate of new subscriptions (termed new first year orders) for the Email Encryption
Service;
    
    Renewal rates for the Email Encryption Service;
    
    Additional payor sponsorship of the e-Prescribing service to prescribers by new or
existing insurance payors;
    
    Successful adoption and usage of the e-Prescribing service by prescribers;
    
    Retention of the users (prescribers) of the e-Prescribing service as indicated by
subscription renewals;
    
    Future transaction fees (or related fees) associated with the use of the e-Prescribing
service; and
    
    Our ability to increase business volume with reasonable cost increases.
 14




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##### Table of Contents



Critical Accounting Policies and Estimates
  Property and Equipment, Long-Lived and Other Intangible Assets, Depreciation and Amortization
   Deferred Tax Assets
 15




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Revenue Recognition Software Revenue Recognition, Modification of SOP 97-2, Software Revenue
Recognition, With respect to Certain Transactions, Revenue Arrangements
with Multiple Deliverables, Revenue Recognition in Financial Statements,
 Deferred cost of sales charge
 Stock-based compensation Share-Based Payment Accounting for Stock Issued to Employees
 Share-Based Payment.
 Results of Operations
 First Quarter 2008 Summary of Operations
 Financial Statement
 
    
    Revenue for the quarter ended March 31, 2008, was $7,199,000 compared with $5,387,000 for the
same period in 2007.
    
    Gross Margin for the quarter ended March 31, 2008, was $4,619,000 or 64% of revenues compared
to $2,534,000 or 47% of revenues for the comparable period in 2007.
    
    Email Encryption  gross margin for this segment for the quarter ended March 31, 2008, was
$4,239,000 or 80% of revenues totaling $5,289,000 compared to $2,739,000 or 70% of revenues
totaling $3,934,000 for the comparable period in 2007.
    
    e-Prescribing  gross margin for this segment for the quarter ended March 31, 2008, was
$380,000 or 20% of revenues totaling $1,910,000 compared to a gross margin loss of $205,000 or
a negative 14% of revenues totaling $1,453,000 for the comparable period in 2007.
    
    Loss before income taxes for the quarter ended March 31, 2008, was $1,627,000 compared with a
loss before income taxes of $1,638,000 for the same period in 2007.
    
    The Companys ending unrestricted cash balance at March 31, 2008, was $12,585,000.
 16




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##### Table of Contents




    
    Net cash provided by operating activities for the first three months of 2008 was $257,000.
Total cash and cash equivalent balances (including unrestricted and restricted cash) increased
by $327,000 in the first quarter of 2008, approximately $140,000 of which came from the
exercise of stock options.
 Operations
 
    
    The Company secured new first year orders in the quarter ended March 31, 2008, totaling
$1,432,000 for its Email Encryption services and achieved customer contract renewals of 93% on
a contract value basis for Email Encryption customers. The customer contract renewal rate on
an annualized basis has consistently remained at or above 95%. See Revenues  Email
Encryption below for more information.
    
    The Company deployed approximately 230 new e-Prescribing devices to prescribers under
sponsorship arrangements with several insurance payor/sponsors.
    
    The Company achieved approximately 2,235,000 electronic prescriptions transacted in the three
months ended March 31, 2008, through use of its e-Prescribing service.
 Revenues
  Three Months Ended,
    
    
    3-month VarianceMarch 31,
    
    
    2008 vs. 20072008
    
    
    2007
    
    
    $
    
    
    %Email Encryption
    
    $
    5,289,000
    
    
    $
    3,934,000
    
    
    $
    1,355,000
    
    
    
    34
    %e-Prescribing
    
    
    1,910,000
    
    
    
    1,453,000
    
    
    
    457,000
    
    
    
    31
    %Total revenues
    
    $
    7,199,000
    
    
    $
    5,387,000
    
    
    $
    1,812,000
    
    
    
    34
    %
 Email Encryption 
  e-Prescribing 
  Revenue Outlook:
 17




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##### Table of Contents



Revenue Indicators  Backlog, Orders, and Deployments
 Company-wide backlog 
   Email Encryption Orders 
  2008
    
    
    2007Three month period ending:March 31
    
    $
    1,432,000
    
    
    $
    1,352,000June 30
    
    
    
    
    
    
    1,397,000September 30
    
    
    
    
    
    
    1,359,000December 31
    
    
    
    
    
    
    1,406,000Total new first year orders
    
    $
    1,432,000
    
    
    $
    5,514,000
   18




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e-Prescribing 
      19




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##### Table of Contents



Cost of Revenues
  Three Months Ended,
    
    
    3-month VarianceMarch 31,
    
    
    2008 vs. 20072008
    
    
    2007
    
    
    $
    
    
    %Email Encryption
    
    $
    1,050,000
    
    
    $
    1,195,000
    
    
    $
    (145,000
    )
    
    
    (12
    %)e-Prescribing
    
    
    1,530,000
    
    
    
    1,658,000
    
    
    
    (128,000
    )
    
    
    (8
    %)Total cost of revenues
    
    $
    2,580,000
    
    
    $
    2,853,000
    
    
    $
    (273,000
    )
    
    
    (10
    %)
  Email Encryption 
 e-Prescribing 
 Research and Development Expenses
  3-month VarianceThree Months Ended, March 31,
    
    
    2008 vs. 20072008
    
    
    2007
    
    
    $
    
    
    %Research and Development
    
    $
    1,545,000
    
    
    $
    1,299,000
    
    
    $
    246,000
    
    
    
    19
    %
 20




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##### Table of Contents



Selling, General and Administrative Expenses
   Three Months Ended,
    
    
    3-month VarianceMarch 31,
    
    
    2008 vs. 20072008
    
    
    2007
    
    
    $
    
    
    %Marketing expenses
    
    $
    885,000
    
    
    $
    919,000
    
    
    $
    (34,000
    )
    
    
    (4
    %)Sales expenses
    
    
    2,272,000
    
    
    
    2,310,000
    
    
    
    (38,000
    )
    
    
    (2
    %)General and administrative expenses
    
    
    1,660,000
    
    
    
    1,571,000
    
    
    
    89,000
    
    
    
    6
    %Total selling, general and administrative expenses
    
    $
    4,817,000
    
    
    $
    4,800,000
    
    
    $
    17,000
    
    
    
    (0
    %)
 Customer Deposit Forfeiture
  Investment and Other Income
  Interest Expense
  Loss on extinguishment of debt
  Income Taxes
   21




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##### Table of Contents



Net Loss
  Liquidity and Capital Resources
 Overview
     Email
Encryption
 22




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##### Table of Contents



e-Prescribing
     Sources and Uses of Cash Summary
  23




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##### Table of Contents



Three Months Ended March 31,2008
    
    
    2007
    
    
    VarianceOperating cash receipts
    
    $
    7,701,000
    
    
    $
    7,980,000
    
    
    $
    (279,000
    )
    
    
    (3
    %)Net operating cash spending
    
    
    (7,444,000
    )
    
    
    (7,990,000
    )
    
    
    546,000
    
    
    
    7
    %Net cash provide (used) by operating activities
    
    $
    257,000
    
    
    $
    (10,000
    )
    
    $
    267,000
    Cash Sources
  
    
    contractual backlog;
    
    Email Encryption growth and retention;
    
    e-Prescribing growth and retention; and
    
    e-Prescribing transaction and performance-based fees.
 Backlog
 Email Encryption growth and retention
 24




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##### Table of Contents



e-Prescribing growth and retention
 e-Prescribing transaction and performance-based fees
    Cash Requirements
    25




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##### Table of Contents



Liquidity Summary
  Options and Warrants of ZixCorp Common Stock
  Summary of Outstanding Options and WarrantsVested SharesTotal Value of
    
    
    (included in
    
    
    Total Value ofExercise Price Range
    
    Outstanding Shares
    
    
    Outstanding Shares
    
    
    Outstanding shares)
    
    
    Vested Shares$1.21 - $1.99
    
    
    6,982,492
    
    
    $
    10,805,042
    
    
    
    5,794,175
    
    
    $
    8,990,625$2.00 - $3.49
    
    
    4,894,874
    
    
    
    14,613,344
    
    
    
    4,485,812
    
    
    
    13,437,329$3.50 - $4.99
    
    
    4,320,976
    
    
    
    19,292,546
    
    
    
    2,751,246
    
    
    
    11,896,143$5.00 - $5.99
    
    
    600,354
    
    
    
    3,047,997
    
    
    
    600,354
    
    
    
    3,043,795$6.00 - $8.99
    
    
    985,099
    
    
    
    6,289,528
    
    
    
    985,099
    
    
    
    6,287,073$9.00 - $19.99
    
    
    1,118,070
    
    
    
    11,984,592
    
    
    
    1,118,070
    
    
    
    11,974,530$20.00 - $57.60
    
    
    1,057,019
    
    
    
    57,590,935
    
    
    
    1,057,019
    
    
    
    57,590,233Total
    
    
    19,958,884
    
    
    $
    123,623,984
    
    
    
    16,791,775
    
    
    $
    113,219,728
 Off-Balance Sheet Arrangements
  26




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##### Table of Contents



Contractual Obligations, Contingent Liabilities and Commitments
  Payments Due by PeriodTotal
    
    
    1 Year
    
    
    2-3 Year
    
    
    > 3 YearsOperating leases
    
    $
    6,436,000
    
    
    $
    1,214,000
    
    
    $
    2,063,000
    
    
    $
    3,159,000
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
  27




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  28




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##### Table of Contents



ITEM 6. EXHIBITS
 a. Exhibits
  Exhibit No.
    
    Description of Exhibits3.1
    
    Restated Articles of Incorporation of Zix Corporation, as
filed with the Texas Secretary of State on November 10, 2005.
Filed as Exhibit 3.1 to Zix Corporations Annual Report on
Form 10-K for the year ended December 31, 2005, and
incorporated herein by reference.3.2
    
    Restated Bylaws of Zix Corporation, dated October 30, 2002.
Filed as Exhibit 3.2 to Zix Corporations Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2002,
and incorporated herein by reference.99.1
    
    Preliminary Approval Order, United States District Court,
Northern District of Texas, Dallas Division (filed August 16,
2007). Filed as Exhibit 99.1 to the Companys Current Report
on Form 8-K, filed August 21, 2007, and incorporated herein by
reference.99.2
    
    Notice of Proposed Settlement of Derivative Litigation,
Hearing Thereon, and Right to Appear. Filed as Exhibit 99.2 to
the Companys Current Report on Form 8-K, filed August 21,
2007, and incorporated herein by reference.99.3*
    
    Order for Notice and Hearing, Cause No. 3-04-CV-1931-K, United
States District Court, Northern District of Texas, Dallas
Division (filed March 18, 2008), including attached Exhibits 1
- 3.31.1*
    
    Certification of Richard D. Spurr, President and Chief
Executive Officer of the Company, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Barry W. Wilson, Chief Financial Officer and
Treasurer of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1**
    
    Certification of Richard D. Spurr, President and Chief
Executive Officer of the Company, and Barry W. Wilson, Chief
Financial Officer and Treasurer of the Company, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 29




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##### Table of Contents



SIGNATURES
  ZIX CORPORATIONBy:
    /s/ Barry W. WilsonBarry W. WilsonChief Financial Officer and Treasurer  Signature
    
    Title/s/ Richard D. Spurr

(Richard D. Spurr)
    
    Chairman, Chief Executive Officer, President and Director 
(Principal
Executive Officer)/s/ Barry W. Wilson

(Barry W. Wilson)
    
    Chief Financial Officer and Treasurer 
(Principal
Financial and Accounting Officer)/s/ Robert C. Hausmann
    
    Director(Robert C. Hausmann)/s/ Charles N. Kahn III
    
    Director(Charles N. Kahn III)/s/ James S. Marston
    
    Director(James S. Marston)/s/ Antonio R. Sanchez III
    
    Director(Antonio R. Sanchez III)/s/ Paul E. Schlosberg
    
    Director(Paul E. Schlosberg)
 30