##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 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(State or Other Jurisdiction of 
Incorporation or Organization)
    
    75-2216818(I.R.S. Employer
Identification Number)
 2711 N. 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)
 Securities Registered Pursuant to Section 12(b) of the Act:
 Common Stock$0.01 Par Value
    
    NASDAQ
 o þ
 o þ
 þ o
 o
  Large accelerated filer: o
    
    Accelerated filer: þ
    
    Non-accelerated filer: o
    
    Smaller reporting company: o(Do not check if a smaller reporting company)
 o þ




---



##### 



TABLE OF CONTENTS
 PART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    9Item 1B. Unresolved Staff Comments
    
    
    17Item 2. Properties
    
    
    17Item 3. Legal Proceedings
    
    
    17Item 4. Submission of Matters to Vote of Security Holders
    
    
    17PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    18Item 6. Selected Financial Data
    
    
    20Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 8. Financial Statements and Supplementary Data
    
    
    37Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
    
    
    37Item 9A. Controls and Procedures
    
    
    37Item 9B. Other Information
    
    
    40PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    40Item 11. Executive Compensation
    
    
    40Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    40Item 13. Certain Relationships and Related Transactions
    
    
    40Item 14. Principal Accountant Fees and Services
    
    
    40PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    40EX-10.24EX-10.27EX-10.28EX-10.29EX-10.30EX-10.31EX-10.32EX-10.38EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1
  2




---



##### Table of Contents



PART I
 
 Item 1. Business
   ®
 Business Segments
 Email Encryption
 Segment Overview:
   3




---



##### Table of Contents




  Competition:
   e-Prescribing
 Segment Overview:
 4




---



##### Table of Contents



PocketScript®
  Competition:
   5




---



##### Table of Contents



Regulatory Drivers
 Email Encryption Service:
    e-Prescribing Service:
  i.e.
 6




---



##### Table of Contents



Sales and Marketing
    Employees
  Research and Development  Patents and Trademarks
   7




---



##### Table of Contents



Compliance with Environmental Regulations
  Governmental Contracts
  Significant Customers
  Backlog
  December 31, 2008
    
    
    December 31, 2007Email Encryption
    
    $
    34,728,000
    
    
    $
    28,314,000e-Prescribing
    
    
    2,661,000
    
    
    
    3,478,000Total backlog
    
    $
    37,389,000
    
    
    $
    31,792,000
   Seasonality
  8




---



##### Table of Contents



Geographic Information
  Available Information
 Item 1A. Risk Factors Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations
  www.sec.gov.
 www.zixcorp.com.
 
 Item 1A. Risk Factors
 (In these risk factors, we, us, our, and ZixCorp refer to Zix Corporation and its
wholly-owned subsidiaries.)
 An investment in our common stock involves a high degree of risk. You should carefully
consider the following risk factors in evaluating an investment in our common stock. If any of the
following risks actually occurs, our business, financial condition, results of operations or cash
flow could be materially and adversely affected. In such case, the trading price of our common
stock could decline, and you could lose all or part of your investment. You should also refer to
the other information set forth in this report, including our consolidated financial statements and
the related notes.
 Our operating results, financial condition and business may be adversely affected by
unfavorable economic and market conditions.
 9




---



##### Table of Contents



We have incurred significant operating losses in previous years and our PocketScript
e-Prescribing Service continues to use significant amounts of cash. i.e.
  The market may not broadly accept our Email Encryption and PocketScript e-Prescribing
Services, which would prevent us from operating profitably.
  End-users of our PocketScript Service may not
continue to use the service Item 7. Managements Discussion and
Analysis of Financial Conditions and Results of Operations, Liquidity and Capital Resources, .
 Failure to enter into additional or to maintain existing sponsorship agreements for our
PocketScript e-Prescribing Service and generate other revenue sources from our PocketScript Service
could harm our business. Item 7. Managements Discussion and Analysis of
Financial Conditions and Results of Operations, Liquidity
and Capital Resources, .
  10




---



##### Table of Contents




    
    sign follow-on orders with our existing healthcare payors, from whom a significant
portion of our cash and revenues are received;
    
    sign new sponsorship agreements with new payors;
    
    generate significant revenue from contingent payments;
    
    maintain and grow existing transaction fees from payors, pharmacy benefit managers
and others for the electronic prescriptions processed through our e-Prescribing
Service;
    
    improve prescriber retention rates; or
    
    identify other revenue opportunities for our e-Prescribing Service.
  Physicians and other healthcare providers may fail to adopt our PocketScript Service.
 End-users of our PocketScript Service may not continue to use the service. The market may not broadly accept our Email Encryption and PocketScript e-Prescribing Services,
which would prevent us from operating profitably Physicians and other healthcare providers
may fail to adopt our PocketScript Service )  Item 7,
Managements Discussion and Analysis of Financial Condition and
Results of Operations, Revenue
Indicators  Backlog, Orders and Deployments .
 Failure to significantly increase our base of PocketScript users or obtain significant
prescription transaction fees, or other fees may result in failure to achieve the critical mass of
physicians and revenue to build a successful business.
  11




---



##### Table of Contents



Competition in our businesses is expected to increase, which could impair our prospects and
cause our business to fail.
  Regulatory Drivers
  Our inability to successfully and timely develop and introduce new Email Encryption and
e-Prescribing Services and related services and to implement technological changes could harm our
business.
  12




---



##### Table of Contents



Future asset impairments could affect our financial results.
 Capacity limits on our technology and network hardware and software may be difficult to
project, and we may not be able to expand and/or upgrade our systems to meet increased use, which
would result in reduced revenues.
 Security interruptions to our data centers could disrupt our business, and any security
breaches could expose us to liability and negatively impact customer demand for our solutions and
services.
    13




---



##### Table of Contents



We may have to defend our rights in intellectual property that we use in our services, which
could be disruptive and expensive to our business.
 Defects or errors in our services could harm our business.
 Public key cryptography technology is subject to risks.
 We depend on key personnel.
 We rely on third parties.
  We could be affected by government regulation.
 14




---



##### Table of Contents



Our stock price may be volatile.
 15




---



##### Table of Contents



We have a significant amount of stock options and warrants outstanding and may issue
additional equity securities in the future. Exercise of the outstanding options and warrants, and
future issuances of other securities will dilute the ownership interests of existing shareholders.
    We may be required to pay liquidated damages in the event one or more of the registration
statements we have filed with the SEC for the benefit of third parties ceases to be effective.
  NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
 Liquidity Summary Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations,
  16




---



##### Table of Contents



Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
   
 Item 3. Legal Proceedings
  1A. Risk Factors, We may have to defend our rights in intellectual property that we use
in our services, which could be disruptive and expensive to our business.
  
 Item 4. Submission of Matters to Vote of Security Holders
  17




---



##### Table of Contents



PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
  2008
    
    
    2007Quarter Ended
    
    High
    
    
    Low
    
    
    High
    
    
    LowMarch 31
    
    $
    4.74
    
    
    $
    2.50
    
    
    $
    1.93
    
    
    $
    1.14June 30
    
    $
    4.16
    
    
    $
    2.25
    
    
    $
    2.49
    
    
    $
    1.63September 30
    
    $
    3.70
    
    
    $
    1.81
    
    
    $
    2.18
    
    
    $
    1.56December 31
    
    $
    2.34
    
    
    $
    0.94
    
    
    $
    6.24
    
    
    $
    1.81
    Performance
Graph
     18




---



##### Table of Contents



19




---



##### Table of Contents



Item 6. Selected Financial Data
 Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations
 Year Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(In thousands, except per share data)Statement of Operations Data:Revenues (1)
    
    $
    28,035
    
    
    $
    24,114
    
    
    $
    18,358
    
    
    $
    13,964
    
    
    $
    14,127Cost of revenues
    
    
    9,850
    
    
    
    10,866
    
    
    
    12,552
    
    
    
    14,194
    
    
    
    15,878Gross margin
    
    
    18,185
    
    
    
    13,248
    
    
    
    5,806
    
    
    
    (230
    )
    
    
    (1,751
    )Research and development expenses
    
    
    6,158
    
    
    
    5,322
    
    
    
    6,085
    
    
    
    6,520
    
    
    
    9,331Selling, general and administrative
expenses
    
    
    18,033
    
    
    
    17,961
    
    
    
    23,188
    
    
    
    26,358
    
    
    
    29,399Customer deposit forfeiture (2)
    
    
    
    
    
    
    (2,000
    )
    
    
    (1,000
    )
    
    
    (960
    )
    
    
    Net (gain) loss on sale of product lines
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    3,716
    
    
    
    Loss on extinguishment of convertible
debt (3)
    
    
    
    
    
    
    255
    
    
    
    871
    
    
    
    1,283
    
    
    
    Asset impairment charge (4)
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    288
    
    
    
    675Interest expense
    
    
    
    
    
    
    171
    
    
    
    1,126
    
    
    
    6,848
    
    
    
    801(Gain) on derivatives (5)
    
    
    
    
    
    
    
    
    
    
    (4,043
    )
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (5,442
    )
    
    
    (8,102
    )
    
    
    (19,508
    )
    
    
    (43,596
    )
    
    
    (42,040
    )Basic and diluted loss per common share
from continuing operations
    
    $
    (0.09
    )
    
    $
    (0.13
    )
    
    $
    (0.34
    )
    
    $
    (1.20
    )
    
    $
    (1.33
    )Shares used in computing basic and
diluted loss per common share
    
    
    62,982
    
    
    
    60,424
    
    
    
    57,068
    
    
    
    36,452
    
    
    
    31,533Statements of Cash Flows Data:Net cash flows provided by (used for):Operating activities
    
    $
    2,064
    
    
    $
    (1,443
    )
    
    $
    (16,678
    )
    
    $
    (24,901
    )
    
    $
    (22,767
    )Investing activities
    
    
    493
    
    
    
    (3,155
    )
    
    
    3,914
    
    
    
    22,767
    
    
    
    (22,726
    )Financing activities
    
    
    164
    
    
    
    2,339
    
    
    
    5,307
    
    
    
    18,518
    
    
    
    42,750Balance Sheet Data:Cash, Cash Equivalents and Marketable
Securities
    
    $
    13,245
    
    
    $
    12,258
    
    
    $
    12,783
    
    
    $
    20,240
    
    
    $
    19,856Working capital (deficit)(6)
    
    
    (3,010
    )
    
    
    (979
    )
    
    
    (897
    )
    
    
    9,348
    
    
    
    4,913Total assets
    
    
    19,357
    
    
    
    19,474
    
    
    
    20,366
    
    
    
    34,115
    
    
    
    52,242Debt obligations
    
    
    
    
    
    
    
    
    
    
    2,916
    
    
    
    7,063
    
    
    
    19,252Stockholders (deficit) equity
    
    
    (1,303
    )
    
    
    (289
    )
    
    
    927
    
    
    
    10,397
    
    
    
    14,765
 
  (1)
    
    Revenues for the years 2005 and 2004 include the previous acquisitions of MyDocOnline
and Elron Software. Revenues resulting from these acquisitions, which were subsequently
sold as indicated immediately above, totaled $0.9 million and $4.6 million in 2005 and
2004, respectively.(2)
    
    See Note 11 to the consolidated financial statements for an explanation of the customer
deposit forfeiture.(3)
    
    See Note 12 to the consolidated financial statements for an explanation on the early
extinguishment of debt items.(4)
    
    See Note 8 to the consolidated financial statements for an explanation on asset
impairment charges.(5)
    
    See Note 13 to the consolidated financial statements for an explanation of the gain on
derivatives.(6)
    
    Working capital includes deferred revenue totaling $17.4 million and $16.1 million as
of December 31, 2008 and 2007 respectively.
 20




---



##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 Managements Discussion and Analysis of Financial Condition and Results of Operations NOTE ON FORWARD-LOOKING STATEMENTS
AND RISK FACTORS
 Overview
     Strategy and Focus Areas
    21




---



##### Table of Contents




    
    Rate of new subscriptions (termed New First Year Orders (NYFO)) for the Email
Encryption Service;
    
    Renewal rates for the Email Encryption Service;
    
    Additional payor sponsorship of the e-Prescribing Service to physicians by new or
existing insurance payors;
    
    Successful adoption and usage of the e-Prescribing Service by physicians;
    
    Retention of the users (physicians) 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.
  Managements Discussion and Analysis of
Financial Condition and Results of Operations  (MD&A)
 Item 1A. Risk Factors 
 Revenue
  Operating Margins
  Other Financial Highlights
 
    
    For Email Encryption, our sales backlog was $34.7 million in 2008, compared with $28.3
at the end of 2007
    
    For Email Encryption, our total orders for 2008 were $29.2 million, an increase of 21%
from the 2007 total orders of $24.2 million
    
    Our deferred revenue at the end of 2008 was $17.4 million, compared with $16.1 million
at the end of 2007
    
    We generated cash flows from operations of $2.1 million. Our cash and cash equivalents,
together with our investments, were $13.2 million at the end of 2008, compared with $12.3
million at the end of 2007
    
    We maintained a strong renewal rate for eligible Email Encryption contracts at 94% for
2008
    
    We topped 15 million user Email addresses with our Email Encryption Service, with an
increased growth
 22




---



##### Table of Contents



rate of approximately 100,000 new Email addresses each week
    
    Our e-Prescribing Service signed four new sponsorship contracts during the year
    
    Our e-Prescribing Service processed approximately 8.6 million e-scripts during 2008, an
increase of 16% over 2007
 Critical Accounting Policies and Estimates
    
    
    Revenue recognition
    
    Income taxes
    
    Valuation of goodwill and other intangible assets
    
    Stock-based compensation costs
  Revenue Recognition
  Revenue Arrangements with Multiple
Deliverables, Revenue
Recognition in Financial Statements
   23




---



##### Table of Contents




    
    persuasive evidence of an arrangement exists,
    
    delivery has occurred or services have been rendered,
    
    the price is fixed and determinable, and
    
    collectability is reasonably assured.
      Income Taxes
 Accounting for Income
Taxes, Accounting
for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 Accounting for Income
Taxes,
   24




---



##### Table of Contents



Valuation of Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets,
   Stock-based Compensation Expense
 Share-Based Payment, Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees.
 i.e.,
 Share Based Payment, Share Based Payment,
  25




---



##### Table of Contents



Year Ended December 31,2008
    
    
    2007
    
    
    2006Risk-free interest rate
    
    
    2.57
    %
    
    
    3.81
    %
    
    
    4.59
    %Expected option life (years)
    
    
    5.8
    
    
    
    5.8
    
    
    
    5.8Expected stock price volatility
    
    
    78
    %
    
    
    81
    %
    
    
    93
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted
    
    $
    1.71
    
    
    $
    2.87
    
    
    $
    1.03
  Full Year 2008 Summary of Operations
 Financial
 
    
    Revenue for 2008 was $28,035,000 from all products compared with $24,114,000 in 2007
and $18,358,000 in 2006.
    
    Gross margin for 2008 was $18,185,000 or 65% of revenues compared to $13,248,000 or 55%
of revenues in 2007.Email Encryption gross margin for this segment was $18,499,000 or 82% of revenues
compared to $13,621,000 or 76% of revenues in 2007.e-prescribing gross loss for this segment was $314,000 or a negative 6% of revenues
compared to a loss of $373,000 or a negative 6% of revenues in 2007.
    
    Net loss for the year 2008 was $5,442,000 compared with $8,102,000 in 2007 and
$19,508,000 in 2006.
    
    Ending unrestricted cash was $13,245,000 and the balance in restricted accounts was
$28,000 on December 31, 2008.
 Results of Operations
 Revenues
  Variance
    
    
    VarianceYear Ended December 31,
    
    

2008 vs. 2007
    
    

2007 vs. 20062008
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    $
    
    
    %Email Encryption
    
    $
    22,604,000
    
    
    $
    17,982,000
    
    
    $
    14,094,000
    
    
    $
    4,622,000
    
    
    
    26
    %
    
    $
    3,888,000
    
    
    
    28
    %e-Prescribing
    
    
    5,431,000
    
    
    
    6,132,000
    
    
    
    4,264,000
    
    
    
    (701,000
    )
    
    
    (11
    %)
    
    
    1,868,000
    
    
    
    44
    %Total revenues
    
    $
    28,035,000
    
    
    $
    24,114,000
    
    
    $
    18,358,000
    
    
    $
    3,921,000
    
    
    
    16
    %
    
    $
    5,756,000
    
    
    
    31
    %
 Email Encryption 
 2008
    
    
    2007
    
    
    2006New first year order value
    
    $
    5,460,000
    
    
    $
    5,514,000
    
    
    $
    4,665,000Renewal percentage
    
    
    94
    %
    
    
    99
    %
    
    
    95
    %
   26




---



##### Table of Contents



e-Prescribing 
  Revenue Outlook:
    
    
    We saw in the fourth quarter of 2008 success in signing three additional contracts
and growing our e-Prescribing backlog; we further added to our backlog with one
additional contract in the first quarter of 2009;
    
    We believe there is additional interest on the part of some of our payors in
expanding their existing programs, as well as, interest from other prospective payors
who are considering our service; and
    
    MIPPA provides an increase in Medicare payments to those physicians who use
e-prescribing beginning January 2009, and later penalizes those physicians that do not
use e-prescribing.
  Backlog, Orders, and Deployments
 Company-wide Backlog 
 27




---



##### Table of Contents



Email Encryption Orders 
 e-Prescribing 
     28




---



##### Table of Contents



Cost of Revenues
  Variance
    
    
    VarianceYear Ended December 31,
    
    

2008 vs. 2007
    
    

2007 vs. 20062008
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    $
    
    
    %Email Encryption
    
    $
    4,105,000
    
    
    $
    4,361,000
    
    
    $
    5,367,000
    
    
    $
    (256,000
    )
    
    
    (6
    %)
    
    $
    (1,006,000
    )
    
    
    (19
    %)e-Prescribing
    
    
    5,745,000
    
    
    
    6,505,000
    
    
    
    7,185,000
    
    
    
    (760,000
    )
    
    
    (12
    %)
    
    
    (680,000
    )
    
    
    (9
    %)Total cost of revenues
    
    $
    9,850,000
    
    
    $
    10,866,000
    
    
    $
    12,552,000
    
    
    $
    (1,016,000
    )
    
    
    (9
    %)
    
    $
    (1,686,000
    )
    
    
    (13
    %)
   Email Encryption 
 e-Prescribing 
 29




---



##### Table of Contents



Revenues
 Research and Development Expenses
  Variance
    
    
    VarianceYear Ended December 31,
    
    

2008 vs. 2007
    
    
    2007 vs. 20062008
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    $
    
    
    %Total research and
development
expenses
    
    $
    6,158,000
    
    
    $
    5,322,000
    
    
    $
    6,085,000
    
    
    $
    836,000
    
    
    
    16
    %
    
    $
    (763,000
    )
    
    
    (13
    %)
    Selling, General and Administrative Expenses
  Variance
    
    
    VarianceYear Ended December 31,
    
    
    2008 vs. 2007
    
    
    2007 vs. 20062008
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %
    
    
    $
    
    
    %Marketing expenses
    
    $
    3,315,000
    
    
    $
    3,423,000
    
    
    $
    5,118,000
    
    
    $
    (108,000
    )
    
    
    (3
    %)
    
    $
    (1,695,000
    )
    
    
    (33
    %)Sales expenses
    
    
    8,846,000
    
    
    
    9,016,000
    
    
    
    9,876,000
    
    
    
    (170,000
    )
    
    
    (2
    %)
    
    
    (860,000
    )
    
    
    (9
    %)General and
administrative expenses
    
    
    5,872,000
    
    
    
    5,522,000
    
    
    
    8,194,000
    
    
    
    350,000
    
    
    
    6
    %
    
    
    (2,672,000
    )
    
    
    (33
    %)Total SG&A
    
    $
    18,033,000
    
    
    $
    17,961,000
    
    
    $
    23,188,000
    
    
    $
    72,000
    
    
    
    
    
    
    $
    (5,227,000
    )
    
    
    (23
    %)
   30




---



##### Table of Contents



Customer Deposit Forfeiture
  Asset Impairment Charge
  Loss on Impairment of Operating Lease
  Interest Expense
  Investment and Other Income
  31




---



##### Table of Contents



Gain on Valuation of Derivative Liabilities
  Accounting for
Registration Payment Arrangements
 Income Taxes
 Accounting for Income
Taxes Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 Accounting for Income
Taxes.
 Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109
   32




---



##### Table of Contents



Net Loss
   Year Ended December 31,2008
    
    
    2007
    
    
    2006Unusual Items:Customer deposit forfeiture
    
    $
    
    
    
    $
    (2,000,000
    )
    
    $
    (1,000,000
    )Asset impairment charge
    
    
    
    
    
    
    
    
    
    
    125,000Loss on impairment of operating lease
    
    
    
    
    
    
    100,000
    
    
    
    Gain on derivatives
    
    
    
    
    
    
    
    
    
    
    (4,043,000
    )Loss on extinguishment of convertible debt
    
    
    
    
    
    
    255,000
    
    
    
    871,000Total unusual items
    
    $
    
    
    
    $
    (1,645,000
    )
    
    $
    (4,047,000
    )
 Liquidity and Capital Resources
 Overview
    33




---



##### Table of Contents



Impact of Current Economic Crisis
   Contractual Obligations
  Sources and Uses of Cash
 Years Ended December 31,2008
    
    2007
    
    2006Net cash provided by (used in) operations
    
    $
    2,064,000
    
    
    $
    (1,443,000
    )
    
    $
    (16,678,000
    )Net cash provided by (used in) investing
activities
    
    $
    493,000
    
    
    $
    (3,155,000
    )
    
    $
    3,914,000Net cash provided by financing activities
    
    $
    164,000
    
    
    $
    2,339,000
    
    
    $
    5,307,000
    Liquidity Summary
  Options and Warrants of ZixCorp Common Stock
 34




---



##### Table of Contents



Summary of Outstanding Options and WarrantsVested SharesTotal Value of
    
    
    (included inOutstanding
    
    
    Outstanding
    
    
    outstanding
    
    
    Total Value ofExercise Price Range
    
    Shares
    
    
    Shares
    
    
    shares)
    
    
    Vested Shares$1.11 - $1.99
    
    
    7,458,896
    
    
    $
    11,426,000
    
    
    
    6,313,394
    
    
    $
    9,786,000$2.00 - $3.49
    
    
    4,967,306
    
    
    
    14,846,000
    
    
    
    4,785,013
    
    
    
    14,296,000$3.50 - $4.99
    
    
    4,127,869
    
    
    
    18,413,000
    
    
    
    3,030,021
    
    
    
    13,214,000$5.00 - $5.99
    
    
    600,354
    
    
    
    3,048,000
    
    
    
    600,354
    
    
    
    3,048,000$6.00 - $8.99
    
    
    971,599
    
    
    
    6,203,000
    
    
    
    971,599
    
    
    
    6,203,000$9.00 - $19.99
    
    
    1,116,570
    
    
    
    11,965,000
    
    
    
    1,116,570
    
    
    
    11,965,000$20.00 - $57.60
    
    
    1,057,019
    
    
    
    57,591,000
    
    
    
    1,057,019
    
    
    
    57,591,000Total
    
    
    20,299,613
    
    
    $
    123,492,000
    
    
    
    17,873,970
    
    
    $
    116,103,000
 Off-Balance Sheet Arrangements
  Contractual Obligations and Contingent Liabilities and Commitments
  Payments Due by PeriodTotal
    
    < 1 Year
    
    2-3 Years
    
    4-5 Years
    
    > 5 YearsOperating leases
    
    $
    5,671,000
    
    
    $
    1,272,000
    
    
    $
    1,960,000
    
    
    $
    1,774,000
    
    
    $
    665,000
  Recently Issued Accounting Standards
  Adopted in 2008:
 SFAS 157  Fair Value Measurements Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13
 SFAS 159  The Fair Value Option for
Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement No. 115
 35




---



##### Table of Contents



Share-Based
Payment
 Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities-a replacement of FASB Statement No. 125, Consolidation of Variable Interest Entities (revised December 2003)  an
interpretation of ARB No. 51,
 To be Adopted in 2009:
 FSP 157-2  Effective Date
of FASB Statement No. 157
 SFAS 141(R) and SFAS 160  Business Combinations Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51
 Determination of the Useful
Life of Intangible Assets, Goodwill and Other Intangible Asset.
 36




---



##### Table of Contents



Beyond 2009:
 International Financial Reporting Standards
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
  
 Item 9A. Controls and Procedures
 Effectiveness of Disclosure Controls and Procedure
 Annual Report on Form 10-K ,
 Managements Annual Report on Internal Control Over Financial Reporting
  Internal
ControlIntegrated Framework
  37




---



##### Table of Contents



Changes in Internal Controls over Financial Reporting
  38




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated
Framework Managements Report on Internal Control Over Financial Reporting
    Internal
ControlIntegrated Framework
     
 39




---



##### Table of Contents



Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  www.zixcorp.com
 
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 Financial Statements
  Financial Statement Schedules
  40




---



##### Table of Contents



Exhibits
 ExhibitNumber
    
    
    
    Description3.1
    
    
    
    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
    
    
    
    Amended and Restated Bylaws of Zix Corporation, dated February 4, 2009.
Filed as Exhibit 3.1 to Zix Corporations Current Report on Form 8-K, dated
February 10, 2009, and incorporated herein by reference.4.1
    
    
    
    Specimen certificate for common stock of Zix Corporation. Filed as Exhibit
4.1 to Zix Corporations Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference.4.2
    
    
    
    Form of Warrant, dated June 24, 2003, to purchase shares of common stock of
Zix Corporation, issued by Zix Corporation (issued in connection with a
$5.25 million financing in 2003). Filed as Exhibit 4.2 to Zix Corporations
Current Report on Form 8-K, dated June 25, 2003, and incorporated herein by
reference.4.3
    
    
    
    Warrant to purchase 166,667 shares of common stock of Zix Corporation
re-issued to Iroquois Master Fund, Ltd., dated December 17, 2007, which was
originally issued by Zix Corporation to Rodman & Renshaw, LLC., dated as of
November 2, 2004 and filed as Exhibit 4.1 to Zix Corporations Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2005, and
incorporated herein by reference.4.4
    
    
    
    Warrant to purchase 108,964 shares of common stock of Zix Corporation
re-issued to Iroquois Master Fund, Ltd., dated December 17, 2007, which was
originally issued by Zix Corporation to Rodman & Renshaw, LLC., dated as of
November 2, 2004 and filed as Exhibit 4.2 to Zix Corporations Report on
Form 8-K dated December 29, 2006, and incorporated herein by reference.4.5
    
    
    
    Form of Common Stock Purchase Warrant, dated as of November 2, 2004, issued
by Zix Corporation to Omicron Master Trust and Amulet Limited issued in
connection with a $20 million convertible note financing in 2004). Filed as
Exhibit 4.4 to Zix Corporations Current Report on Form 8-K, dated November
4, 2004, and incorporated herein by reference.4.6
    
    
    
    Form of Amended and Restated Common Stock Purchase Warrant to purchase
shares of Zix Corporation issued to Omicron Master Trust and Amulet
Limited, dated as of July 22, 2005 (excluding exhibits) issued in
connection with a $20 million convertible note financing in 2004). Filed as
Exhibit 4.4 to Zix Corporations Current Report on Form 8-K, dated April
14, 2005, and incorporated herein by reference.4.7
    
    
    
    Form of Warrant, dated August 9, 2005, to purchase shares of Common Stock
of Zix Corporation (including appendices) (issued in connection with a
$26.3 million private placement in 2005). Filed as Exhibit 4.2 to Zix
Corporations Current Report on Form 8-K, dated August 9, 2005, and
incorporated herein by reference.4.8
    
    
    
    Warrant, dated September 30, 2005, issued to Zix Corporation by MITEM
Corporation and exercisable for 400,000 shares of common stock of MITEM
Corporation issued in connection with the sale of the Dr. Chart assets in
2005. Filed as Exhibit 2.3 to Zix Corporations Current Report on Form 8-K,
dated October 5, 2005, and incorporated herein by reference.4.9
    
    
    
    Form of Warrant, as of April 6, 2006, to purchase approximately 5.9 million
shares of Common Stock of Zix Corporation (issued to various purchasers in
connection with an $11.8 million private placement in 2006). Filed as
Exhibit 4.2 to Zix Corporations Report on Form 8-K dated April 5, 2006,
and incorporated herein by reference.4.10
    
    
    
    Warrant, dated February 22, 2007, to purchase 145,853 shares of Common
Stock issued by Zix Corporation to sanofi-aventis, U.S. Inc. issued in
connection with the exchange of a promissory note and issuance of a $1.6
million promissory note. Filed as Exhibit 4.3 to Zix Corporations Current
Report on Form 8-K, dated February 28, 2007, and incorporated herein by
reference.
 41




---



##### Table of Contents



ExhibitNumber
    
    
    
    Description4.11
    
    
    
    Registration Rights Agreement, dated June 24, 2003, by and among Zix
Corporation and the investors named therein (issued in connection with the
$5.75 million financing). Filed as Exhibit 4.3 to Zix Corporations Current
Report on Form 8-K, dated June 25, 2003, and incorporated herein by
reference.4.12
    
    
    
    Registration Rights Agreement, dated July 22, 2003, between Zix Corporation
and Pocket Script, L.L.C. Filed as Exhibit 4.2 to Zix Corporations Current
Report on Form 8-K, dated July 23, 2003, and incorporated herein by
reference.4.13
    
    
    
    Registration Rights Agreement, dated January 30, 2004, by and among Zix
Corporation, Aventis Inc., a Pennsylvania corporation, and Aventis Holdings
Inc., a Delaware corporation. Filed as Exhibit 4.2 to Zix Corporations
Current Report on Form 8-K, dated February 10, 2004, and incorporated
herein by reference.4.14
    
    
    
    Form of Registration Rights Agreement, dated as of November 2, 2004, by and
between Zix Corporation and the Investors named therein (issued in
connection with a $20 million convertible note private placement). Filed as
Exhibit 4.5 to Zix Corporations Current Report on Form 8-K, dated November
4, 2004, and incorporated herein by reference.4.15
    
    
    
    Form of Amended and Restated Registration Rights Agreement by and between
Zix Corporation and the Investors (excluding exhibits) (issued in
connection with a $20 million convertible note private placement). Filed as
Exhibit 4.5 to Zix Corporations Current Report on Form 8-K, dated April
14, 2005, and incorporated herein by reference.4.16
    
    
    
    Securities Purchase Agreement, dated June 24, 2003, by and among Zix
Corporation and the investors named therein (including schedules but
excluding exhibits) in connection with a $5.75 million financing in 2003).
Filed as Exhibit 4.1 to Zix Corporations Current Report on Form 8-K, dated
June 25, 2003, and incorporated herein by reference.4.17
    
    
    
    Securities Purchase Agreement, dated as of August 9, 2005, by and between
Zix Corporation and the Purchasers listed on Schedule A thereto (including
schedules, appendices and exhibits) (issued in connection with a $26.3
million private placement in 2005). Filed as Exhibit 4.1 to Zix
Corporations Current Report on Form 8-K/A, dated October 21, 2005, and
incorporated herein by reference.4.18
    
    
    
    Securities Purchase Agreement, dated as of April 4, 2006, by and between
Zix Corporation and the Purchasers listed on Schedule A thereto (in
connection with an $11.8 million private placement in 2006). Filed as
Exhibit 4.1 to Zix Corporations Report on Form 8-K dated April 5, 2006,
and incorporated herein by reference.4.19
    
    
    
    Purchase Agreement, dated as of November 1, 2004, by and between Zix
Corporation and Omicron Master Trust (excluding schedules and exhibits) in
connection with a $20 million convertible note financing in 2004). Filed as
Exhibit 4.1 to Zix Corporations Current Report on Form 8-K, dated November
4, 2004, and incorporated herein by reference.4.20
    
    
    
    Amendment No. 1 to Purchase Agreement, dated as of April 13, 2005, by and
between Zix Corporation and Omicron Master Trust (excluding schedules and
exhibits) in connection with a restructuring of the $20 million convertible
note financing in 2004. Filed as Exhibit 4.1 to Zix Corporations Current
Report on Form 8-K, dated April 14, 2005, and incorporated herein by
reference.4.21
    
    
    
    Purchase Agreement, dated as of November 1, 2004, by and between Zix
Corporation and Amulet Limited (excluding schedules and exhibits) in
connection with a $20 million convertible note financing in 2004. Filed as
Exhibit 4.2 to Zix Corporations Current Report on Form 8-K, dated November
4, 2004, and incorporated herein by reference.4.22
    
    
    
    Amendment No. 1 to Purchase Agreement, dated as of April 13, 2005, by and
between Zix Corporation and Amulet Limited (excluding schedules and
exhibits) in connection with a restructuring of the $20 million convertible
note financing in 2004. Filed as Exhibit 4.2 to Zix Corporations Current
Report on Form 8-K, dated April 14, 2005, and incorporated herein by
reference.
 42




---



##### Table of Contents



ExhibitNumber
    
    
    
    Description10.1
    
    
    
    1990 Stock Option Plan of Zix Corporation (Amended and Restated as of
September 1999). Filed as Exhibit 10.1 to Zix Corporations Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1999, and
incorporated herein by reference.10.2
    
    
    
    1992 Stock Option Plan of Zix Corporation (Amended and Restated as of
August 2000). Filed as Exhibit 10.2 to Zix Corporations Annual Report on
Form 10-K for the year ended December 31, 2003, and incorporated herein by
reference.10.3
    
    
    
    1995 Long-Term Incentive Plan of Zix Corporation (Amended and Restated as
of September 20, 2000). Filed as Exhibit 10.3 to Zix Corporations
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2000, and incorporated herein by reference.10.4
    
    
    
    1996 Employee Stock Purchase Plan of Zix Corporation (Amended and Restated
as of July 1, 2000). Filed as Exhibit 10.2 to Zix Corporations Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000, and
incorporated herein by reference.10.5
    
    
    
    Zix Corporation 1999 Directors Stock Option Plan (Amended and Restated as
of August 1, 2002). Filed as Exhibit 10.1 to Zix Corporations Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2002, and
incorporated herein by reference.10.6
    
    
    
    Zix Corporation 2001 Employee Stock Option Plan (Amended and Restated as of
June 7, 2007). Filed as Exhibit 10.6 to Zix Corporations Report on Form
8-K, filed June 12, 2007, and incorporated herein by reference.10.7
    
    
    
    Zix Corporations 2001 Stock Option Plan (Amended and Restated as of June
7, 2007). Filed as Exhibit 10.5 to Zix Corporations Report on Form 8-K,
filed June 12, 2007, and incorporated herein by reference.10.8
    
    
    
    Zix Corporations 2003 New Employee Stock Option Plan (Amended and Restated
as of June 7, 2007). Filed as Exhibit 10.4 to Zix Corporations Report on
Form 8-K, filed June 12, 2007, and incorporated herein by reference.10.9
    
    
    
    Zix Corporation 2004 Stock Option Plan (Amended and Restated as of June 7,
2007). Filed as Exhibit 10.3 to Zix Corporations Report on Form 8-K, filed
June 12, 2007, and incorporated herein by reference.10.10
    
    
    
    Zix Corporation 2004 Stock Option Plan (Amended and Restated as of May 25,
2005). Filed as Exhibit 10.1 to Zix Corporations Registration Statement on
Form S-8 (Registration No. 333-126576), dated July 13, 2005, and
incorporated herein by reference.10.11
    
    
    
    Zix Corporation 2004 Directors Stock Option Plan, dated May 6, 2004. Filed
as Exhibit 10.2 to Zix Corporations Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2004, and incorporated herein by
reference.10.12
    
    
    
    Zix Corporation 2006 Directors Stock Option Plan (Amended and Restated as
of June 7, 2007) Filed as Exhibit 10.1 to Zix Corporations Current Report
on Form 8-K, filed June 12, 2007, and incorporated herein by reference.10.13
    
    
    
    Form of Stock Option Agreement (with no change in control provision) for
Zix Corporation Stock Option Plans. Filed as Exhibit 10.2 to Zix
Corporations Registration Statement on Form S-8 (Registration No.
333-126576), dated July 13, 2005, and incorporated herein by reference.10.14
    
    
    
    Form of Stock Option Agreement (with change in control provision) for Zix
Corporation Stock Option Plans. Filed as Exhibit 10.3 to Zix Corporations
Registration Statement on Form S-8 (Registration No. 333-126576), dated
July 13, 2005, and incorporated herein by reference.10.15
    
    
    
    Form of Stock Option Agreement (with acceleration event provision) for
Zix Corporation Stock Option Plans and applicable to option agreements held
by the Companys chief executive officer and direct reports. Filed as
Exhibit 10.17 to Zix Corporations Annual Report on Form 10-K for the year
ended December 31, 2007, and incorporated herein by reference.
 43




---



##### Table of Contents



ExhibitNumber
    
    
    
    Description10.16
    
    
    
    Zix Corporation 401(k) Retirement Plan. Filed as Exhibit 10.10 to Zix
Corporations Annual Report on Form 10-K for the year ended December 31,
2003, and incorporated herein by reference.10.17
    
    
    
    Adoption Agreement relating to Zix Corporation 401(k) Retirement Plan.
Filed as Exhibit 10.11 to Zix Corporations Annual Report on Form 10-K for
the year ended December 31, 2003, and incorporated herein by reference.10.18
    
    
    
    Stock Option Agreement, dated February 24, 2004, between Zix Corporation
and Richard D. Spurr, covering 650,000 shares at $10.80 exercise price per
share. Filed as Exhibit 10.15 to Zix Corporations Annual Report on Form
10-K for the year ended December 31, 2003, and incorporated herein by
reference.10.19
    
    
    
    Stock Option Agreement, dated November 17, 2004, between Zix Corporation
and Richard D. Spurr, covering 350,000 shares at $6.00 exercise price per
share. Filed as Exhibit 10.18 to Zix Corporations Annual Report on Form
10-K for the year ended December 31, 2004, and incorporated herein by
reference.10.20
    
    
    
    Stock Option Agreement, dated March 23, 2005, between Zix Corporation and
Richard D. Spurr, covering 350,000 shares at $3.78 exercise price per
share. Filed as Exhibit 10.2 to Zix Corporations Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2005, and incorporated herein
by reference.10.21
    
    
    
    Stock Option Agreement, dated March 2, 2006, between Zix Corporation and
Richard D. Spurr, covering 350,000 shares at $4.00 exercise price per
share. Filed as Exhibit 10.25 to Zix Corporations Annual Report on Form
10-K for the year ended December 31, 2006, and incorporated herein by
reference.10.22
    
    
    
    Stock Option Agreement, dated December 18, 2006, between Zix Corporation
and Richard D. Spurr, covering 400,000 shares at $1.50 exercise price per
share. Filed as Exhibit 10.24 to Zix Corporations Annual Report on Form
10-K for the year ended December 31, 2007, and incorporated herein by
reference.10.23
    
    
    
    Stock Option Agreement, dated December 20, 2007, between Zix Corporation
and Richard D. Spurr, covering 400,000 shares at $4.87 exercise price per
share. Filed as Exhibit 10.25 to Zix Corporations Annual Report on Form
10-K for the year ended December 31, 2007, and incorporated herein by
reference.10.24*
    
    
    
    Stock Option Agreement, dated December 23, 2008, between Zix Corporation
and Richard D. Spurr, covering 100,000 shares at $1.11 exercise price per
share.10.25
    
    
    
    Stock Option Agreement between Zix Corporation and Susan K. Conner covering
130,000 shares at $1.70 exercise price per share (grant date October 16,
2008). Filed as Exhibit 10.1 to Zix Corporations Form 10-Q for the
quarter ended September 30, 2008, and incorporated herein by reference.10.26
    
    
    
    Form of Zix Corporation Outside Director Stock Option Agreement. Filed as
Exhibit 10.3 to Zix Corporations Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2004, and incorporated herein by reference.10.27*
    
    
    
    Amended and Restated Severance Agreement, entered into as of December 18,
2008, between Zix Corporation and Richard D. Spurr (amended for I.R.C. 409A
compliance purposes).10.28*
    
    
    
    Amended and Restated Severance Agreement, entered into as of December 18,
2008, between Zix Corporation and Ronald A. Woessner (amended for I.R.C.
409A compliance purposes).10.29*
    
    
    
    Amended and Restated Separation Pay Agreement, entered into as of December
18, 2008, between Zix Corporation and Susan K. Conner (amended for I.R.C.
409A compliance purposes).10.30*
    
    
    
    Amended and Restated Severance Agreement, entered into as of December 30,
2008, between Zix Corporation and David J. Robertson (amended for I.R.C.
409A compliance purposes).
 44




---



##### Table of Contents



ExhibitNumber
    
    
    
    Description10.31*
    
    
    
    Form of Amended and Restated Separation Pay Agreement between Zix
Corporation and certain executive officers (amended for I.R.C. 409A
compliance purposes).10.32*
    
    
    
    Form of Amended and Restated Severance Agreement between Zix Corporation
and certain executive officers (amended for I.R.C. 409A compliance
purposes).10.33
    
    
    
    Description of Compensation for Members of Zix Corporation Board of
Directors. Filed as Exhibit 10.38 to Zix Corporations Annual Report on
Form 10-K for the year ended December 31, 2007, and incorporated herein by
reference.10.34
    
    
    
    Lease Agreement, dated December 29, 2003, between Zix Corporation and
7-Eleven, Inc. (excluding exhibits) (relating to Zix Corporations Dallas,
Texas facilities). Filed as Exhibit 10.24 to Zix Corporations Annual
Report on Form 10-K for the year ended December 31, 2003, and incorporated
herein by reference.10.35
    
    
    
    Office Lease Agreement, dated February 28, 2005, between Gateway Rosewood,
Inc. and Zix SCM, Inc. (relating to Zix Corporations Burlington,
Massachusetts facility). Filed as Exhibit 10.26 to Zix Corporations Annual
Report on Form 10-K for the year ended December 31, 2004, and incorporated
herein by reference.10.36
    
    
    
    Facilities Service Agreement, entered into as of June 25, 2003, by and
between Collocation Solutions, LLC and Zix Corporation (excluding schedule
and exhibit) (relating to Zix Corporations Austin, Texas data processing
operations). Filed as Exhibit 10.33 to Zix Corporations Annual Report on
Form 10-K for the year ended December 31, 2003, and incorporated herein by
reference.10.37
    
    
    
    Lease, dated March 9, 2004, between Duke Realty Ohio and PocketScript, Inc.
(excluding exhibits) (relating to Zix Corporations Mason, Ohio facility
and expiring October 2009). Filed as Exhibit 10.34 to Zix Corporations
Annual Report on Form 10-K for the year ended December 31, 2003, and
incorporated herein by reference.10.38*
    
    
    
    Master Service Agreement, entered into October 1, 2008, between ZixCorp
Global, Inc. and Equinix (UK) Limited (relating to Zix Corporations
European Union encrypted email data processing operations).10.39
    
    
    
    Letter of Agreement dated September 12, 2006 between MITEM Corporation and
Zix Corporation. Filed as Exhibit 10.2 to Zix Corporations Quarterly
Report on Form 10-Q for the period ended September 30, 2006, and
incorporated herein by reference.21.1*
    
    
    
    Subsidiaries of Zix Corporation.23.1*
    
    
    
    Consent of Independent Registered Public Accounting Firm (Whitley Penn LLP).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 Susan K. Conner, Chief Financial Officer of the Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    
    
    Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as
adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.1
    
    
    
    Order and Final Judgment, United States District Court, Cause No.
3-04-CV-1931-K, Northern District of Texas, Dallas Division (dated June 16,
2008). Filed as Exhibit 99.1 to the Zix Corporation Current Report on Form
8-K, filed June 17, 2008, and incorporated herein by reference.
 
 *
    
    Filed herewith.
    
    Management contract or compensatory plan or arrangement. 45




---



##### Table of Contents



SIGNATURES
  ZIX CORPORATIONBy:
    /s/ SUSAN K. CONNERSusan K. ConnerChief Financial Officer  Signature
    
    Title/s/ RICHARD D. SPURR

(Richard D. Spurr)
    
    Chairman, Chief Executive Officer, President and Director (Principal
Executive Officer)/s/ SUSAN K. CONNER

(Susan K. Conner)
    
    Chief Financial Officer (Principal
Financial and Accounting Officer)/s/ ROBERT C. HAUSMANN

(Robert C. Hausmann)
    
    Director/s/ CHARLES N. KAHN III

(Charles N. Kahn III)
    
    Director/s/ JAMES S. MARSTON

(James S. Marston)
    
    Director/s/ ANTONIO R. SANCHEZ III

(Antonio R. Sanchez III)
    
    DirectorDirector(Paul E. Schlosberg)
 46




---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets at December 31, 2008 and 2007
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006
    
    F-4Consolidated Statements of Stockholders Equity (Deficit) for the years ended December
31, 2008, 2007 and 2006
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
    
    F-6Notes to Consolidated Financial Statements
    
    F-7




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal ControlIntegrated Framework
  
 F-2




---



##### Table of Contents



ZIX CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,245,000
    
    
    $
    10,524,000Marketable securities
    
    
    
    
    
    
    1,734,000Receivables, net
    
    
    476,000
    
    
    
    1,119,000Prepaid and other current assets
    
    
    1,145,000
    
    
    
    1,545,000Total current assets
    
    
    14,866,000
    
    
    
    14,922,000Restricted cash
    
    
    28,000
    
    
    
    25,000Property and equipment, net
    
    
    2,236,000
    
    
    
    2,297,000Goodwill
    
    
    2,161,000
    
    
    
    2,161,000Deferred financing costs and other assets
    
    
    66,000
    
    
    
    69,000Total assets
    
    $
    19,357,000
    
    
    $
    19,474,000LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    512,000
    
    
    $
    231,000Accrued expenses
    
    
    2,404,000
    
    
    
    3,064,000Deferred revenue
    
    
    14,960,000
    
    
    
    12,606,000Total current liabilities
    
    
    17,876,000
    
    
    
    15,901,000Long-term liabilities:Deferred revenue
    
    
    2,484,000
    
    
    
    3,497,000Deferred rent
    
    
    300,000
    
    
    
    365,000Total long-term liabilities
    
    
    2,784,000
    
    
    
    3,862,000Total liabilities
    
    
    20,660,000
    
    
    
    19,763,000Commitments and contingencies (Note 17)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;
65,646,663 issued and 63,319,482 outstanding in 2008 and
64,959,649 issued and 62,632,468 outstanding in 2007
    
    
    656,000
    
    
    
    650,000Additional paid-in capital
    
    
    333,608,000
    
    
    
    329,186,000Treasury stock, at cost; 2,327,181 common shares in 2008 and 2007
    
    
    (11,507,000
    )
    
    
    (11,507,000
    )Accumulated deficit
    
    
    (324,060,000
    )
    
    
    (318,618,000
    )Total stockholders deficit
    
    
    (1,303,000
    )
    
    
    (289,000
    )Total liabilities and stockholders deficit
    
    $
    19,357,000
    
    
    $
    19,474,000
  F-3




---



##### Table of Contents



ZIX CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Revenues
    
    $
    28,035,000
    
    
    $
    24,114,000
    
    
    $
    18,358,000Cost of revenues
    
    
    9,850,000
    
    
    
    10,866,000
    
    
    
    12,552,000Gross margin
    
    
    18,185,000
    
    
    
    13,248,000
    
    
    
    5,806,000Research and development expenses
    
    
    6,158,000
    
    
    
    5,322,000
    
    
    
    6,085,000Selling, general and administrative expenses
    
    
    18,033,000
    
    
    
    17,961,000
    
    
    
    23,188,000Customer deposit forfeiture
    
    
    
    
    
    
    (2,000,000
    )
    
    
    (1,000,000
    )Gain on sale of product lines
    
    
    
    
    
    
    
    
    
    
    (53,000
    )Asset impairment charge
    
    
    
    
    
    
    
    
    
    
    125,000Loss on impairment of operating lease
    
    
    
    
    
    
    100,000
    
    
    
    Operating loss
    
    
    (6,006,000
    )
    
    
    (8,135,000
    )
    
    
    (22,539,000
    )Other income (expense):Investment and other income
    
    
    606,000
    
    
    
    640,000
    
    
    
    925,000Interest expense
    
    
    
    
    
    
    (171,000
    )
    
    
    (1,126,000
    )Gain on derivatives (see Note 13)
    
    
    
    
    
    
    
    
    
    
    4,043,000Loss on extinguishment of convertible debt (see Note 12)
    
    
    
    
    
    
    (255,000
    )
    
    
    (871,000
    )Total other income
    
    
    606,000
    
    
    
    214,000
    
    
    
    2,971,000Loss before income taxes
    
    
    (5,400,000
    )
    
    
    (7,921,000
    )
    
    
    (19,568,000
    )Income tax benefit (expense)
    
    
    (42,000
    )
    
    
    (181,000
    )
    
    
    60,000Net loss
    
    $
    (5,442,000
    )
    
    $
    (8,102,000
    )
    
    $
    (19,508,000
    )Basic and diluted loss per common share:
    
    $
    (0.09
    )
    
    $
    (0.13
    )
    
    $
    (0.34
    )Basic and diluted weighted average common shares
outstanding
    
    
    62,981,958
    
    
    
    60,424,251
    
    
    
    57,067,678
  F-4




---



##### Table of Contents



ZIX CORPORATION
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
 Stockholders' Equity (Deficit)Additional
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    Accumulated
    
    
    Stockholders'Shares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    Equity (Deficit)Balance, December 31, 2005
    
    
    51,932,561
    
    
    $
    519,000
    
    
    $
    308,461,000
    
    
    $
    (11,507,000
    )
    
    $
    (287,076,000
    )
    
    $
    10,397,000Issuance of common stock and related
warrants upon private investment (net of
issuance costs)
    
    
    9,930,000
    
    
    
    100,000
    
    
    
    4,648,000
    
    
    
    
    
    
    
    
    
    
    
    4,748,000Common stock issued to employees for compensation
in lieu of cash
    
    
    82,196
    
    
    
    1,000
    
    
    
    156,000
    
    
    
    
    
    
    
    
    
    
    
    157,000Common stock issued in lieu of cash for
third-party services
    
    
    21,263
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    30,000Employee stock-based compensation costs
    
    
    
    
    
    
    
    
    
    
    2,808,000
    
    
    
    
    
    
    
    
    
    
    
    2,808,000Valuation of additional warrants issued relating
to the convertible promissory notes payable
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000Valuation of beneficial conversion feature in
convertible promissory note resulting from
the private placement of common stock
    
    
    
    
    
    
    
    
    
    
    459,000
    
    
    
    
    
    
    
    
    
    
    
    459,000Valuation of additional anti-dilutive warrants
issued upon private placement of common
stock
    
    
    
    
    
    
    
    
    
    
    74,000
    
    
    
    
    
    
    
    
    
    
    
    74,000Valuation of additional warrants issued upon
retirement of convertible promissory note
    
    
    
    
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    6,000Reversal of unamortized valuation of beneficial
conversion feature upon retirement of
convertible promissory note
    
    
    
    
    
    
    
    
    
    
    (365,000
    )
    
    
    
    
    
    
    
    
    
    
    (365,000
    )Non-employee stock-based compensation
    
    
    
    
    
    
    
    
    
    
    24,000
    
    
    
    
    
    
    
    
    
    
    
    24,000Cumulative effect of change in accounting
principle (see Note 13)
    
    
    
    
    
    
    
    
    
    
    5,979,000
    
    
    
    
    
    
    
    (3,932,000
    )
    
    
    2,047,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,508,000
    )
    
    
    (19,508,000
    )Balance, December 31, 2006
    
    
    61,966,020
    
    
    
    620,000
    
    
    
    322,330,000
    
    
    
    (11,507,000
    )
    
    
    (310,516,000
    )
    
    
    927,000Issuance of common stock upon exercise of stock
options
    
    
    145,689
    
    
    
    1,000
    
    
    
    541,000
    
    
    
    
    
    
    
    
    
    
    
    542,000Issuance of common stock upon exercise of warrants
    
    
    2,147,940
    
    
    
    22,000
    
    
    
    3,630,000
    
    
    
    
    
    
    
    
    
    
    
    3,652,000Issuance of common stock upon restructure of
promissory note payable
    
    
    700,000
    
    
    
    7,000
    
    
    
    1,386,000
    
    
    
    
    
    
    
    
    
    
    
    1,393,000Employee stock-based compensation costs
    
    
    
    
    
    
    
    
    
    
    1,059,000
    
    
    
    
    
    
    
    
    
    
    
    1,059,000Non-employee stock-based compensation
    
    
    
    
    
    
    
    
    
    
    205,000
    
    
    
    
    
    
    
    
    
    
    
    205,000Other
    
    
    
    
    
    
    
    
    
    
    35,000
    
    
    
    
    
    
    
    
    
    
    
    35,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,102,000
    )
    
    
    (8,102,000
    )Balance, December 31, 2007
    
    
    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
    
    
    67,342
    
    
    
    1,000
    
    
    
    163,000
    
    
    
    
    
    
    
    
    
    
    
    164,000Shares issued to employees in lieu of cash
compensation
    
    
    619,672
    
    
    
    5,000
    
    
    
    1,692,000
    
    
    
    
    
    
    
    
    
    
    
    1,697,000Employee stock-based compensation costs
    
    
    
    
    
    
    
    
    
    
    2,498,000
    
    
    
    
    
    
    
    
    
    
    
    2,498,000Non-employee stock-based compensation
    
    
    
    
    
    
    
    
    
    
    48,000
    
    
    
    
    
    
    
    
    
    
    
    48,000Other
    
    
    
    
    
    
    
    
    
    
    21,000
    
    
    
    
    
    
    
    
    
    
    
    21,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,442,000
    )
    
    
    (5,442,000
    )Balance, December 31, 2008
    
    
    65,646,663
    
    
    $
    656,000
    
    
    $
    333,608,000
    
    
    $
    (11,507,000
    )
    
    $
    (324,060,000
    )
    
    $
    (1,303,000
    )
  F-5




---



##### Table of Contents



ZIX CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Operating activities:Net loss
    
    $
    (5,442,000
    )
    
    $
    (8,102,000
    )
    
    $
    (19,508,000
    )Non-cash items in net loss:Depreciation and amortization
    
    
    1,268,000
    
    
    
    1,578,000
    
    
    
    2,754,000Amortization of debt discount/premium, financing costs, and other
    
    
    
    
    
    
    88,000
    
    
    
    910,000Valuation of additional warrants issued upon cash payment of convertible debt
    
    
    
    
    
    
    
    
    
    
    10,000Common stock issued to employees and non-employees in lieu of cash
    
    
    1,181,000
    
    
    
    
    
    
    
    187,000Loss on extinguishment of debt
    
    
    
    
    
    
    255,000
    
    
    
    871,000Gain on derivative liabilities (see Note 13)
    
    
    
    
    
    
    
    
    
    
    (4,043,000
    )Asset impairment charge
    
    
    
    
    
    
    
    
    
    
    125,000Employee stock based compensation expense
    
    
    2,498,000
    
    
    
    1,059,000
    
    
    
    2,808,000Non-employee stock-based compensation
    
    
    48,000
    
    
    
    205,000
    
    
    
    24,000Customer deposit forfeiture (see Note 11)
    
    
    
    
    
    
    (2,000,000
    )
    
    
    (1,000,000
    )Changes in deferred taxes
    
    
    3,000
    
    
    
    (33,000
    )
    
    
    1,000Gain on sale of product lines
    
    
    
    
    
    
    
    
    
    
    (53,000
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    643,000
    
    
    
    (373,000
    )
    
    
    (597,000
    )Prepaid and other assets
    
    
    416,000
    
    
    
    649,000
    
    
    
    (9,000
    )Accounts payable
    
    
    296,000
    
    
    
    (23,000
    )
    
    
    (993,000
    )Deferred revenue
    
    
    1,341,000
    
    
    
    5,219,000
    
    
    
    2,536,000Accrued and other liabilities
    
    
    (188,000
    )
    
    
    35,000
    
    
    
    (701,000
    )Net cash provided by (used in) operating activities
    
    
    2,064,000
    
    
    
    (1,443,000
    )
    
    
    (16,678,000
    )Investing activities:Purchases of property and equipment
    
    
    (1,238,000
    )
    
    
    (1,431,000
    )
    
    
    (1,239,000
    )Purchases of marketable securities
    
    
    1,734,000
    
    
    
    (1,734,000
    )
    
    
    Restricted cash investments, net
    
    
    (3,000
    )
    
    
    10,000
    
    
    
    5,100,000Proceeds from sale of product lines
    
    
    
    
    
    
    
    
    
    
    53,000Net cash provided by (used in) investing activities
    
    
    493,000
    
    
    
    (3,155,000
    )
    
    
    3,914,000Financing activities:Proceeds from private placement of common stock (see Note 13)
    
    
    
    
    
    
    
    
    
    
    11,817,000Payment of expenses relating to private placement of common stock
    
    
    
    
    
    
    
    
    
    
    (853,000
    )Proceeds from exercise of stock options
    
    
    164,000
    
    
    
    542,000
    
    
    
    Proceeds from exercise of warrants
    
    
    
    
    
    
    3,652,000
    
    
    
    Payment of short term note payable, capital lease, and other
    
    
    
    
    
    
    (255,000
    )
    
    
    (457,000
    )Payment of premium on convertible debt
    
    
    
    
    
    
    
    
    
    
    (200,000
    )Payment of convertible debt
    
    
    
    
    
    
    
    
    
    
    (5,000,000
    )Payment of promissory note payable
    
    
    
    
    
    
    (1,600,000
    )
    
    
    Net cash provided by financing activities
    
    
    164,000
    
    
    
    2,339,000
    
    
    
    5,307,000Increase (decrease) in cash and cash equivalents
    
    
    2,721,000
    
    
    
    (2,259,000
    )
    
    
    (7,457,000
    )Cash and cash equivalents, beginning of year
    
    
    10,524,000
    
    
    
    12,783,000
    
    
    
    20,240,000Cash and cash equivalents, end of year
    
    $
    13,245,000
    
    
    $
    10,524,000
    
    
    $
    12,783,000
  F-6




---



##### Table of Contents



ZIX CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Company Overview
  2. Summary of Significant Accounting Policies
 Basis of Presentation
 Use of Estimates
 Certain Risks
 Cash Equivalents and Restricted Cash
 Inventory
 Valuation of Property and Equipment
 Accounting for the Impairment or Disposal of Long-Lived Assets.
  F-7




---



##### Table of Contents



Goodwill Goodwill and Other Intangible Assets ,
   Deferred Tax Assets Accounting for Income Taxes Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement
No. 109 Accounting for Income Taxes,
   F-8




---



##### Table of Contents



Leases
 Revenue Recognition
 Revenue Arrangements with Multiple
Deliverables, Revenue
Recognition in Financial Statements,
   
    
    persuasive evidence of an arrangement exists,
    
    delivery has occurred or services have been rendered,
    
    the price is fixed and determinable,
    
    and collectability is reasonably assured.
      F-9




---



##### Table of Contents



Customer Indemnification Guarantees
 Deferred Cost of Revenue
 Software Development Costs
  Advertising Expense
 Stock Based Compensation Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to
Employees.
  Earnings Per Share
 F-10




---



##### Table of Contents



Reclassifications 
 Recently Issued Accounting Standards
  Adopted in 2008:
 SFAS 157  Fair Value Measurements Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13
 The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115.
 Share-Based
Payment.
 Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities-a replacement of FASB Statement No. 125, Consolidation of Variable Interest Entities (revised December 2003) 
an interpretation of ARB No. 51,
 To be adopted in 2009:
 FSP 157-2  Effective Date
of FASB Statement No. 157
 F-11




---



##### Table of Contents



Business Combinations,
 Non-controlling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Determination of the Useful
Life of Intangible Assets, Goodwill and Other Intangible Asset.
 Beyond 2009:
 International Financial Reporting Standards
 3. Segment Information
   F-12




---



##### Table of Contents



Year Ended December 31,2008
    
    
    2007
    
    
    2006Revenue:Email Encryption
    
    $
    22,604,000
    
    
    $
    17,982,000
    
    
    $
    14,094,000e-Prescribing
    
    
    5,431,000
    
    
    
    6,132,000
    
    
    
    4,264,000Total revenues
    
    
    28,035,000
    
    
    
    24,114,000
    
    
    
    18,358,000Gross margin:Email Encryption
    
    
    18,499,000
    
    
    
    13,621,000
    
    
    
    8,727,000e-Prescribing
    
    
    (314,000
    )
    
    
    (373,000
    )
    
    
    (2,921,000
    )Total gross margin
    
    
    18,185,000
    
    
    
    13,248,000
    
    
    
    5,806,000Direct costs:Email Encryption
    
    
    11,049,000
    
    
    
    10,750,000
    
    
    
    10,920,000e-Prescribing
    
    
    7,277,000
    
    
    
    7,005,000
    
    
    
    9,848,000Total direct costs
    
    
    18,326,000
    
    
    
    17,755,000
    
    
    
    20,768,000Unallocated (expense) / income:Marketing, general and administrative expense
    
    
    (5,865,000
    )
    
    
    (5,528,000
    )
    
    
    (8,505,000
    )Gain (loss) on sales of product lines
    
    
    
    
    
    
    
    
    
    
    53,000Asset impairment charge
    
    
    
    
    
    
    
    
    
    
    (125,000
    )Operating lease impairment charge
    
    
    
    
    
    
    (100,000
    )
    
    
    Customer deposit forfeiture
    
    
    
    
    
    
    2,000,000
    
    
    
    1,000,000Gain on derivatives
    
    
    
    
    
    
    
    
    
    
    4,043,000Loss on extinguishment of debt
    
    
    
    
    
    
    (255,000
    )
    
    
    (871,000
    )Investment and other income
    
    
    606,000
    
    
    
    640,000
    
    
    
    925,000Interest expense
    
    
    
    
    
    
    (171,000
    )
    
    
    (1,126,000
    )Total unallocated expenses
    
    
    (5,259,000
    )
    
    
    (3,414,000
    )
    
    
    (4,606,000
    )Loss before income taxes
    
    $
    (5,400,000
    )
    
    $
    (7,921,000
    )
    
    $
    (19,568,000
    )Depreciation
and amortization expense:Email Encryption
    
    $
    730,000
    
    
    $
    963,000
    
    
    $
    2,016,000e-Prescribing
    
    
    371,000
    
    
    
    427,000
    
    
    
    628,000Unallocated
    
    
    167,000
    
    
    
    188,000
    
    
    
    110,000Total depreciation expense
    
    $
    1,268,000
    
    
    $
    1,578,000
    
    
    $
    2,754,000
   December 31,2008
    
    
    2007Total assets:Email Encryption
    
    $
    3,335,000
    
    
    $
    3,730,000e-Prescribing
    
    
    664,000
    
    
    
    1,272,000Corporate
    
    
    15,358,000
    
    
    
    14,472,000Total assets
    
    $
    19,357,000
    
    
    $
    19,474,000
 F-13




---



##### Table of Contents



4. Stock Options and Stock-based Employee Compensation
  Authorized
    
    
    Options
    
    
    Options
    
    
    AvailableShares
    
    
    Outstanding
    
    
    Vested
    
    
    for GrantEmployee and Director Stock Option Plans:1992 Stock Option Plan
    
    
    450,000
    
    
    
    64,666
    
    
    
    64,666
    
    
    
    1995 Long-term Incentive Plan
    
    
    1,825,000
    
    
    
    1,113,500
    
    
    
    1,113,500
    
    
    
    1996 Directors Stock Option Plan
    
    
    225,000
    
    
    
    27,500
    
    
    
    27,500
    
    
    
    1999 Directors Stock Option Plan
    
    
    975,000
    
    
    
    560,842
    
    
    
    560,842
    
    
    
    2001 Stock Option Plan
    
    
    2,525,000
    
    
    
    2,024,821
    
    
    
    1,715,987
    
    
    
    27,4752001 Employee Stock Option Plan
    
    
    300,000
    
    
    
    236,257
    
    
    
    143,005
    
    
    
    6,0622003 New Employee Stock Option Plan
    
    
    500,000
    
    
    
    282,694
    
    
    
    131,694
    
    
    
    189,3002004 Stock Option Plan
    
    
    5,000,000
    
    
    
    4,065,178
    
    
    
    2,486,984
    
    
    
    862,6562004 Directors Stock Option Plan
    
    
    300,000
    
    
    
    246,042
    
    
    
    245,208
    
    
    
    2006 Directors Stock Option Plan
    
    
    1,100,000
    
    
    
    642,867
    
    
    
    349,338
    
    
    
    457,133Total employee and director stock option plans
    
    
    13,200,000
    
    
    
    9,264,367
    
    
    
    6,838,724
    
    
    
    1,542,626Executive Stock Option Agreements:Richard D. Spurr, Chairman, President and CEO
    
    
    650,000
    
    
    
    650,000
    
    
    
    650,000
    
    
    
    Other executive stock option agreements
    
    
    450,000
    
    
    
    125,000
    
    
    
    125,000
    
    
    
    Total executive stock option agreements
    
    
    1,100,000
    
    
    
    775,000
    
    
    
    775,000
    
    
    
    Total
    
    
    14,300,000
    
    
    
    10,039,367
    
    
    
    7,613,724
    
    
    
    1,542,626
  Employee and Director Stock Option Plans
  Executive Stock Option Agreements:
 Richard D. Spurr
 Other
Executive Stock Option Agreements
 Other Stock Option Agreements:
  Accounting Treatment
 Share-Based Payment Accounting for Stock-Based Compensation
 F-14




---



##### Table of Contents



Accounting for Stock Issued to Employees.
   Year Ended December 31,2008
    
    
    2007
    
    
    2006Cost of revenues
    
    $
    304,000
    
    
    $
    136,000
    
    
    $
    177,000Research and development expenses
    
    
    255,000
    
    
    
    106,000
    
    
    
    127,000Selling, general and administrative expenses
    
    
    1,939,000
    
    
    
    817,000
    
    
    
    2,504,000Stock-based compensation expense
    
    $
    2,498,000
    
    
    $
    1,059,000
    
    
    $
    2,808,000
    Share Based Payment, Share
Based Payment
  F-15




---



##### Table of Contents



Year Ended December 31,2008
    
    2007
    
    2006Risk-free interest rate
    
    
    2.57
    %
    
    
    3.81
    %
    
    
    4.59
    %Expected option life (years)
    
    
    5.8
    
    
    
    5.8
    
    
    
    5.8Expected stock price volatility
    
    
    78
    %
    
    
    81
    %
    
    
    93
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted
    
    $
    1.71
    
    
    $
    2.87
    
    
    $
    1.03
  Stock Option Activity
  WeightedWeighted
    
    AverageAverage
    
    RemainingExercise
    
    ContractualShares
    
    Price
    
    Term (Yrs)Outstanding at January 1, 2006
    
    
    7,595,415
    
    
    $
    7.03Granted at market price
    
    
    15,000
    
    
    $
    1.93Granted above market price
    
    
    3,968,486
    
    
    $
    2.27Cancelled or expired
    
    
    (1,902,592
    )
    
    $
    5.44Exercised
    
    
    
    
    
    $
    Outstanding at December 31, 2006
    
    
    9,676,309
    
    
    $
    5.38Granted at market price
    
    
    1,713,552
    
    
    $
    4.00Cancelled or expired
    
    
    (1,705,459
    )
    
    $
    5.39Exercised
    
    
    (145,689
    )
    
    $
    3.72Outstanding at December 31, 2007
    
    
    9,538,713
    
    
    $
    5.16Granted at market price
    
    
    923,220
    
    
    $
    2.54Cancelled or expired
    
    
    (355,224
    )
    
    $
    10.16Exercised
    
    
    (67,342
    )
    
    $
    2.44Outstanding at December 31, 2008
    
    
    10,039,367
    
    
    $
    4.76
    
    
    
    6.47Options exercisable at December 31, 2008
    
    
    7,613,724
    
    
    $
    5.32
    
    
    
    5.74
    Options Outstanding
    
    Options ExercisableWeighted Average
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Remaining
    
    Average
    
    Number
    
    AverageExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$1. 11 - $1.99
    
    
    2,630,210
    
    
    
    7.92
    
    
    $
    1.49
    
    
    
    1,484,708
    
    
    $
    1.55$2.00 - $3.49
    
    
    1,448,257
    
    
    
    6.68
    
    
    $
    2.87
    
    
    
    1,265,964
    
    
    $
    2.87$3.50 - $4.99
    
    
    3,298,692
    
    
    
    7.07
    
    
    $
    4.46
    
    
    
    2,200,844
    
    
    $
    4.32$5.00 - $5.99
    
    
    600,354
    
    
    
    4.37
    
    
    $
    5.08
    
    
    
    600,354
    
    
    $
    5.08$6.00 - $8.99
    
    
    804,932
    
    
    
    4.90
    
    
    $
    6.46
    
    
    
    804,932
    
    
    $
    6.46$9.00 - $19.99
    
    
    1,116,570
    
    
    
    3.88
    
    
    $
    10.72
    
    
    
    1,116,570
    
    
    $
    10.72$20.00 - $57.60
    
    
    140,352
    
    
    
    1.00
    
    
    $
    34.14
    
    
    
    140,352
    
    
    $
    34.1410,039,367
    
    
    
    6.47
    
    
    $
    4.76
    
    
    
    7,613,724
    
    
    $
    5.32
 F-16




---



##### Table of Contents



Reserved Common Stock
  Common Stock Issued in Lieu of Cash
  Year Ended December 31,2008
    
    
    2007
    
    
    2006Common stock issued to employees for compensation in lieu of cash
    
    $
    1,697,000
    
    
    $
    
    
    
    $
    157,000Stock issued to third parties
    
    
    
    
    
    
    
    
    
    
    30,000Total
    
    $
    1,697,000
    
    
    $
    
    
    
    $
    187,000
 5. Supplemental Cash Flow Information
  Year Ended December 31,2008
    
    
    2007
    
    
    2006Cash interest paid
    
    $
    
    
    
    $
    83,000
    
    
    $
    265,000Income tax payment (refund)
    
    $
    53,000
    
    
    $
    175,000
    
    
    $
    (12,000
    )Issuance of common stock and warrants related to the restructure of
the prior promissory notes payable (see Note 12)
    
    $
    
    
    
    $
    1,393,000
    
    
    $
    Issuance of replacement promissory note payable
(see Note 12)
    
    $
    
    
    
    $
    1,474,000
    
    
    $
    Payables related to purchases of assets
    
    $
    51,000
    
    
    $
    33,000
    
    
    $
    99,000Assets sold to customers as part of their subscription service
    
    $
    16,000
    
    
    $
    16,000
    
    
    $
    45,000Insurance premiums financed by short-term note payable
    
    $
    
    
    
    $
    
    
    
    $
    279,000Stock issued in lieu of accrued expenses (see Note 4)
    
    $
    516,000
    
    
    $
    
    
    
    $
    Valuation of additional anti-dilutive warrants issued upon private
placement (see Note 14)
    
    $
    
    
    
    $
    
    
    
    $
    130,000Valuation of beneficial conversion feature resulting from
restructure of convertible promissory notes payable (see Note 12)
    
    $
    
    
    
    $
    
    
    
    $
    94,000Accrued expenses relating to private placement common stock
(see Note 13)
    
    $
    20,000
    
    
    $
    35,000
    
    
    $
    55,000Accumulated effect of adjustment resulting from change in
accounting principle for previously recorded derivative (see Note 13)
    
    $
    
    
    
    $
    
    
    
    $
    2,047,000
 6. Receivables, net
 December 31,2008
    
    
    2007Gross accounts receivable
    
    $
    3,682,000
    
    
    $
    4,513,000Allowance for returns and doubtful accounts
    
    
    (37,000
    )
    
    
    (66,000
    )Unpaid portion of deferred revenue
    
    
    (3,169,000
    )
    
    
    (3,328,000
    )Note receivable
    
    
    488,000
    
    
    
    488,000Allowance for note receivable
    
    
    (488,000
    )
    
    
    (488,000
    )Receivables, net
    
    $
    476,000
    
    
    $
    1,119,000
  F-17




---



##### Table of Contents



7. Prepaid and other current assets
 December 31,2008
    
    
    2007Inventory
    
    $
    86,000
    
    
    $
    218,000Deferred cost of sales charges
    
    
    262,000
    
    
    
    301,000Prepaid insurance, maintenance and other
    
    
    786,000
    
    
    
    1,013,000Tax-related
    
    
    11,000
    
    
    
    13,000Prepaid and other current assets
    
    $
    1,145,000
    
    
    $
    1,545,000
 8. Property and Equipment
 December 31,2008
    
    
    2007Computer and office equipment and software
    
    $
    25,271,000
    
    
    $
    26,042,000Leasehold improvements
    
    
    4,828,000
    
    
    
    4,825,000Furniture and fixtures
    
    
    1,127,000
    
    
    
    1,221,00031,226,000
    
    
    
    32,088,000Less accumulated depreciation and amortization
    
    
    (28,990,000
    )
    
    
    (29,791,000
    )$
    2,236,000
    
    
    $
    2,297,000
   9. Goodwill and Definite-Lived Intangible Assets
   December 31,2008
    
    
    2007Intangible asset cost
    
    $
    2,034,000
    
    
    $
    2,034,000Accumulated amortization
    
    
    (2,034,000
    )
    
    
    (2,034,000
    )Net intangible assets
    
    $
    
    
    
    $
    
 F-18




---



##### Table of Contents



10. Accrued Expenses
 December 31,2008
    
    
    2007Employee compensation and benefits
    
    $
    931,000
    
    
    $
    1,292,000Professional fees
    
    
    407,000
    
    
    
    606,000Taxes
    
    
    718,000
    
    
    
    790,000Other
    
    
    348,000
    
    
    
    376,000Total accrued expenses
    
    $
    2,404,000
    
    
    $
    3,064,000
 11. Customer Deposit
  12. Notes Payable
  Sanofi-aventis Promissory Note Payable
 Payment Status
 Original incurrence of debt 
 
    
    Concurrent with our acquisition of MyDocOnline in January 2004, sanofi-aventis, U.S.
Inc., loaned us $3,000,000 due March 15, 2007. The principal portion of the note was
payable in either cash or shares of our common stock, based on the then-current value of
such shares. Additionally, at sanofi-aventis discretion and after the $4,000,000 customer
deposit from sanofi-aventis under the Master Services Agreement had been consumed (see Note
11), the principal portion of the note may have been paid in the form of additional
services provided to sanofi-aventis by us. If sanofi-aventis chose not to have the note
paid in the form of services, we would be required to pay the note in cash or stock at
maturity, however, at an amount equal to 90% of the face amount of the loan, or $2,700,000,
which we considered its minimum liability.
    
    Concurrent with the issuance of the note payable to sanofi-aventis, we issued warrants
to purchase 145,853 shares of our common stock at $13.01 per share. All of these warrants
expired in early 2007. Based on relative fair values at the time of issuance, the loan
proceeds were allocated to the note payable of $1,525,000 and to the warrants of $1,475,000
based on the relative fair values of the note payable and warrants. The resulting discount
on the note payable of $1,175,000 on the minimum liability of $2,700,000 was amortized to
interest expense over the three-year loan life to yield an effective interest rate of 11%.
 F-19




---



##### Table of Contents



Restructuring of the original debt
 
    
    In February 2007, we restructured the original debt by satisfying its obligations under
the original note by means of (i) a prepayment on the original note in the form of 700,000
unrestricted shares of our common stock, and (ii) following such prepayment, the delivery
to sanofi-aventis of a secured promissory note in the principal amount of $1,600,000 and
the issuance of a five year warrant for 145,853 shares at an exercise price of $4.48 per
share which replaced the warrant to purchase 145,853 shares of common stock that was issued
on the date of the original transaction. The fair value of the warrants was calculated to
be $126,000 and recorded as discount on the new note, while using the BSOPM. The $126,000
warrant value was to be amortized as interest expense over the life of the new note.
    
    The new note was payable in eight quarterly installments of $200,000 each, with the
first payment due in April 2008 and the final payment due in January 2010. The new note was
fully secured by a letter of credit in favor of sanofi-aventis and bore interest at the
rate of 5%. The value of the $1,678,000 letter of credit and corresponding restricted cash
balance would be automatically reduced as we made periodic principal payments.
    
    No additional consideration was given by or on behalf of sanofi-aventis or received by
us in connection with the delivery of the 700,000 common stock shares in partial prepayment
of the original note, and no consideration was given or received by us in exchange for the
new note and the new warrant, other than the cancellation of the original note and the
cancellation of a security agreement relating to the original note.
    
    The two tables below illustrate the accounting treatment applied in 2007 to the
restructuring of the indebtedness, which was handled as an extinguishment of the Original
Note and the issuance of the New Note:
 2007Debt Extinguishment Determination:
    
    RestructuringPresent value of new note payable
    
    $
    1,474,000Issuance of common stock (700,000 shares @ $1.81/share)
    
    
    1,267,000Black Scholes value of warrants issued
    
    
    126,000Paid fees & expenses
    
    
    11,000Total consideration given
    
    $
    2,878,000Loss on extinguishment of debt
    
    
    (178,000
    )Original note value
    
    $
    2,700,000Recording of New Note:New note value
    
    $
    1,600,000Discount on note payable
    
    
    (126,000
    )Issuance of common stock (700,000 shares @ $0.01/share)
    
    
    7,000Additional paid in capital
    
    
    1,260,000Additional paid in warrants
    
    
    126,000Accrued expenses
    
    
    11,000Total consideration given
    
    $
    2,878,000
 Extinguishment of the restructured debt 
 
    
    In December 2007, we paid in full the $1,600,000 principal amount, plus accrued interest
owing under the new note. As a result of this early payment, we recorded a $77,000 loss on
the extinguishment of debt, representing the unamortized balance of the discount on the new
note. Further, sanofi-aventis surrendered the Letter of Credit instrument to the issuing
bank, which in turn cancelled the Letter of Credit instrument and released the associated
restriction on the $1,675,000 cash deposit. At December 31, 2007, the cash deposit
remained invested in a one-year certificate of deposit investment instrument with a
maturity date in early 2008 and was reported as current, marketable securities in our
balance sheets. Upon the maturity of the certificate of deposit instrument, the principal
amount, plus accrued interest was reclassified to cash and cash equivalents.
 Convertible Promissory Notes Payable
 F-20




---



##### Table of Contents



Payment Status
 Original incurrence of debt in 2004 -
  Restructure of Original Debt and Payments made in 2005 -
  
    
    an executed amendment to restructure the original convertible promissory notes payable
completed in April 2005
    
    on-time principal payments in a combination of cash and stock totaling $10,000,000
commencing in May 2005, and
    
    early extinguishment of 50% of the remaining outstanding balance or $5,000,000 in
December 2005
    
    with each of these events, there was the issuance of additional warrants  see Note 14
for details of outstanding warrants at December 31, 2008.
 Payments in 2006 -
  
    
    We retired the full $5,000,000 convertible promissory notes payable using restricted
cash and paid a $200,000 early payment premium plus accrued interest for a total payoff
amount of $5,259,000.
    
    Upon repayment of the convertible promissory note payable, we wrote off all unamortized
discounts and deferred financing costs against the loss on extinguishment of debt. The
total loss on extinguishment of debt was $871,000 and consisted of $200,000 for early
payment premium, $449,000 for write-off of unamortized discount, $216,000, for write-off of
unamortized financing costs and $6,000 for the value of warrants issued upon
extinguishment.
    
    Total interest expense relating to the convertible promissory notes payable was $671,000
for the year ended December 31, 2006.
 13. April 2006 Private Placement of Common Stock
   F-21




---



##### Table of Contents



Gross proceeds
    
    $
    11,817,000Less:Fair value of warrants issued to investors in the private placement
    
    
    (5,979,000
    )Fair value of liquidated damages
    
    
    (123,000
    )Potential future payments to transaction underwriters
    
    
    (59,000
    )Warrants issued to underwriters
    
    
    (199,000
    )Cash issuance costs
    
    
    (908,000
    )Proceeds allocated to common stock
    
    $
    4,549,000
 Warrants issued to investors in the private placement
 Potential future payments to transaction underwriters
 Warrants issued to underwriters
 Common stock
  F-22




---



##### Table of Contents



Accounting for
Registration Payment Arrangements
 
    
    Warrants issued to investors in the private placement The warrants issued to
investors were no longer considered a derivative liability and the initial value of the
warrants ($5,979,000) was reclassified to additional paid-in capital by reducing the
derivative liability by $1,950,000 (the September 30, 2006, value after revaluation) and a
cumulative adjustment to accumulated deficit of $4,029,000 (the cumulative gain recognized
on the warrants in the second and third quarters of 2006).
    
    Liquidated damages The liquidated damages were no longer considered a derivative
liability and the September 30, 2006, value of the liquidated damages ($97,000) was
written-off through a cumulative adjustment to the September 30, 2006, accumulated
deficit.
    
    Potential future payments to transaction underwriters The potential future
payments to the transaction underwriters were considered a contingent liability in
accordance with FASB Statement No. 5, Accounting for Contingencies,and recorded as an
accrued expense.This contingent liability is revalued each quarter with the change in
valuation recorded as a gain or loss in the statement of operations. The total liability
recorded is $47,000 and $51,000 at December 31, 2008 and 2007, respectively, and is
included in accrued expense.
 14. Equity Financing Arrangements and Related Warrants
 Warrants Summary
  December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31,2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2008Warrants
    
    
    Warrants
    
    
    Warrants
    
    
    Warrants
    
    
    Warrants
    
    
    Exercise
    
    
    WarrantWarrant Grants:
    
    Outstanding
    
    
    Issued
    
    
    Expired
    
    
    Exercised
    
    
    Outstanding
    
    
    Price
    
    
    Expiration2006 private placement of common
stock (See Note 13)
    
    
    4,413,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,413,000
    
    
    $
    1.54
    
    
    Oct 20112005 private placement of common
stock
    
    
    3,231,974
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,231,974
    
    
    
    3.04
    
    
    Aug 20102005 private placement broker
warrants
    
    
    108,964
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,964
    
    
    
    3.04
    
    
    Aug 20102005 private placement agent warrants
    
    
    178,111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178,111
    
    
    
    3.04
    
    
    Aug 20102004 private placement of convertible
notes payable
    
    
    1,099,010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,099,010
    
    
    
    4.47 -1.42
    
    
    Nov 20092004 private placement broker
warrants
    
    
    166,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    166,667
    
    
    
    6.00
    
    
    Nov 2009Additional warrants issued with cash
payment of convertible promissory
notes payable
    
    
    174,558
    
    
    
    
    
    
    
    (174,558
    )
    
    
    
    
    
    
    
    
    
    
    4.47
    
    
    Nov 20082002 private placement of equity
securities
    
    
    916,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    916,667
    
    
    
    57.60
    
    
    May 2010Promissory note payable (see Note 12)
    
    
    145,853
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,853
    
    
    
    4.48
    
    
    Jan 2012Total
    
    
    10,434,804
    
    
    
    
    
    
    
    (174,558
    )
    
    
    
    
    
    
    10,260,246
  2006 Private Placement of Common Stock and Warrants
  F-23




---



##### Table of Contents



2005 Private Placement of Common Stock and Warrants
      2004 Private Placement of Convertible Notes Payable and Related Transactions
  F-24




---



##### Table of Contents



 2006 Private Placement of Common Stock and Warrants 
 
    
    Per anti-dilution terms included in the amended convertible promissory notes payable,
we issued additional warrants to purchase 264,718 shares of common stock. These warrants
expire on the following schedule: 57,529 expired in November 2006, 57,529 expired in
November 2007, 25,651 expired in November 2008, and 124,009 will expire in November 2009.
    
    The exercise prices of the warrants relating to the convertible promissory notes
payable were reduced from a range of $1.44 to $5.24 to a range of $1.42 to $4.47.
    F-25




---



##### Table of Contents



2002 Private Placement of Equity Securities
  15. Earnings Per Share and Potential Dilution
  2008
    
    
    2007
    
    
    2006Stock options
    
    
    10,039,367
    
    
    
    9,538,713
    
    
    
    9,676,309Warrants issued in relation to debt and equity arrangements
(see Note 14)
    
    
    10,260,246
    
    
    
    10,434,804
    
    
    
    13,547,194Shares issuable for conversion of convertible promissory
notes payable
    
    
    
    
    
    
    
    
    
    
    700,000Total antidilutive securities excluded from EPS Calculation
    
    
    20,299,613
    
    
    
    19,973,517
    
    
    
    23,923,503
  
    
    For 2006, they are included in the shares issuable for conversion of the original
convertible promissory notes payable.
    
    For 2007, they are not included in the chart above because they are no longer part of
the fully diluted share calculation, but rather, part of the total shares outstanding
because of the issuance of the shares as part of the 2007 restructuring arrangement.
 16. Significant Customers
  17. Commitments and Contingencies
 Leases and Debt
   2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Thereafter
    
    
    TotalOperating leases
    
    $
    1,272,000
    
    
    $
    992,000
    
    
    $
    968,000
    
    
    $
    887,000
    
    
    $
    887,000
    
    
    $
    665,000
    
    
    $
    5,671,000
 F-26




---



##### Table of Contents



Claims and Proceedings
  1A. Risk Factors, We may have to defend our rights in intellectual property that we use
in our services, which could be disruptive and expensive to our business.
  18. Income Taxes
  2008
    
    
    2007
    
    
    2006Current:U.S.
    
    $
    (111,000
    )
    
    $
    
    
    
    $
    State
    
    
    22,000
    
    
    
    13,000
    
    
    
    (24,000
    )Foreign
    
    
    139,000
    
    
    
    197,000
    
    
    
    (36,000
    )DeferredState
    
    
    (48,000
    )
    
    
    
    
    
    
    Foreign
    
    
    40,000
    
    
    
    (29,000
    )
    
    
    $
    42,000
    
    
    $
    181,000
    
    
    $
    (60,000
    )
  2008
    
    
    2007
    
    
    2006Expected tax benefit at U.S. statutory rate
    
    $
    (1,902,000
    )
    
    $
    (2,723,000
    )
    
    $
    (6,597,000
    )Unbenefited U.S. losses, net
    
    
    1,945,000
    
    
    
    2,741,000
    
    
    
    7,915,000Nondeductible expense and nontaxable income
    
    
    (43,000
    )
    
    
    (17,000
    )
    
    
    (1,326,000
    )Refundable U.S. research credits
    
    
    (111,000
    )
    
    
    
    
    
    
    State income taxes
    
    
    (26,000
    )
    
    
    13,000
    
    
    
    (24,000
    )Foreign income taxes
    
    
    179,000
    
    
    
    168,000
    
    
    
    (36,000
    )Other
    
    
    
    
    
    
    (1,000
    )
    
    
    8,000$
    42,000
    
    
    $
    181,000
    
    
    $
    (60,000
    )
  2008
    
    
    2007Deferred tax assets:Nondeductible reserves
    
    $
    203,000
    
    
    $
    643,000U.S. net operating loss carryforwards
    
    
    96,661,000
    
    
    
    97,987,000State net operating loss carryforwards
    
    
    109,000
    
    
    
    1,826,000Tax credit carryforwards
    
    
    5,692,000
    
    
    
    3,347,000Stock-based compensation
    
    
    3,437,000
    
    
    
    2,710,000
 F-27




---



##### Table of Contents



2008
    
    
    2007Start-up costs
    
    
    
    
    
    
    87,000Intangible assets
    
    
    3,296,000
    
    
    
    3,576,000Depreciable assets
    
    
    1,474,000
    
    
    
    1,947,000Unrecognized gain on derivatives
    
    
    16,000
    
    
    
    Other assets
    
    
    1,178,000
    
    
    
    940,000Total deferred tax assets
    
    
    112,066,000
    
    
    
    113,063,000Less valuation allowance
    
    
    (111,994,000
    )
    
    
    (112,995,000
    )Net deferred tax assets
    
    
    72,000
    
    
    
    68,000Deferred tax liability:Unrecognized gain on derivatives
    
    
    
    
    
    
    (4,000
    )Prepaid Interest
    
    
    
    
    
    
    Net deferred income taxes
    
    $
    72,000
    
    
    $
    64,000
    Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 Accounting for Income
Taxes
  UnrecognizedTax Benefitsunder FIN 48Balance at December 31, 2007
    
    $
    327,000Additions based on tax positions related to current year
    
    
    50,000Decreases based on tax positions related to current year
    
    
    Additions based on tax positions related to prior years
    
    
    Decreases based on tax positions related to prior years
    
    
    Additions based on tax positions related to settlements
    
    
    Decreases related to lapse of statute of limitations
    
    
    Balance at end of December 31, 2008
    
    $
    377,000
   F-28




---



##### Table of Contents



19. Employee Benefit Plan
 4 01(k) Plan
 20. Quarterly Results of Operations (Unaudited)
  Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312008Revenues
    
    $
    7,199,000
    
    
    $
    6,958,000
    
    
    $
    6,709,000
    
    
    $
    7,169,000Gross margin
    
    
    4,619,000
    
    
    
    4,416,000
    
    
    
    4,326,000
    
    
    
    4,824,000Net loss
    
    
    (1,704,000
    )
    
    
    (1,350,000
    )
    
    
    (1,509,000
    )
    
    
    (879,000
    )Basic and diluted net loss per common share
    
    
    (0.03
    )
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.01
    )2007Revenues
    
    $
    5,387,000
    
    
    $
    5,555,000
    
    
    $
    6,191,000
    
    
    $
    6,981,000Gross margin
    
    
    2,534,000
    
    
    
    2,908,000
    
    
    
    3,529,000
    
    
    
    4,277,000Net loss
    
    
    (1,641,000
    )
    
    
    (3,135,000
    )
    
    
    (1,936,000
    )
    
    
    (1,390,000
    )Basic and diluted net loss per common share
    
    
    (0.03
    )
    
    
    (0.05
    )
    
    
    (0.03
    )
    
    
    (0.02
    )
 F-29