United States
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from           to
 Commission File Number: 0-17995
 
 Zix Corporation
 (Exact Name of Registrant as Specified in its Charter)
 Texas
    
    75-2216818(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    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 o
 o
  o Large accelerated filer
    
    þ Accelerated filer
    
    o Non-accelerated filer
(Do not check if a smaller reporting company)
    
    o Smaller reporting company
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TABLE OF CONTENTS
 PART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    9Item 1B. Unresolved Staff Comments
    
    
    16Item 2. Properties
    
    
    16Item 3. Legal Proceedings
    
    
    16Item 4. (Removed and Reserved)
    
    
    16PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    17Item 6. Selected Financial Data
    
    
    18Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 8. Financial Statements and Supplementary Data
    
    
    31Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    31Item 9A. Controls and Procedures
    
    
    31Item 9B. Other Information
    
    
    34PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    35Item 11. Executive Compensation
    
    
    35Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    35Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    35Item 14. Principal Accountant Fees and Services
    
    
    35PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    35
  2




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




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Competition:
   4




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e-Prescribing
 Segment Overview:
    PocketScript ®
 Competition:
 5




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##### 



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




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




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®
    Compliance with Environmental Regulations
  Governmental Contracts
  Significant Customers
  Backlog
  December 31, 2009
    
    
    December 31, 2008Email Encryption
    
    $
    42,901,000
    
    
    $
    34,728,000e-Prescribing
    
    
    1,399,000
    
    
    
    2,661,000Total backlog
    
    $
    44,300,000
    
    
    $
    37,389,000
   8




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##### 



Seasonality
  Geographic Information
  Available Information
  
  www.sec.gov.
 www.zixcorp.com.
 
 Item 1A. Risk Factors
 Risk Factors
 9




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Our Email Encryption business depends upon customers using email to exchange confidential
information, and a significant shift of those messages to other communication channels could impair
our growth prospects and negatively affect our business, financial condition and financial results.
  Public key cryptography technology used in our businesses is subject to technology integrity risks
that could reduce demand for our products and services and could negatively affect our business,
financial condition and financial results.
  The growth of our business may require significant investment in systems and infrastructure with no
guarantee of revenue, which could impair our profitability and negatively affect our business,
financial condition and financial results.
  We face strong and increasing competition, which could negatively affect our business, financial
condition and financial results.
  10




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Some competitors have advantages that may allow them to compete more effectively than us, which
could negatively affect our business, financial condition and financial results.
  We plan to increasingly rely on third party distributors to help us market our Email Encryption
products and services, and our failure to succeed in those relationships could negatively affect
our business, financial condition and financial results.
  Our business substantially depends on market acceptance of our Email Encryption service, and our
failure to achieve market penetration could negatively affect our business, financial condition and
financial results.
  Unfavorable economic and political environments could negatively affect our business, financial
condition and financial results.
  11




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Our failure to keep pace with rapid technology changes could have a negative impact on our
business, financial condition and financial results.
  If our products do not work properly, our business, financial condition and financial results could
be negatively affected.
  The infrastructure supporting our Email Encryption business may suffer capacity constraints and
business interruptions that could cause us to lose customers, increase our operating costs and
could negatively affect our business, financial condition and financial results.
  12




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Our Email Encryption business depends substantially on our data center facilities, and their
unreliability or unavailability for a significant period could cause us to lose customers and could
negatively affect our business, financial condition and financial results.
  Outages or problems with systems and infrastructure supplied by third parties could negatively
affect our business, financial condition and financial results.
  Problems with enforcing our intellectual property rights or using third party intellectual property
could negatively affect our business, financial condition and financial results. Our proprietary
rights may be difficult to enforce and may offer limited protection of our intellectual property
rights against potential infringers.
  We may have to defend our rights in intellectual property that we use in our services, and we could
be found to infringe the intellectual property rights of others, which could be disruptive and
expensive to our business.
  13




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We may face risks from using open source software that could negatively affect our business,
financial condition and financial results.
  We may fail to recruit and retain key personnel, which could impair our ability to meet key
objectives.
  Our usage of personal information, and inadvertent exposure of confidential information, could
cause us to violate data privacy laws or lose customers and could negatively affect our business,
financial condition and financial results.
  Governmental restrictions on the sale of our products and services in non-U.S. markets could
negatively affect our business, financial condition and financial results.
  Our financial performance could be erratic and asset impairments could negatively affect our
financial condition and financial results.
  14




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The market price of our securities could be volatile and our securities may decline in value.
  Exercises of options and warrants for our common stock would dilute the ownership interests of
existing shareholders and could negatively affect the value of our securities.
  Our issuances of additional debt or equity securities could dilute the ownership interests of
existing shareholders and could negatively affect the value of our securities.
  NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
 Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations,
  15




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
   
 Item 3. Legal Proceedings
  
 Item 4. (Removed and Reserved)
 16




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##### 



PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
  2009
    
    
    2008Quarter Ended
    
    High
    
    
    Low
    
    
    High
    
    
    LowMarch 31
    
    $
    1.73
    
    
    $
    0.88
    
    
    $
    4.74
    
    
    $
    2.50June 30
    
    $
    1.94
    
    
    $
    0.95
    
    
    $
    4.16
    
    
    $
    2.25September 30
    
    $
    2.54
    
    
    $
    1.49
    
    
    $
    3.70
    
    
    $
    1.81December 31
    
    $
    2.30
    
    
    $
    1.53
    
    
    $
    2.34
    
    
    $
    0.94
     Performance Graph
   
 17




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##### 



Item 6. Selected Financial Data
  Year Ended December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(In thousands, except per share data)Statement of Operations Data:Revenues (1)
    
    $
    30,651
    
    
    $
    28,035
    
    
    $
    24,114
    
    
    $
    18,358
    
    
    $
    13,964Cost of revenues
    
    
    9,384
    
    
    
    9,850
    
    
    
    10,866
    
    
    
    12,552
    
    
    
    14,194Gross margin
    
    
    21,267
    
    
    
    18,185
    
    
    
    13,248
    
    
    
    5,806
    
    
    
    (230
    )Research and development expenses
    
    
    6,948
    
    
    
    6,158
    
    
    
    5,322
    
    
    
    6,085
    
    
    
    6,520Selling, general and administrative expenses
    
    
    18,880
    
    
    
    18,033
    
    
    
    17,961
    
    
    
    23,188
    
    
    
    26,358Customer deposit forfeiture (2)
    
    
    
    
    
    
    
    
    
    
    (2,000
    )
    
    
    (1,000
    )
    
    
    (960
    )Net (gain) loss on sale of product lines
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    3,716Loss on extinguishment of convertible debt (3)
    
    
    
    
    
    
    
    
    
    
    255
    
    
    
    871
    
    
    
    1,283Asset impairment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    288Interest expense
    
    
    21
    
    
    
    
    
    
    
    171
    
    
    
    1,126
    
    
    
    6,848(Gain) on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,043
    )
    
    
    Loss from continuing operations
    
    
    (4,435
    )
    
    
    (5,442
    )
    
    
    (8,102
    )
    
    
    (19,508
    )
    
    
    (43,596
    )Basic and diluted loss per common share from continuing operations
    
    $
    (0.07
    )
    
    $
    (0.09
    )
    
    $
    (0.13
    )
    
    $
    (0.34
    )
    
    $
    (1.20
    )Shares used in computing basic and diluted loss per common share
    
    
    63,422
    
    
    
    62,982
    
    
    
    60,424
    
    
    
    57,068
    
    
    
    36,452Statements of Cash Flows Data:Net cash flows provided by (used for):Operating activities
    
    $
    603
    
    
    $
    2,064
    
    
    $
    (1,443
    )
    
    $
    (16,678
    )
    
    $
    (24,901
    )Investing activities
    
    
    (1,138
    )
    
    
    493
    
    
    
    (3,155
    )
    
    
    3,914
    
    
    
    22,767Financing activities
    
    
    577
    
    
    
    164
    
    
    
    2,339
    
    
    
    5,307
    
    
    
    18,518Balance Sheet Data:Cash, Cash Equivalents and Marketable Securities
    
    $
    13,312
    
    
    $
    13,245
    
    
    $
    12,258
    
    
    $
    12,783
    
    
    $
    20,240Working capital (deficit)(4)
    
    
    (3,283
    )
    
    
    (3,010
    )
    
    
    (979
    )
    
    
    (897
    )
    
    
    9,348Total assets
    
    
    19,748
    
    
    
    19,357
    
    
    
    19,474
    
    
    
    20,366
    
    
    
    34,115Debt obligations
    
    
    312
    
    
    
    
    
    
    
    
    
    
    
    2,916
    
    
    
    7,063Stockholders (deficit) equity
    
    
    (1,989
    )
    
    
    (1,303
    )
    
    
    (289
    )
    
    
    927
    
    
    
    10,397
 Our consolidated financial statements include for 2005 the results from operations for a
previously acquired business, Elron Software, in 2003, and a January 2004 acquisition, MyDocOnline.
In 2005, the two product lines relating to the Elron Software acquisition were sold in March and
the one remaining MyDocOnline product line, Dr. Chart, was sold in September. 
 (1)
    
    Revenues for the year 2005 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.(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)
    
    Working capital includes deferred revenue totaling $14.5 million, $15.0 million, $12.6
million and $8.4 million as of December 31, 2009, 2008, 2007 and 2006 respectively. Working
capital also includes customer deposits totaling $2.0 million as of December 31, 2006.
 18




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 Risk Factors
 Overview
    Strategy and Focus Areas
    19




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
    
    Rate of new subscriptions (termed New First Year Orders (NYFO)) for the Email
Encryption Service;
    
    Renewal rates for the Email Encryption Service;
    
    Total orders (includes NYFOs, second and third years on multi-year orders and
renewals);
    
    Our ability to increase business volume with minimal cost increases, and;
    
    Successful wind-down of the e-Prescribing Service by meeting cost objectives while
executing on existing customer obligations.
   Revenue
  Operating Margins
  Other Financial Highlights
 
    
    For Email Encryption, our sales backlog was $42.9 million in 2009, compared with $34.7
at the end of 2008
    
    For Email Encryption, our total orders for 2009 were $35.2 million, an increase of 20%
from the 2008 total orders of $29.2 million
    
    Our deferred revenue at the end of 2009 was $17.3 million, compared with $17.4 million
at the end of 2008
    
    We generated cash flows from operations of $0.6 million during 2009. Our cash and cash
equivalents, together with our investments, were $13.3 million at the end of 2009, compared
with $13.2 million at the end of 2008
    
    We maintained a strong renewal rate of 91% for those eligible Email Encryption
contracts that came up for renewal in 2009. The loss of annual revenue due to non-renewal
was approximately $976,000
 20




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
    
    We topped 20 million user Email addresses with our Email Encryption Service, with an
increased growth rate of approximately 100,000 new Email addresses each week
    
    We announced our planned exit from the e-Prescribing business. We are targeting
December 31, 2010, as the official termination date for this segment
 Critical Accounting Policies and Estimates
    
    
    Revenue recognition
    
    Income taxes
    
    Valuation of goodwill and other intangible assets
    
    Stock-based compensation costs
  Revenue Recognition
   21




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
    
    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
   Valuation of Goodwill and Other Intangible Assets
  22




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Stock-based Compensation
  Full Year 2009 Summary of Operations
 Financial
 
    
    Revenue for 2009 was $30,651,000 from all products compared with $28,035,000 in 2008
and $24,114,000 in 2007.
    
    Gross margin for 2009 was $21,267,000 or 69% of revenues compared to $18,185,000 or 65%
of revenues in 2008.Email Encryption gross margin for this segment was $21,831,000 or 83% of revenues
compared to $18,499,000 or 82% of revenues in 2008.e-Prescribing gross loss for this segment was $564,000 or a negative 13% of revenues
compared to a loss of $314,000 or a negative 6% of revenues in 2008.
    
    Net loss for the year 2009 was $4,435,000 compared with $5,442,000 in 2008 and
$8,102,000 in 2007.
    
    Ending unrestricted cash was $13,287,000 on December 31, 2009.
 Results of Operations
 Revenues
  Variance
    
    
    VarianceYear Ended December 31,
    
    
    2009 vs. 2008
    
    
    2008 vs. 20072009
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    $
    
    
    %Email Encryption
    
    $
    26,407,000
    
    
    $
    22,604,000
    
    
    $
    17,982,000
    
    
    $
    3,803,000
    
    
    
    17
    %
    
    $
    4,622,000
    
    
    
    26
    %e-Prescribing
    
    
    4,244,000
    
    
    
    5,431,000
    
    
    
    6,132,000
    
    
    
    (1,187,000
    )
    
    
    (22
    %)
    
    
    (701,000
    )
    
    
    (11
    %)Total revenues
    
    $
    30,651,000
    
    
    $
    28,035,000
    
    
    $
    24,114,000
    
    
    $
    2,616,000
    
    
    
    9
    %
    
    $
    3,921,000
    
    
    
    16
    %
 23




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Email Encryption 
 2009
    
    
    2008
    
    
    2007New first year order value
    
    $
    6,478,000
    
    
    $
    5,460,000
    
    
    $
    5,514,000Renewal percentage
    
    
    91
    %
    
    
    94
    %
    
    
    99
    %Lost revenue due to lost renewals
    
    $
    976,000
    
    
    $
    652,000
    
    
    $
    69,000
     e-Prescribing 
  Revenue Outlook:
    24




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Backlog, Orders, and Deployments
 Company-wide Backlog 
  Email Encryption Orders 
 e-Prescribing 
   Cost of Revenues
  Variance
    
    
    VarianceYear Ended December 31,
    
    
    2009 vs. 2008
    
    
    2008 vs. 20072009
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    $
    
    
    %Email Encryption
    
    $
    4,576,000
    
    
    $
    4,105,000
    
    
    $
    4,361,000
    
    
    $
    471,000
    
    
    
    11
    %
    
    $
    (256,000
    )
    
    
    (6
    %)e-Prescribing
    
    
    4,808,000
    
    
    
    5,745,000
    
    
    
    6,505,000
    
    
    
    (937,000
    )
    
    
    (16
    %)
    
    
    (760,000
    )
    
    
    (12
    %)Total cost of revenues
    
    $
    9,384,000
    
    
    $
    9,850,000
    
    
    $
    10,866,000
    
    
    $
    (466,000
    )
    
    
    (5
    %)
    
    $
    (1,016,000
    )
    
    
    (9
    %)
  25




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Email Encryption 
 e-Prescribing 
 Research and Development Expenses
  Variance
    
    
    VarianceYear Ended December 31,
    
    
    2009 vs. 2008
    
    
    2008 vs. 20072009
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    $
    
    
    %Total research and development expenses
    
    $
    6,948,000
    
    
    $
    6,158,000
    
    
    $
    5,322,000
    
    
    $
    790,000
    
    
    
    13
    %
    
    $
    836,000
    
    
    
    16
    %
    26




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Selling, General and Administrative Expenses
  Variance
    
    
    VarianceYear Ended December 31,
    
    
    2009 vs. 2008
    
    
    2008 vs. 20072009
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    $
    
    
    %Total selling, general and administrative expenses
    
    $
    18,880,000
    
    
    $
    18,033,000
    
    
    $
    17,961,000
    
    
    $
    847,000
    
    
    
    5
    %
    
    $
    72,000
    
    
    
    
     Customer Deposit Forfeiture
  Loss on Impairment of Operating Lease
  Interest Expense
  27




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Investment and Other Income
  Income Taxes
     Net Loss
  28




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##### 



Year Ended December 31,2009
    
    
    2008
    
    
    2007Unusual Items:Customer deposit forfeiture
    
    $
    
    
    
    $
    
    
    
    $
    (2,000,000
    )Non-recurring severance payments
    
    
    1,451,000
    
    
    
    
    
    
    
    Loss on impairment of operating lease
    
    
    
    
    
    
    
    
    
    
    100,000Expenses related to the strategic review of the e-Prescribing business
    
    
    393,000
    
    
    
    
    
    
    
    Loss on extinguishment of convertible debt
    
    
    
    
    
    
    
    
    
    
    255,000Total unusual items
    
    $
    1,844,000
    
    
    $
    
    
    
    $
    (1,645,000
    )
 Liquidity and Capital Resources
 Overview
    Impact of Current Economic Environment
  Sources and Uses of Cash
 Years Ended December 31,2009
    
    
    2008
    
    
    2007Net cash provided by (used in) operations
    
    $
    603,000
    
    
    $
    2,064,000
    
    
    $
    (1,443,000
    )Net cash provided by (used in) investing activities
    
    $
    (1,138,000
    )
    
    $
    493,000
    
    
    $
    (3,155,000
    )Net cash provided by financing activities
    
    $
    577,000
    
    
    $
    164,000
    
    
    $
    2,339,000
   29




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##### 



Options and Warrants of ZixCorp Common Stock
  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
    
    
    7,060,897
    
    
    $
    10,743,094
    
    
    
    6,597,863
    
    
    $
    10,100,204$2.00 - $3.49
    
    
    4,950,842
    
    
    
    14,810,079
    
    
    
    4,928,930
    
    
    
    14,750,818$3.50 - $4.99
    
    
    3,313,952
    
    
    
    14,744,875
    
    
    
    2,848,579
    
    
    
    12,543,164$5.00 - $5.99
    
    
    549,260
    
    
    
    2,791,672
    
    
    
    549,260
    
    
    
    2,791,672$6.00 - $8.99
    
    
    736,816
    
    
    
    4,757,199
    
    
    
    736,816
    
    
    
    4,757,199$9.00 - $19.99
    
    
    890,381
    
    
    
    9,727,417
    
    
    
    890,381
    
    
    
    9,727,417$20.00 - $57.60
    
    
    998,343
    
    
    
    55,370,687
    
    
    
    998,343
    
    
    
    55,370,687Total
    
    
    18,500,491
    
    
    $
    112,945,023
    
    
    
    17,550,172
    
    
    $
    110,041,161
 Liquidity Summary
  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
    
    $
    4,963,000
    
    
    $
    1,313,000
    
    
    $
    2,098,000
    
    
    $
    1,552,000
    
    
    $
    License subscription note payable
    
    
    346,000
    
    
    
    148,000
    
    
    
    198,000
    
    
    
    
    
    
    
    $
    5,309,000
    
    
    $
    1,461,000
    
    
    $
    2,296,000
    
    
    $
    1,552,000
    
    
    $
    
  30




---



##### 



Recently Issued Accounting Standards
 To be adopted in 2010 or beyond:
  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 Disclosure
  
 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
  31




---



##### 



Internal
ControlIntegrated Framework
  Changes in Internal Controls over Financial Reporting
  32




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated
Framework Managements Report on Internal Control Over Financial Reporting
    Internal
ControlIntegrated Framework
   
 33




---



##### 



Item 9B. Other Information
  34




---



##### 



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, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 Financial Statements
  Financial Statement Schedules
  35




---



##### 



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.
 36




---



##### 



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.
 37




---



##### 



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.10.16
    
    
    
    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.
 38




---



##### 



ExhibitNumber
    
    
    
    Description10.17
    
    
    
    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, and incorporated herein by reference.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), and incorporated herein by reference.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), and incorporated herein by reference.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), and incorporated herein by reference.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), and incorporated herein by reference.10.31
    
    
    
    Form of Amended and Restated Separation Pay Agreement between Zix
Corporation and certain executive officers (amended for I.R.C. 409A
compliance purposes), and incorporated herein by reference.10.32
    
    
    
    Form of Amended and Restated Severance Agreement between Zix Corporation
and certain executive officers (amended for I.R.C. 409A compliance
purposes), and incorporated herein by reference.
 39




---



##### 



ExhibitNumber
    
    
    
    Description10.33
    
    
    
    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), and
incorporated herein by reference.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.10.40*
    
    
    
    Separation Pay Agreement, entered into as of February 8, 2010, between Zix
Corporation and James F. Brashear.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. 40




---



##### 



SIGNATURES
  ZIX CORPORATIONBy:
    /s/ SUSAN K. CONNERSusan K. ConnerChief Financial Officer  Signature
    
    Title/s/ RICHARD D. SPURR
    
    Chairman, Chief Executive Officer,
President and Director

(Richard D. Spurr)
    
    (Principal
Executive Officer)/s/ SUSAN K. CONNER
    
    Chief Financial Officer(Susan K. Conner)
    
    (Principal
Financial and Accounting Officer)/s/ DAVID P. COOK
    
    Director(David P. Cook)/s/ ROBERT C. HAUSMANN
    
    Director(Robert C. Hausmann)Director(Charles N. Kahn III)/s/ JAMES S. MARSTON
    
    Director(James S. Marston)/s/ ANTONIO R. SANCHEZ III
    
    Director(Antonio R. Sanchez III)/s/ PAUL E. SCHLOSBERG
    
    Director(Paul E. Schlosberg)
 41




---



##### 



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets at December 31, 2009 and 2008
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007
    
    
    F-4Consolidated Statements of Stockholders Equity (Deficit) for the years ended December 31, 2009,
2008 and 2007
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7




---



##### 



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




---



##### 



ZIX CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,287,000
    
    
    $
    13,245,000Marketable securities
    
    
    25,000
    
    
    
    Receivables, net
    
    
    760,000
    
    
    
    476,000Prepaid and other current assets
    
    
    1,142,000
    
    
    
    1,145,000Total current assets
    
    
    15,214,000
    
    
    
    14,866,000Restricted cash
    
    
    
    
    
    
    28,000Property and equipment, net
    
    
    2,137,000
    
    
    
    2,236,000Goodwill
    
    
    2,161,000
    
    
    
    2,161,000Other assets
    
    
    236,000
    
    
    
    66,000Total assets
    
    $
    19,748,000
    
    
    $
    19,357,000LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    769,000
    
    
    $
    512,000Accrued expenses
    
    
    3,124,000
    
    
    
    2,404,000Deferred revenue
    
    
    14,478,000
    
    
    
    14,960,000License subscription note payable
    
    
    126,000
    
    
    
    Total current liabilities
    
    
    18,497,000
    
    
    
    17,876,000Long-term liabilities:Deferred revenue
    
    
    2,821,000
    
    
    
    2,484,000License subscription note payable
    
    
    186,000
    
    
    
    Deferred rent
    
    
    233,000
    
    
    
    300,000Total long-term liabilities
    
    
    3,240,000
    
    
    
    2,784,000Total liabilities
    
    
    21,737,000
    
    
    
    20,660,000Commitments 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; 66,053,772 issued and
63,726,591 outstanding in 2009 and 65,646,663 issued and 63,319,482 outstanding in 2008
    
    
    661,000
    
    
    
    656,000Additional paid-in capital
    
    
    337,352,000
    
    
    
    333,608,000Treasury stock, at cost; 2,327,181 common shares in 2009 and 2008
    
    
    (11,507,000
    )
    
    
    (11,507,000
    )Accumulated deficit
    
    
    (328,495,000
    )
    
    
    (324,060,000
    )Total stockholders deficit
    
    
    (1,989,000
    )
    
    
    (1,303,000
    )Total liabilities and stockholders deficit
    
    $
    19,748,000
    
    
    $
    19,357,000
  F-3




---



##### 



ZIX CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended December 31,2009
    
    
    2008
    
    
    2007Revenues
    
    $
    30,651,000
    
    
    $
    28,035,000
    
    
    $
    24,114,000Cost of revenues
    
    
    9,384,000
    
    
    
    9,850,000
    
    
    
    10,866,000Gross margin
    
    
    21,267,000
    
    
    
    18,185,000
    
    
    
    13,248,000Research and development expenses
    
    
    6,948,000
    
    
    
    6,158,000
    
    
    
    5,322,000Selling, general and administrative expenses
    
    
    18,880,000
    
    
    
    18,033,000
    
    
    
    17,961,000Customer deposit forfeiture
    
    
    
    
    
    
    
    
    
    
    (2,000,000
    )Loss on impairment of operating lease
    
    
    
    
    
    
    
    
    
    
    100,000Operating loss
    
    
    (4,561,000
    )
    
    
    (6,006,000
    )
    
    
    (8,135,000
    )Other income (expense):Investment and other income
    
    
    214,000
    
    
    
    606,000
    
    
    
    640,000Interest expense
    
    
    (21,000
    )
    
    
    
    
    
    
    (171,000
    )Loss on extinguishment of convertible debt
    
    
    
    
    
    
    
    
    
    
    (255,000
    )Total other income
    
    
    193,000
    
    
    
    606,000
    
    
    
    214,000Loss before income taxes
    
    
    (4,368,000
    )
    
    
    (5,400,000
    )
    
    
    (7,921,000
    )Income tax expense
    
    
    (67,000
    )
    
    
    (42,000
    )
    
    
    (181,000
    )Net loss
    
    $
    (4,435,000
    )
    
    $
    (5,442,000
    )
    
    $
    (8,102,000
    )Basic and diluted loss per common share:
    
    $
    (0.07
    )
    
    $
    (0.09
    )
    
    $
    (0.13
    )Basic and diluted weighted average common shares
outstanding
    
    
    63,422,088
    
    
    
    62,981,958
    
    
    
    60,424,251
  F-4




---



##### 



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, 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
    )Issuance of common stock upon exercise of stock options
    
    
    11,743
    
    
    
    1,000
    
    
    
    18,000
    
    
    
    
    
    
    
    
    
    
    
    19,000Issuance of common stock upon exercise of warrants
    
    
    395,366
    
    
    
    4,000
    
    
    
    632,000
    
    
    
    
    
    
    
    
    
    
    
    636,000Employee stock-based compensation costs
    
    
    
    
    
    
    
    
    
    
    3,063,000
    
    
    
    
    
    
    
    
    
    
    
    3,063,000Non-employee stock-based compensation
    
    
    
    
    
    
    
    
    
    
    31,000
    
    
    
    
    
    
    
    
    
    
    
    31,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,435,000
    )
    
    
    (4,435,000
    )Balance, December 31, 2009
    
    
    66,053,772
    
    
    $
    661,000
    
    
    $
    337,352,000
    
    
    $
    (11,507,000
    )
    
    $
    (328,495,000
    )
    
    $
    (1,989,000
    )
  F-5




---



##### 



ZIX CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2009
    
    
    2008
    
    
    2007Operating activities:Net loss
    
    $
    (4,435,000
    )
    
    $
    (5,442,000
    )
    
    $
    (8,102,000
    )Non-cash items in net loss:Depreciation and amortization
    
    
    1,328,000
    
    
    
    1,268,000
    
    
    
    1,578,000Amortization of debt discount/premium, financing costs, and other
    
    
    
    
    
    
    
    
    
    
    88,000Common stock issued to employees and non-employees
in lieu of cash
    
    
    
    
    
    
    1,181,000
    
    
    
    Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    255,000Employee stock based compensation expense
    
    
    3,063,000
    
    
    
    2,498,000
    
    
    
    1,059,000Non-employee stock-based compensation
    
    
    31,000
    
    
    
    48,000
    
    
    
    205,000Customer deposit forfeiture
    
    
    
    
    
    
    
    
    
    
    (2,000,000
    )Changes in deferred taxes
    
    
    4,000
    
    
    
    3,000
    
    
    
    (33,000
    )Changes in operating assets and liabilities:Receivables
    
    
    (284,000
    )
    
    
    643,000
    
    
    
    (373,000
    )Prepaid and other assets
    
    
    220,000
    
    
    
    416,000
    
    
    
    649,000Accounts payable
    
    
    168,000
    
    
    
    296,000
    
    
    
    (23,000
    )Deferred revenue
    
    
    (145,000
    )
    
    
    1,341,000
    
    
    
    5,219,000Accrued and other liabilities
    
    
    653,000
    
    
    
    (188,000
    )
    
    
    35,000Net cash provided by (used in) operating activities
    
    
    603,000
    
    
    
    2,064,000
    
    
    
    (1,443,000
    )Investing activities:Purchases of property and equipment
    
    
    (1,141,000
    )
    
    
    (1,238,000
    )
    
    
    (1,431,000
    )Sales (purchases) of marketable securities
    
    
    (25,000
    )
    
    
    1,734,000
    
    
    
    (1,734,000
    )Restricted cash investments, net
    
    
    28,000
    
    
    
    (3,000
    )
    
    
    10,000Net cash provided by (used in) investing activities
    
    
    (1,138,000
    )
    
    
    493,000
    
    
    
    (3,155,000
    )Financing activities:Proceeds from exercise of stock options
    
    
    19,000
    
    
    
    164,000
    
    
    
    542,000Proceeds from exercise of warrants
    
    
    636,000
    
    
    
    
    
    
    
    3,652,000Payment of short term note payable, capital lease, and other
    
    
    
    
    
    
    
    
    
    
    (255,000
    )Payment of license subscription note payable
    
    
    (78,000
    )
    
    
    
    
    
    
    Payment of promissory note payable
    
    
    
    
    
    
    
    
    
    
    (1,600,000
    )Net cash provided by financing activities
    
    
    577,000
    
    
    
    164,000
    
    
    
    2,339,000Increase (decrease) in cash and cash equivalents
    
    
    42,000
    
    
    
    2,721,000
    
    
    
    (2,259,000
    )Cash and cash equivalents, beginning of year
    
    
    13,245,000
    
    
    
    10,524,000
    
    
    
    12,783,000Cash and cash equivalents, end of year
    
    $
    13,287,000
    
    
    $
    13,245,000
    
    
    $
    10,524,000
  F-6




---



##### 



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
 Fair Value of Financial Instruments
 Inventory
 F-7




---



##### 



Valuation of Property and Equipment
   Goodwill
   Deferred Tax Assets
  F-8




---



##### 



Leases
 Revenue Recognition
   
    
    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.
     Customer Indemnification Guarantees
 F-9




---



##### 



Deferred Cost of Revenue
 Software Development Costs
  Advertising Expense
 Stock Based Compensation
  Earnings Per Share
 Recently Issued Accounting Standards
  F-10




---



##### 



Adopted in 2009:
  The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles.
  .
 To be adopted in 2010 or beyond:
  International Financial Reporting Standards
 3. Segment Information
   F-11




---



##### 



Year Ended December 31, 2009
    
    Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    26,407,000
    
    
    $
    4,244,000
    
    
    $
    
    
    
    $
    30,651,000Cost of revenues
    
    
    4,576,000
    
    
    
    4,808,000
    
    
    
    
    
    
    
    9,384,000Gross profit
    
    
    21,831,000
    
    
    
    (564,000
    )
    
    
    
    
    
    
    21,267,000Direct expenses
    
    
    12,110,000
    
    
    
    6,282,000
    
    
    
    
    
    
    
    18,392,000Segment contribution (loss)
    
    
    9,721,000
    
    
    
    (6,846,000
    )
    
    
    
    
    
    
    2,875,000Unallocated (expense) incomeSelling, general and administrative expense
    
    
    
    
    
    
    
    
    
    
    (7,436,000
    )
    
    
    (7,436,000
    )Investment and other income, net
    
    
    
    
    
    
    
    
    
    
    214,000
    
    
    
    214,000Interest expense
    
    
    
    
    
    
    
    
    
    
    (21,000
    )
    
    
    (21,000
    )Total unallocated (expense) income
    
    
    
    
    
    
    
    
    
    
    (7,243,000
    )
    
    
    (7,243,000
    )Income (loss) before provision for income taxes
    
    $
    9,721,000
    
    
    $
    (6,846,000
    )
    
    $
    (7,243,000
    )
    
    $
    (4,368,000
    )
 Year Ended December 31, 2008
    
    Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    22,604,000
    
    
    $
    5,431,000
    
    
    $
    
    
    
    $
    28,035,000Cost of revenues
    
    
    4,105,000
    
    
    
    5,745,000
    
    
    
    
    
    
    
    9,850,000Gross profit
    
    
    18,499,000
    
    
    
    (314,000
    )
    
    
    
    
    
    
    18,185,000Direct expenses
    
    
    11,049,000
    
    
    
    7,277,000
    
    
    
    
    
    
    
    18,326,000Segment contribution (loss)
    
    
    7,450,000
    
    
    
    (7,591,000
    )
    
    
    
    
    
    
    (141,000
    )Unallocated (expense) incomeSelling, general and administrative expense
    
    
    
    
    
    
    
    
    
    
    (5,865,000
    )
    
    
    (5,865,000
    )Investment and other income, net
    
    
    
    
    
    
    
    
    
    
    606,000
    
    
    
    606,000Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total unallocated (expense) income
    
    
    
    
    
    
    
    
    
    
    (5,259,000
    )
    
    
    (5,259,000
    )Income (loss) before provision for income taxes
    
    $
    7,450,000
    
    
    $
    (7,591,000
    )
    
    $
    (5,259,000
    )
    
    $
    (5,400,000
    )
 Year Ended December 31, 2007
    
    Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    17,982,000
    
    
    $
    6,132,000
    
    
    $
    
    
    
    $
    24,114,000Cost of revenues
    
    
    4,361,000
    
    
    
    6,505,000
    
    
    
    
    
    
    
    10,866,000Gross profit
    
    
    13,621,000
    
    
    
    (373,000
    )
    
    
    
    
    
    
    13,248,000Direct expenses
    
    
    10,750,000
    
    
    
    7,005,000
    
    
    
    
    
    
    
    17,755,000Segment contribution (loss)
    
    
    2,871,000
    
    
    
    (7,378,000
    )
    
    
    
    
    
    
    (4,507,000
    )Unallocated (expense) incomeSelling, general and administrative expense
    
    
    
    
    
    
    
    
    
    
    (5,528,000
    )
    
    
    (5,528,000
    )Operating lease impairment
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    (100,000
    )Customer deposit forfeiture
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    2,000,000Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (255,000
    )
    
    
    (255,000
    )Investment and other income, net
    
    
    
    
    
    
    
    
    
    
    640,000
    
    
    
    640,000Interest expense
    
    
    
    
    
    
    
    
    
    
    (171,000
    )
    
    
    (171,000
    )Total unallocated (expense) income
    
    
    
    
    
    
    
    
    
    
    (3,414,000
    )
    
    
    (3,414,000
    )Income (loss) before provision for income taxes
    
    $
    2,871,000
    
    
    $
    (7,378,000
    )
    
    $
    (3,414,000
    )
    
    $
    (7,921,000
    )
 Depreciation and amortization expense:
  2009
    
    
    2008
    
    
    2007Email Encryption
    
    $
    838,000
    
    
    $
    730,000
    
    
    $
    963,000e-Prescribing
    
    
    311,000
    
    
    
    371,000
    
    
    
    427,000Unallocated
    
    
    179,000
    
    
    
    167,000
    
    
    
    188,000Total depreciation expense
    
    $
    1,328,000
    
    
    $
    1,268,000
    
    
    $
    1,578,000
 F-12




---



##### 



Allocated costs:
    Other segment information:
   December 31,2009
    
    
    2008Total assets:Email Encryption
    
    $
    3,781,000
    
    
    $
    3,335,000e-Prescribing
    
    
    416,000
    
    
    
    664,000Corporate
    
    
    15,551,000
    
    
    
    15,358,000Total assets
    
    $
    19,748,000
    
    
    $
    19,357,000
 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
    
    
    
    33,666
    
    
    
    33,666
    
    
    
    1995 Long-term Incentive Plan
    
    
    1,825,000
    
    
    
    1,063,500
    
    
    
    1,063,500
    
    
    
    1999 Directors Stock Option Plan
    
    
    975,000
    
    
    
    267,767
    
    
    
    267,767
    
    
    
    2001 Stock Option Plan
    
    
    2,525,000
    
    
    
    2,043,348
    
    
    
    1,977,200
    
    
    
    3,1502001 Employee Stock Option Plan
    
    
    300,000
    
    
    
    204,641
    
    
    
    180,467
    
    
    
    37,6782003 New Employee Stock Option Plan
    
    
    500,000
    
    
    
    278,134
    
    
    
    178,028
    
    
    
    193,8602004 Stock Option Plan
    
    
    5,000,000
    
    
    
    3,955,704
    
    
    
    3,403,638
    
    
    
    966,1882004 Directors Stock Option Plan
    
    
    300,000
    
    
    
    215,000
    
    
    
    215,000
    
    
    
    2006 Directors Stock Option Plan
    
    
    1,100,000
    
    
    
    734,352
    
    
    
    526,527
    
    
    
    365,648Total employee and director stock option plans
    
    
    12,975,000
    
    
    
    8,796,112
    
    
    
    7,845,793
    
    
    
    1,566,524Executive 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
    
    
    14,075,000
    
    
    
    9,571,112
    
    
    
    8,620,793
    
    
    
    1,566,524
 F-13




---



##### 



Employee and Director Stock Option Plans
  Executive Stock Option Agreements:
 Richard D. Spurr
 Other Executive Stock Option Agreements
 Other Stock Option Agreements:
  Accounting Treatment
   Year Ended December 31,2009
    
    
    2008
    
    
    2007Cost of revenues
    
    $
    387,000
    
    
    $
    304,000
    
    
    $
    136,000Research and development expenses
    
    
    338,000
    
    
    
    255,000
    
    
    
    106,000Selling, general and administrative expenses
    
    
    2,338,000
    
    
    
    1,939,000
    
    
    
    817,000Stock-based compensation expense
    
    $
    3,063,000
    
    
    $
    2,498,000
    
    
    $
    1,059,000
 F-14




---



##### 



Year Ended December 31,2009
    
    
    2008
    
    
    2007Risk-free interest rate
    
    
    2.20
    %
    
    
    2.57
    %
    
    
    3.81
    %Expected option life (years)
    
    
    5.7
    
    
    
    5.8
    
    
    
    5.8Expected stock price volatility
    
    
    79
    %
    
    
    78
    %
    
    
    81
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Fair value of options granted
    
    $
    0.84
    
    
    $
    1.71
    
    
    $
    2.87
  Stock Option Activity
  F-15




---



##### 



WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    ContractualShares
    
    
    Price
    
    
    Term (Yrs)Outstanding at January 1, 2007
    
    
    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
    
    
    $
    4.76Granted at market price
    
    
    196,684
    
    
    $
    1.49Cancelled or expired
    
    
    (653,196
    )
    
    $
    9.15Exercised
    
    
    (11,743
    )
    
    $
    1.55Outstanding at December 31, 2009
    
    
    9,571,112
    
    
    $
    4.40
    
    
    
    5.80Options exercisable at December 31, 2009
    
    
    8,620,793
    
    
    $
    4.55
    
    
    
    5.53
    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
    
    
    2,713,087
    
    
    
    7.06
    
    
    $
    1.49
    
    
    
    2,250,053
    
    
    $
    1.51$2.00 - $3.49
    
    
    1,431,793
    
    
    
    5.67
    
    
    $
    2.87
    
    
    
    1,409,881
    
    
    $
    2.87$3.50 - $4.99
    
    
    3,168,099
    
    
    
    6.16
    
    
    $
    4.45
    
    
    
    2,702,726
    
    
    $
    4.40$5.00 - $5.99
    
    
    549,260
    
    
    
    3.78
    
    
    $
    5.08
    
    
    
    549,260
    
    
    $
    5.08$6.00 - $8.99
    
    
    736,816
    
    
    
    4.35
    
    
    $
    6.46
    
    
    
    736,816
    
    
    $
    6.46$9.00 - $19.99
    
    
    890,381
    
    
    
    3.87
    
    
    $
    10.93
    
    
    
    890,381
    
    
    $
    10.93$20.00 - $57.60
    
    
    81,676
    
    
    
    0.46
    
    
    $
    31.47
    
    
    
    81,676
    
    
    $
    31.479,571,112
    
    
    
    5.80
    
    
    $
    4.40
    
    
    
    8,620,793
    
    
    $
    4.55
  Reserved Common Stock
  Common Stock Issued in Lieu of Cash
  F-16




---



##### 



5. Supplemental Cash Flow Information
  Year Ended December 31,2009
    
    
    2008
    
    
    2007Cash interest paid
    
    $
    21,000
    
    
    $
    
    
    
    $
    83,000Income tax payment
    
    $
    196,000
    
    
    $
    53,000
    
    
    $
    175,000Issuance of common stock and warrants related to the restructure
of the prior promissory notes payable
    
    $
    
    
    
    $
    
    
    
    $
    1,393,000Issuance of replacement promissory note payable
    
    $
    
    
    
    $
    
    
    
    $
    1,474,000Payables related to purchases of assets
    
    $
    89,000
    
    
    $
    51,000
    
    
    $
    33,000Assets sold to customers as part of their subscription service
    
    $
    2,000
    
    
    $
    16,000
    
    
    $
    16,000Issuance of promissory note for software license service agreement
    
    $
    390,000
    
    
    $
    
    
    
    $
    Stock issued in lieu of accrued expenses (see Note 4)
    
    $
    
    
    
    $
    516,000
    
    
    $
    Accrued expenses relating to private placement common stock
(see Note 13)
    
    $
    
    
    
    $
    20,000
    
    
    $
    35,000
 6. Receivables, net
 December 31,2009
    
    
    2008Receivables
    
    $
    786,000
    
    
    $
    513,000Allowance for returns and doubtful accounts
    
    
    (26,000
    )
    
    
    (37,000
    )Note receivable
    
    
    484,000
    
    
    
    488,000Allowance for note receivable
    
    
    (484,000
    )
    
    
    (488,000
    )Receivables, net
    
    $
    760,000
    
    
    $
    476,000
   7. Prepaid and other current assets
 December 31,2009
    
    
    2008Inventory
    
    $
    8,000
    
    
    $
    86,000Deferred cost of sales charges
    
    
    97,000
    
    
    
    262,000Prepaid insurance, maintenance, software licenses and other
    
    
    1,029,000
    
    
    
    786,000Tax-related
    
    
    8,000
    
    
    
    11,000Prepaid and other current assets
    
    $
    1,142,000
    
    
    $
    1,145,000
 8. Property and Equipment
 December 31,2009
    
    
    2008Computer and office equipment and software
    
    $
    23,711,000
    
    
    $
    25,271,000Leasehold improvements
    
    
    4,876,000
    
    
    
    4,828,000Furniture and fixtures
    
    
    1,220,000
    
    
    
    1,127,00029,807,000
    
    
    
    31,226,000Less accumulated depreciation and amortization
    
    
    (27,670,000
    )
    
    
    (28,990,000
    )$
    2,137,000
    
    
    $
    2,236,000
  F-17




---



##### 



9. Goodwill and Finite-Lived Intangible Assets
   December 31,2009
    
    
    2008Intangible asset cost
    
    $
    2,034,000
    
    
    $
    2,034,000Accumulated amortization
    
    
    (2,034,000
    )
    
    
    (2,034,000
    )Net intangible assets
    
    $
    
    
    
    $
    
  10. Accrued Expenses
 December 31,2009
    
    
    2008Employee compensation and benefits
    
    $
    1,496,000
    
    
    $
    931,000Professional fees
    
    
    414,000
    
    
    
    407,000Taxes
    
    
    768,000
    
    
    
    718,000Other
    
    
    446,000
    
    
    
    348,000Total accrued expenses
    
    $
    3,124,000
    
    
    $
    2,404,000
 11. Customer Deposit
  12. Notes Payable
 License Subscription Note Payable
  F-18




---



##### 



13. April 2006 Private Placement of Common Stock
      F-19




---



##### 



14. Equity Financing Arrangements and Related Warrants
 Warrants Summary
  December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31,2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2009Warrants
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    (65,190
    )
    
    
    4,347,810
    
    
    $
    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
    
    
    
    
    
    
    
    (768,834
    )
    
    
    (330,176
    )
    
    
    
    
    
    
    1.42  4.47
    
    
    Nov 20092004 private placement broker warrants
    
    
    166,667
    
    
    
    
    
    
    
    (166,667
    )
    
    
    
    
    
    
    
    
    
    
    6.00
    
    
    Nov 20092002 private placement of equity securities
    
    
    916,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    916,667
    
    
    
    57.60
    
    
    May 2010Promissory note payable
    
    
    145,853
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,853
    
    
    
    4.48
    
    
    Jan 2012Total
    
    
    10,260,246
    
    
    
    
    
    
    
    (935,501
    )
    
    
    (395,366
    )
    
    
    8,929,379
  2006 Private Placement of Common Stock and Warrants
  2005 Private Placement of Common Stock and Warrants
      2004 Private Placement of Convertible Notes Payable and Related Transactions
  F-20




---



##### 



2002 Private Placement of Equity Securities
  15. Earnings Per Share and Potential Dilution
  2009
    
    
    2008
    
    
    2007Stock options
    
    
    9,571,112
    
    
    
    10,039,367
    
    
    
    9,538,713Warrants issued in relation to debt and equity arrangements (see Note 14)
    
    
    8,929,379
    
    
    
    10,260,246
    
    
    
    10,434,804Total antidilutive securities excluded from EPS Calculation
    
    
    18,500,491
    
    
    
    20,299,613
    
    
    
    19,973,517
 16. Significant Customers
  17. Commitments and Contingencies
 Leases and Debt
   2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    Thereafter
    
    
    TotalOperating leases
    
    $
    1,313,000
    
    
    $
    1,149,000
    
    
    $
    949,000
    
    
    $
    887,000
    
    
    $
    665,000
    
    
    
    
    
    
    $
    4,963,000License subscription note payable
    
    
    126,000
    
    
    
    137,000
    
    
    
    49,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    312,000Total cash obligations
    
    
    1,439,000
    
    
    
    1,286,000
    
    
    
    998,000
    
    
    
    887,000
    
    
    
    665,000
    
    
    
    
    
    
    
    5,275,000Interest on obligations
    
    
    22,000
    
    
    
    11,000
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,000Total
    
    $
    1,461,000
    
    
    $
    1,297,000
    
    
    $
    999,000
    
    
    $
    887,000
    
    
    $
    665,000
    
    
    
    
    
    
    $
    5,309,000
 Claims and Proceedings
  F-21




---



##### 



18. Income Taxes
  2009
    
    
    2008
    
    
    2007Current:U.S
    
    $
    (95,000
    )
    
    $
    (111,000
    )
    
    $
    State
    
    
    (20,000
    )
    
    
    22,000
    
    
    
    13,000Foreign
    
    
    179,000
    
    
    
    139,000
    
    
    
    197,000DeferredState
    
    
    
    
    
    
    (48,000
    )
    
    
    Foreign
    
    
    3,000
    
    
    
    40,000
    
    
    
    (29,000
    )$
    67,000
    
    
    $
    42,000
    
    
    $
    181,000
  2009
    
    
    2008
    
    
    2007Expected tax benefit at U.S. statutory rate
    
    $
    (1,527,000
    )
    
    $
    (1,902,000
    )
    
    $
    (2,723,000
    )Unbenefited U.S. losses, net
    
    
    1,546,000
    
    
    
    1,945,000
    
    
    
    2,741,000Nondeductible expense and nontaxable income
    
    
    (19,000
    )
    
    
    (43,000
    )
    
    
    (17,000
    )Refundable U.S. research credits
    
    
    (95,000
    )
    
    
    (111,000
    )
    
    
    State income taxes
    
    
    (20,000
    )
    
    
    (26,000
    )
    
    
    13,000Foreign income taxes
    
    
    182,000
    
    
    
    179,000
    
    
    
    168,000Other
    
    
    
    
    
    
    
    
    
    
    (1,000
    )$
    67,000
    
    
    $
    42,000
    
    
    $
    181,000
  2009
    
    
    2008Deferred tax assets:Nondeductible reserves
    
    $
    193,000
    
    
    $
    203,000U.S. net operating loss carryforwards
    
    
    98,206,000
    
    
    
    96,661,000State net operating loss carryforwards
    
    
    144,000
    
    
    
    109,000Tax credit carryforwards
    
    
    5,494,000
    
    
    
    5,692,000Stock-based compensation
    
    
    4,364,000
    
    
    
    3,437,000Intangible assets
    
    
    2,848,000
    
    
    
    3,296,000Depreciable assets
    
    
    1,438,000
    
    
    
    1,474,000Unrecognized gain on derivatives
    
    
    21,000
    
    
    
    16,000Other assets
    
    
    571,000
    
    
    
    1,178,000Total deferred tax assets
    
    
    113,279,000
    
    
    
    112,066,000Less valuation allowance
    
    
    (113,210,000
    )
    
    
    (111,994,000
    )Net deferred income taxes
    
    $
    69,000
    
    
    $
    72,000
   F-22




---



##### 



UnrecognizedTax BenefitsBalance at December 31, 2007
    
    $
    327,000Change in beginning balance due to currency fluctuation
    
    
    Additions 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 December 31, 2008
    
    
    377,000Change in beginning balance due to currency fluctuation
    
    
    63,000Additions based on tax positions related to current year
    
    
    Decreases 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, 2009
    
    $
    440,000
    19. Employee Benefit Plan
 4 01(k) Plan
 F-23




---



##### 



20. Quarterly Results of Operations (Unaudited)
  Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312009Revenues
    
    $
    7,256,000
    
    
    $
    7,371,000
    
    
    $
    7,835,000
    
    
    $
    8,189,000Gross margin
    
    
    4,785,000
    
    
    
    5,003,000
    
    
    
    5,586,000
    
    
    
    5,893,000Net loss
    
    
    (1,542,000
    )
    
    
    (1,925,000
    )
    
    
    (657,000
    )
    
    
    (311,000
    )Basic and diluted net loss per common share*
    
    
    (0.02
    )
    
    
    (0.03
    )
    
    
    (0.01
    )
    
    
    (0.00
    )2008Revenues
    
    $
    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
    )
 
 *
    
    Net loss per share is calculated independently for each quarter. The sum of Net loss per share
for each quarter does not equal the total Net loss per share for the year due to rounding
differences. F-24