Edgar Filing: ZIXIT CORP

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K/A

(Mark One)

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

For the fiscal year ended December 31, 2001

[_] 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

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ZIXIT CORPORATION
(Exact Name of Registrant as Specified in its Charter)

Texas 75-2216818
(I.R.S. Employer
(State of Incorporation) Identification Number)

2711 N. Haskell Avenue, Suite 2300, 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:

None Not Applicable
(Title of Class) (Name of Exchange on
Which Registered)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock
$0.01 Par Value
(Title of Class)

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

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

As of January 31, 2002, there were 17,557,854 shares of ZixIt Corporation
$0.01 par value common stock outstanding, 15,149,274 of which having an
aggregate market value of $75,746,370 were held by non-affiliates. For purposes
of the above statement, all directors and officers of the Registrant are
presumed to be affiliates.

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PART I

ITEM 1. Business.

Overview

In 1998 and prior years, ZixIt Corporation ("ZixIt" or the "Company" or
"we") designed, manufactured, marketed, installed and supported a wide array of
wireless data and security technology products and solutions for a variety of
industries through two primary market-oriented groups, each with a core
competency in radio frequency technology.

The Company's Electronic Security Group designed, manufactured, marketed,
installed and supported its electronic security equipment and full-service
solutions for electronic security needs to corporate and government markets
throughout the world. These products and services were marketed under the
"Cotag" and "Cardkey" brand names, and were targeted primarily to the
electronic access control, asset management and tracking, healthcare security
and security management markets.

The Company's Transportation Systems Group designed, manufactured, marketed,
installed and supported wireless equipment and systems that permitted the
remote identification of, and communication with, objects through the use of
high frequency radio frequency signals rather than bar codes, magnetic cards,
or other means. These products and systems, which were marketed under the
"Amtech" brand name, were targeted primarily to the rail, electronic toll
collection and traffic management, intermodal, airport, access control, and
motor freight markets.

The Company in 1998 determined that its businesses were low margin and the
industries in which they operated were approaching maturity. Accordingly, the
Company decided to exit its then-current businesses, and during 1998 it sold
all of its operating units and raised approximately $85 Million in cash. It
began evaluating new Internet-related business opportunities -- which it deemed
to offer more promising prospects for growth and profitability than the
previous businesses. The Company perceived a need for products and services to
bring privacy, security and convenience to Internet communications and in 1999
it began developing secure messaging products as well as a shopping portal and
Internet payment authorization system to address these needs.

ZixIt is now a technology provider of secure e-messaging services, providing
innovative, cost-effective, and easy-to-deploy solutions that ensure the
highest levels of security for corporate email and other electronic messages.
ZixIt's security suite enables organizations to send the most sensitive
electronic messages and content securely and efficiently.

Email has become a core communication technology for enterprises. However,
once email leaves an enterprise's secure network environment, it enters the
Internet -- a global network of computers -- and is transmitted to the
recipient through one or more Internet communication nodes. If the email
transmission is sent over the Internet as cleartext (i.e., in unencrypted
form), it could be intercepted anywhere along the path between a sender and a
recipient.

In addition, federal regulations such as HIPAA (Health Insurance Portability
and Accountability Act) and enhanced security awareness in general have
organizations adopting data security faster than ever. Corporations, however,
require ubiquitous coverage that is cost-effective and quickly deployed.

To satisfy the need for enterprise-wide email security, ZixIt delivers
comprehensive solutions for encrypting Internet communications that are
scalable, easily integrated within the organization and quickly deployable.
ZixIt solutions encompass a Best Method of Delivery(TM) feature and a
centralized directory of users' encryption codes to enable simplicity of use,
flexibility and ease of management. ZixIt solutions include ZixMail(TM) and

ZixMail.net(TM) desktop (e.g. installed on a user's computer) solutions for
sending and receiving secure email; ZixBlast(TM), which is an automated
broadcaster of high volumes of customized messages; and our recently introduced
Zix Virtual Private Messenger (ZixVPM(TM)) service, which is a server-based
solution for satisfying ZixIt's customer's content delivery and management
needs.

The ZixIt "Best Method of Delivery"(TM) secure e-messaging solutions enable
senders and recipients of "Zix" enabled secure corporate email and other
electronic messages to determine the method of the secure delivery. For
example, when sending a Zix enabled secure message, the sender may choose to
have the encrypted message delivered through one of several different means:
directly to the desktop computer of a recipient who is ZixMail(TM) enabled; to
an enterprise's ZixVPM server for an enterprise that is ZixVPM enabled; or
through the ZixMail.net service (a secure Web-based portal) for viewing over a
Secure Socket Layer (SSL) Internet connection. We believe this ability to send
the message through different, user selectable modes of delivery, makes our
secure content delivery products and services superior to those of our
competitors. Our ZixMail(TM) product received PC Magazine's Editors' Choice
Award in January 2001 for the email security category. ZixIt applies its
award-winning technology and subscription-based services to enable global
enterprise to securely distribute electronic content with business partners,
customers and internal employees.

ZixIt customers are able to implement ZixIt's secure e-messaging solutions
within their existing network infrastructures without imposing additional
demands on those resources, and a corporate-wide deployment can be completely
integrated in half a day or less. With ZixVPM, ZixIt has the ability to tap
into a worldwide market for secure content delivery and management that is
estimated to total $23 billion in 2002, growing to $46 billion by 2005,
according to IDC.

Successful growth of a development stage enterprise, particularly
Internet-related businesses, is costly and highly competitive. The Company's
growth depends on the timely development and market acceptance of its products
and services. A development stage enterprise involves risks and uncertainties,
and there are no assurances that the Company will be successful in its efforts.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below for a description of certain management
assumptions, risks and uncertainties relating to the Company's operations.

ZixIt was incorporated in Texas in 1988. ZixIt's executive offices are
located at 2711 North Haskell Avenue, Suite 2300, LB 36, Dallas, Texas
75204-2960, (214) 370-2000. ZixIt's secure data center and its HTTP/SMTP relay
systems are also located in Dallas, Texas. ZixIt's Web site address is
www.zixit.com. Information contained on ZixIt's Web site is not a part of this
report.

Products and Services

ZixVPM -- ZixIt's Virtual Private Messenger solution -- is a server-based
solution, which employs encryption technology, for encrypting email
transmissions outside an enterprise's corporate firewall. It is designed for
enterprises that require security and encryption for inbound and outbound email
communications. ZixVPM provides secure email correspondence among remote
employees, customers and business partners without requiring the enterprise to
create, deploy and manage end-user encryption keys and desktop software. ZixVPM
operates independently of existing email systems and can integrate seamlessly
with scanning and filtering tools and policies. Since ZixVPM is installed at
the server level within an enterprise -- and the email messages leaving that
enterprise's corporate firewall are encrypted at the server level -- the users
of that enterprise's email system are not required to install any software at
their computer desktops, nor are they required to obtain any public or private
encryption codes to encrypt their email messages. Our ZixVPM product is being
beta tested by a number of prospective customers and is expected to be
available for customer purchase in March 2002.

ZixMail is a secure email application and messaging service that employs
encryption technology to enable Internet users worldwide to easily send
encrypted, digitally-signed communications to any email address in the world,
even if the recipient does not subscribe to ZixMail. ZixMail provides computer
desktop-level encryption and works with existing email addresses and systems,
and is available in versions that integrate fully with Microsoft Outlook(R) and
Lotus Notes.(R) As with ZixVPM, ZixMail does not require the user to manually
exchange or manage encryption keys. ZixIt's secure data center automatically
validates a user's unique digital signature and distributes public keys in real
time for each message. Optional certified receipts irrefutably establish the
exact time messages are sent and opened. Our ZixMail product is generally
available for sale and is being used or beta tested by a number of current or
prospective customers.

Recipients who are not ZixMail subscribers can receive and reply to ZixMail
messages free of charge through the ZixMail.net service (a secure Web-based
portal) that provides a browser-based solution for viewing and composing secure
messages over a Secure Socket Layer (SSL) Internet connection. Messages are
stored until the expiration date (set by the sender) or until the recipient
opens and deletes the message. At the option of the sender, ZixMail.net will
generate and send a pick-up receipt and an expiration notice to the sender. The
ZixMail.net service allows ZixMail subscribers to send secure messages to
non-ZixMail subscribers, thus providing a send-to-anyone encryption solution.

ZixBlast, built on ZixIt's core technology, employs encryption technology to
provide high-volume secure electronic messaging capabilities for companies
needing to communicate confidential information to large numbers of customers
or to other large audiences. ZixBlast easily encrypts and delivers private
information securely to any email address. ZixBlast summary reports provide
critical information by recording the number of messages sent, the number
opened and the percentage of messages opened. Detailed reports supply this
information for each recipient's email address, indicating exactly when
messages were sent and opened. Reports can be generated daily, weekly or
monthly, as needed, so senders can measure and know who is reading messages
sent and who is not. Our ZixBlast product is available for customer usage.

ZixIt's key management system implements, in effect, PKI (Public Key
Infrastructure) functionality for email encryption. ZixIt's solutions are
provided as a service, thereby removing the significant implementation burden
and cost that PKI infrastructures or products require. The ZixIt implementation
is focused on ease of use to the senders and recipients of encrypted email
while affording them the option of the strongest methods of encryption ZixIt
offers, an extended feature set and user-friendly implementation. ZixIt users
obtain:

. privacy with encryption

. authentication

. integrity of message

. non-repudiation - such that senders cannot deny sending, and recipient
cannot deny receiving, a message

ZixIt has several approaches for its "best-method" of delivery transmission
-- with a single administrative console that allows corporations to send
electronic content to anyone ... anywhere ... at anytime, securely. Due to
ZixIt's unique best-method of delivery and service capabilities, it provides
several added levels of security while assuming the burden of managing users'
public keys. These additional security components are:

. certified receipts

. storage security

. time stamps that are non-repudiable

. corporate policy enforcement

ZixIt's core technology and best-method of delivery is enabled by ZixIt's
centralized directory of users' encryption codes. This centralized directory
(gateway) provides a stable, secure, highly responsive, and scalable
environment for all secure messaging needs. The centralized directory gateway
provides the following services:

. validation and distribution of public keys in real time for each message

. creation of irrefutable, time-stamped transaction certificates and
certified receipts

. delivery of ZixMail.net messages via SSL web-browser

In broad market terms, ZixIt operates in the secure e-document delivery
industry. Because of this, ZixIt is often perceived to compete against much
larger software manufacturers, such as Microsoft Corporation, as well as
established information technology (IT) security companies, such as Check Point
Software Technologies Ltd., Entrust, Inc., RSA Security Inc., and VeriSign,
Inc. Although these companies have substantial IT security product offerings,
ZixIt does not perceive them to be competitors because ZixIt operates in a
segment of the secure e-document delivery industry these companies do not --
the secure messaging market.

Within the secure messaging market, ZixIt's product and services offering is
focused on the secure delivery portion of the secure messaging market.
Companies operating in this portion of the market include content management
companies, such as Tumbleweed Communications Corp., and other secure delivery
participants such as CertifiedMail.com, PrivateExpress, Inc., and Sigaba
Corporation. While these companies offer "send-to-anyone" encrypted email,
ZixIt believes they are unable to offer the benefits that come from using
ZixIt's "Best Method of Delivery"(TM) product and service offering. ZixIt does
not believe that its competitors have made the investments required to match
ZixIt's infrastructure development and product offerings. ZixIt believes only
it offers a complete secure delivery package: robust email encryption from the
sender's computer desktop; robust email encryption from the sender's network
server; policy management from the sender's network server; and, a full array
of benefits and managed services provided by ZixIt's multi-million dollar
on-site Secure Data Center. ZixIt believes this complete secure delivery
solution differentiates its product and service offerings from all other secure
e-document delivery and secure messaging market participants.

The Company has also developed ZixCharge(TM), a shopping portal and Internet
payment authorization system that enables consumers, using their existing
charge cards, to purchase goods and services over the Internet without being
required to provide personal and charge card information to Internet merchants.
ZixCharge has not been commercially released. See Item 3. "Legal Proceedings"
below and Note 9 to the consolidated financial statements.

Sales and Marketing

The Company began revamping its sales and marketing team following the
hiring in November 2001 of John A. Ryan, the former president and CEO of
Entrust, Inc., as its new president and CEO. The Company hired other senior
executives, also formerly with Entrust, Inc., with a demonstrated track record
of success in the sale of security products and services. The Company has also
begun hiring seasoned account executives with prior experience in either
selling security products and services or enterprise software products to
Fortune 1000 companies.

The Company is targeting the healthcare, financial services and
manufacturing markets, as well as international markets and the Fortune 1000
companies. The healthcare market is the Company's highest priority, given the
legislative requirements of the Health Insurance and Portability Accountability
Act ("HIPAA"), which mandates eliminating paper flow and providing privacy and
security for medical information.

New business, primarily focused on the corporate market, is expected to be
generated from the Company's own direct sales efforts and the promotional
efforts of strategic marketing partners. The Company continues to pursue
collaborative relationships with third parties that market to companies with
large existing email user bases. Progress has been made marketing ZixMail in
the international arena, as evidenced by a distributor agreement with an entity
in Japan.

Employees

ZixIt had 94 employees as of January 31, 2002.

Research and Development; Patents and Trademarks

ZixIt's continuing operations incurred research and development expenses of
$9,019,000, $8,661,000 and $23,548,000 in 2001, 2000 and 1999, respectively.

ZixIt has filed several patent applications covering concepts ZixIt is
employing, or may employ, in implementing its Internet businesses. In addition,
ZixIt and certain of its subsidiaries have filed applications for trademarks
and service marks, as applicable, for "ZixIt", "ZixMail", "ZixMail.net",
"ZixBlast", "ZixVPM" and other "Zix" related marks.

Customers

ZixIt, a development stage company, had no significant revenues in 2001,
2000 and 1999. The Company began charging for its ZixMail services in the first
quarter of 2001, with ZixVPM and ZixBlast expected to contribute to revenues in
the near-term.

Sales Backlog

As a development stage company, ZixIt had no measurable backlog as of
January 31, 2002 and January 31, 2001.

Geographic Information

ZixIt's operations are based in the United States ("U.S."), and its
corporate assets at December 31, 2001 were primarily comprised of cash
investments and marketable securities invested generally in U.S. corporate debt
securities and high-grade daily money market funds.

ITEM 2. Properties.

ZixIt leases approximately 9,400 square feet of space for its corporate
offices in Dallas, Texas under a sublease that expires in September 2004;
approximately 29,000 square feet of space for its primary secure data center
operations in Dallas, Texas under a sublease that expires in September 2004;
and approximately 6,910 square feet of space for back-up data center operations
in Dallas, Texas under a sublease that expires in July 2003. Through December
31, 2001, ZixIt has invested approximately $30,000,000 in property and
equipment to establish its secure data center. Features of the secure data
center include:

. Multi-level security, including cameras, access controlled with badge and
biometric hand readers and 24-hour operations personnel;

. Communications:

. Three redundantly configured DS3 (45 Mbit) fiber connections;

. Three independent ISPs; and

. Redundant Cisco 7500 routers;

. Power:

. Redundant electrical feeds from two independent utility power grids;

. Redundant 400 kw UPS systems;

. 1,000 kw diesel generator located underground; and

. Four redundantly configured Power Distribution Units (PDUs);

. Two Sun (Starfires) Enterprise 10,000 Application Servers; currently 64
Central Processing Units (CPUs), but expandable to 128 CPUs;

. 6 Sun Enterprise 4500 Application Servers;

. 220 Sun UltraSparc web Servers;

. 4 EMC Symmetrix 3830(TM) Enterprise Storage units for online storage (5
Terabytes currently, but expandable to 12 Terabytes);
. 2 EMC Symmetrix 3900 Enterprise Storage units for online storage (9
Terabytes currently, but expandable to 18 Terabytes);

. StorageTek automated tape library (360-tape capacity) for offline storage
(12-20 Terabytes); and

. Email-based customer response center systems, including 3 Intel-based
servers with estimated intelligent response capacity of 20,000 inquiries
per day.

ZixIt has two HTTP/SMTP relay systems located in Dallas, Texas. These relays
enable ZixIt to serve those ZixMail users who choose not to use their existing
SMTP mail servers or who desire to use a HTTP-based email address, such as a
Yahoo(TM) or HotMail(TM) address.

ITEM 3. Legal Proceedings.

On December 30, 1999, the Company and ZixCharge.com, Inc., a wholly-owned
subsidiary of the Company, filed a lawsuit against Visa U.S.A., Inc. and Visa
International Service Association (collectively "Visa") in the 192/nd/ Judicial
District Court of Dallas County, Texas, which alleges that Visa undertook a
series of actions that interfered with its ZixCharge prospective business
relationships and disparaged the Company, its products, its management and its
stockholders. The suit, which is scheduled for trial in July 2002, seeks
monetary damages and such other relief as the court deems appropriate. The
Company believes it is unlikely that any Visa member banks would enter into any
ZixCharge sponsorship agreements until the Visa litigation is resolved.
Moreover, the resolution of the lawsuit could have a material effect on the
Company's ability to market the ZixCharge system.

The Company is involved in legal proceedings that arise in the ordinary
course of business. In the opinion of management, the outcome of pending legal
proceedings will not have a material adverse effect on the Company's
consolidated financial statements.

ITEM 4. Submission of Matters to Vote of Security Holders.

None.

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.

ZixIt's common stock trades on the The Nasdaq Stock Market under the symbol
ZIXI. The following table shows the high and low sales prices by quarter for
2001 and 2000. These prices do not include adjustments for retail mark-ups,
mark-downs or commissions.

2001 2000
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Quarter Ended High Low High Low
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March 31............................................ $16.00 $6.50 $96.50 $29.50
June 30............................................. $13.45 $5.13 $71.50 $21.50
September 30........................................ $10.94 $4.06 $59.47 $27.62
December 31......................................... $ 9.92 $4.41 $31.38 $ 5.97

At January 31, 2002, there were 17,557,854 shares of common stock
outstanding held by 456 stockholders of record. On that date, the last reported
sales price of the common stock was $5.00.

ZixIt has not paid any cash dividends on its common stock during the last
two years and does not anticipate doing so in the foreseeable future.

ITEM 6. Selected Financial Data.

The following table sets forth selected financial data regarding the
Company's results of operations and financial position for, and as of the end
of, each of the years in the five-year period ended December 31, 2001, which
are derived from the audited consolidated financial statements of the Company.
The consolidated financial statements and notes thereto as of December 31, 2001
and 2000, and for the years ended December 31, 2001, 2000 and 1999, and the
report of Ernst & Young LLP thereon are included elsewhere in this Form 10-K/A.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto included elsewhere
herein.

Year Ended December 31,
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2001 2000 1999 1998 1997
-------- -------- -------- ------- --------
(In thousands, except per share data)

Statement of Operations Data(1):
Revenues............................................... $ 317 $ 394 $ 99 $ -- $ --
Cost of revenues(5).................................... (14,996) (10,821) (4,289) -- --
Research and development expenses(5)................... (9,019) (8,661) (23,548) -- --
Selling, general and administrative expenses(2)(5)..... (29,892) (32,162) (12,407) (4,022) (2,931)
Investment and other income............................ 2,187 3,130 3,533 1,956 1,068
Realized and unrealized loss on investments(6)......... (5,391) (1,202) -- -- --
-------- -------- -------- ------- --------
Loss from continuing operations before income taxes.... (56,794) (49,322) (36,612) (2,066) (1,863)
Income taxes........................................... -- -- 807 576 (8)
-------- -------- -------- ------- --------
Loss from continuing operations........................ (56,794) (49,322) (35,805) (1,490) (1,871)
Discontinued operations(1)
Income (loss) from discontinued operations, net of
income taxes(3)(4)................................ -- -- -- 6,105 (12,089)
Gain (loss) on sale of discontinued operations, net
of income taxes................................... 48 441 1,453 21,651 (3,657)
-------- -------- -------- ------- --------
48 441 1,453 27,756 (15,746)
-------- -------- -------- ------- --------
Net income (loss)...................................... $(56,746) $(48,881) $(34,352) $26,266 $(17,617)
======== ======== ======== ======= ========

Basic and diluted earnings (loss) per common share.....
Continuing operations............................... $ (3.32) $ (3.03) $ (2.35) $ (0.09) $ (0.12)
Discontinued operations............................. -- 0.03 0.10 1.75 (1.05)
-------- -------- -------- ------- --------
Net income (loss)................................... $ (3.32) $ (3.00) $ (2.25) $ 1.66 $ (1.17)
======== ======== ======== ======= ========

Shares used in computing basic and diluted earnings
(loss) per share..................................... 17,083 16,266 15,244 15,836 15,081
Balance Sheet Data:
Working capital........................................ $ 17,266 $ 48,685 $ 39,766 $81,291 $ 63,648
Total assets........................................... 32,436 78,677 66,523 86,898 63,919
Total stockholders' equity............................. 27,529 75,130 62,894 81,449 63,696
Stockholders' equity per share......................... 1.57 4.41 4.10 5.40 3.76

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(1) In 1995, the Company acquired Cotag International Limited, Cardkey Systems,
Inc., Cardkey Systems Limited and WaveNet International, Inc. WaveNet
International, Inc. was sold in 1997, while the remainder of these
businesses and the Company's Transportation Systems Group ("TSG") were sold
in 1998. The operating results of these businesses have been classified as
discontinued operations for all periods presented. See Note 6 to the
consolidated financial statements included herein.

(2) Selling, general and administrative expenses for the years 1997 and 1998
represent the costs associated with a holding company function.

(3) In 1997, loss from discontinued operations includes a $5.7 million pre-tax
contract loss provision related to a multi-year implementation of an
electronic toll collection system by the TSG.

(4) In 1997, income taxes related to discontinued operations includes $4.7
million representing the effect of establishing a valuation allowance for
U.S. deferred tax assets.

(5) In 2001, 2000 and 1999, expenses associated with continuing operations
include non-cash stock-based compensation of $8.4 million, $11.8 million
and $12.3 million, respectively. See Note 3 to the consolidated financial
statements included herein. In 2001, cost of revenues include a $3 million
write-off of digital identification certificates. Selling, general and
administrative expenses include advertising costs of $10.3 million and $4.5
million for 2000 and 2001, respectively.

(6) In 2001, realized and unrealized loss on investments includes the write-off
of the Company's $5 million investment in Maptuit Corporation.

ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Overview

In 1998 and prior years, the Company provided systems and solutions for the
intelligent transportation, electronic security and other markets. The
Company's operations included the design, manufacturing, installation and
support of hardware and software products utilizing the Company's wireless data
and security technologies. The Company determined in 1998 that the Company's
businesses were low margin and the markets in which they operated were
approaching maturity. Accordingly, the Company decided to exit its then-current
businesses, and during 1998 it sold all of its operating units. It began
evaluating new Internet-related business opportunities -- which it deemed to
offer more promising prospects for growth and profitability than the previous
businesses.

The Company perceived a need for products and services to bring privacy,
security and convenience to Internet communications and since January 1999, the
Company has been developing and marketing products and services that bring
privacy, security and convenience to Internet users. ZixMail is a secure email
application and messaging service that enables Internet users worldwide to
easily send encrypted, digitally-signed communications to any email address in
the world, even if the recipient does not subscribe to ZixMail. The Company
began charging for the use of its ZixMail product and related services in the
first quarter of 2001. The Company recently announced two new products,
ZixBlast, which is now generally available, and ZixVPM (Zix Virtual Private
Messenger), which is being beta tested by a number of prospective customers and
is scheduled to be released in the first quarter of 2002. ZixBlast, priced on a
transaction basis, allows enterprises to track messages and receive cumulative
reports detailing receipt confirmations for customized, encrypted, time and
date stamped emails sent via ZixMail to large volumes of recipients. ZixVPM is
a server-based, highly secure enterprise-wide solution for email sent over the
Internet that allows IT administrators to ensure that all email sent beyond a
company's firewall by specified individuals or departments is encrypted.

The Company's initial product in the secure email and messaging space,
ZixMail, was originally marketed to both the consumer and business markets. In
the Spring of 2001, the Company began focusing its ZixMail sales and marketing
efforts exclusively toward the business market -- but experienced only modest
success. Subsequently, in the Fall of 2001, as noted in Item 1.
"Business -- Sales and Marketing" above, the Company began revamping its sales
and marketing team and has hired or is hiring seasoned sales and account
executives with prior experience in either selling security products and
services or enterprise software products and services. Also, in the Fall of
2001, the Company announced its ZixVPM product, a server-based encryption
solution that is configured to provide businesses with an enterprise-wide
secure e-messaging solution. These changes have had no significant effect on
the Company's revenues to-date. However, the Company believes that its new,
experienced sales team will be able to significantly expand the Company's sales
and revenues, given the new focus on the business market and the expansion of
the Company's product portfolio with the pending release of ZixVPM -- scheduled
to be available in March 2002.

The foundation of the Company's business model for its current set of
products and services centers around the financial leverage expected to be
generated by revenues that are believed to be predominantly recurring in nature
and an efficient cost structure for its secure data center operations, the core
of which is expected to remain relatively stable. New business, primarily
focused on the corporate market, is expected to be generated from the Company's
own direct sales efforts and the promotional efforts of strategic marketing
partners. For financial accounting purposes, subscription fees will generally
be recognized as revenue on a prorated basis over the length of the
subscription period, usually one year. Subscription fees are generally expected
to be collected annually at the beginning of the subscription period.

As noted below under "Risks and Uncertainties", Anacom Communications, Inc.
("Anacom"), a privately-held provider of real-time transaction processing
services to Internet merchants purchased by the Company in October 1999, ceased
operations in June 2001 following the unauthorized access to Anacom's
databases. Anacom, an independently operated subsidiary, was purchased in
conjunction with the Company's development of the ZixCharge product which has
not been commercially released. See Item 3. "Legal Proceedings" and Note 9 to
the consolidated financial statements. Future operating losses and liquidity
will be favorably impacted by Anacom's shut-down, as Anacom recorded operating
losses, excluding non-cash charges, of $1,676,000 and $1,091,000 for 2000 and
2001, respectively.

The cessation of the Anacom operations will have no affect on the Company's
secure e-messaging services since the Anacom business and technologies were not
used in this part of the Company's business. Rather, Anacom's credit card
processing technologies were to have been used to perform the payment gateway
functionality -- as a component of our ZixCharge Internet payment system. At
such time, if ever, that our ZixCharge system is commercially released, we will
either use the Anacom technology or a comparable technology to perform the
payment gateway functionality. Accordingly, the cessation of the Anacom
operations will not materially impede our ability to commercially release the
ZixCharge system.

The Company anticipates further operating losses in 2002, but expects the
losses will be significantly less than those incurred in 2001. The Company has
taken steps, in late 2001 and early 2002, to decrease its cash expenditure rate
including reducing personnel and decreasing expenditures for outside
consultants and discretionary advertising and promotion costs. Non-cash charges
in 2002 for stock based compensation and depreciation and amortization should
be substantially less than the corresponding amounts in 2001.

Results of Operations

Continuing Operations

Revenues

The Company is in the development stage and had no significant revenues in
1999, 2000 and 2001. Substantially all of the Company's revenues since 1999
have been generated by Anacom Communications, Inc. ("Anacom") which ceased
operations in June 2001. The Company began charging for its ZixMail product and
services in the first quarter of 2001. Subscription fees billed or received
from customers in advance are recorded as deferred revenue and recognized as
revenues ratably over the subscription period.

Cost of revenues

Cost of revenues increased from $4,289,000 in 1999 to $10,821,000 in 2000
primarily due to increased depreciation and amortization of $4,398,000
resulting from additional investments in property and equipment during 1999 and
2000 for the Company's data center and related leasehold improvements.
Additionally, costs associated with Anacom's business increased by $773,000, as
1999 costs only include Anacom's activities from its date of purchase in
October 1999. The net increase from 2000 to 2001 of $4,175,000 consists
primarily of a non-cash charge of $3,000,000 for the write-off of digital
identification certificates in the fourth quarter of 2001, as these
certificates did not enter into the sales and marketing plans established by
the Company's new executive management team. These digital identification
certificates were not a component of the Company's current product set, and
their write-off will have no effect on future operations. Additionally,
depreciation and amortization costs increased by $558,000 from $7,577,000 in
2000 to $8,135,000 in 2001.

Research and development expenses

The Company began incurring development expenses for its current business
endeavors in the first quarter of 1999, resulting in total research and
development expenses of $23,548,000 in 1999, $8,661,000 in 2000 and $9,019,000
in 2001. The 1999 expenses include a net non-cash charge of $6,915,000
representing the fair value of options granted to Lante Corporation ("Lante"),
a third party Internet services company that assisted the Company with its
development efforts, reduced by $1,872,000, the fair value, on the date of
grant, of options granted to the Company by Lante. Lante's engagement was
completed in November 1999, resulting in a final valuation for the options
granted to Lante. The remaining research and development expenses in 1999 of
$16,633,000 primarily consisted of expenditures to third parties, including
$11,282,000 paid to Lante, for development of software for the Company's base
technology and related ZixMail and ZixCharge systems. In 2000, employee
compensation costs increased but were more than offset by a reduction in third
party consulting expenditures as a result of hiring additional technical
personnel to support the development of the Company's various Internet
products. In 2001, employee compensation costs continued to increase as
additional technical personnel were hired. These increases in compensation
costs were offset, for the most part, by continued reductions in third party
consulting expenditures.

Selling, general and administrative expenses

Selling, general and administrative expenses increased from $12,407,000 in
1999 to $32,162,000 in 2000 and decreased to $29,892,000 in 2001. The change
from 1999 to 2000, amounting to $19,755,000, is primarily due to the initiation
of discretionary advertising costs totaling $10,267,000 for various print media
and online advertising on sites such as Yahoo!, Lycos and McAfee.com to promote
the introduction of the Company's ZixMail service and an increase in non-cash
charges of $7,798,000 primarily consisting of $6,597,000 for stock-based
compensation related to stock option grants to employees and third party
service providers. Included in 1999 are non-cash charges of $5,078,000,
including a non-recurring expense of $3,335,000, relating to stock options
granted in January 1999 to certain of the Company's outside directors under a
plan that was approved by the stockholders in September 1999. Other operating
costs increased $1,690,000 in 2000 as a result of hiring additional sales and
marketing personnel and an increase in the operating expenses related to
Anacom's business of $666,000.

The net decrease from 2000 to 2001 amounted to $2,270,000. Expenses,
excluding non-cash charges, increased $266,000 in 2001 as the Company increased
its development stage efforts, primarily in the areas of direct sales and
marketing support, as the Company began commercially selling and charging for
its ZixMail product and related services in the first quarter of 2001. Changes
in expense levels between 2000 and 2001, excluding non-cash charges, included
the costs for additional personnel added in 2001 totaling $3,406,000 and a
reduction in discretionary advertising costs of $5,815,000 as the Company
re-evaluated the effectiveness of certain advertising mediums previously
utilized and shifted its focus to the commercial markets rather than the
consumer markets. In addition, with the closing of Anacom's business mid-year
2001, selling, general and administrative expenses of Anacom, excluding
non-cash charges, decreased from $779,000 in 2000 to $532,000 in 2001. Other
operating costs increased $2,922,000 due to increased occupancy and other costs
related to the Company's increased employee headcount. Non-cash charges
decreased from $12,876,000 in 2000 to $10,340,000 in 2001 primarily due to a
decrease in stock-based compensation of $3,077,000 which included a $2,000,000
reversal of previously recorded unvested stock-based compensation expense
related to the ceasing of operations at Anacom in June 2001. See Note 3 to the
consolidated financial statements.

Investment and other income

Investment income decreased from $3,533,000 in 1999 to $3,130,000 in 2000
and further decreased to $2,187,000 in 2001. The decrease from 1999 to 2000 is
primarily due to a decrease in invested cash and marketable securities
partially offset by an increase in interest rates. The decrease from 2000 to
2001 is primarily due to lower interest rates in 2001 and a further decrease in
invested cash and marketable securities during 2001.

Realized and unrealized loss on investments

Realized and unrealized loss on investments in 2000 represents an impairment
write-down related to the Company's equity investment in Lante of $1,202,000,
representing the decline in market value that management believed was other
than temporary. In 2001, realized and unrealized losses on investments include
a realized loss of $391,000 for the disposition of the Lante shares and an
impairment write-off of the Company's $5,000,000 related party investment in
Maptuit Corporation ("Maptuit"). See Note 7 to the consolidated financial
statements.

Income taxes

The income tax benefit on the loss from continuing operations in 1999, 2000
and 2001 is different from the U.S. statutory rate of 34%, primarily due to
unbenefitted U.S. losses and unbenefitted tax credits. The Company has fully
reserved its net deferred tax assets in 1999, 2000 and 2001 due to the
uncertainty of future taxable income.

Loss from continuing operations

As a result of the foregoing, the Company experienced losses from continuing
operations of $35,805,000 in 1999, $49,322,000 in 2000 and $56,794,000 in 2001.

Discontinued Operations

The Company sold all of its remaining operating businesses during 1998
realizing follow-on after-tax gains of $1,453,000, $441,000 and $48,000 in
1999, 2000 and 2001, respectively.

Liquidity and Capital Resources

At December 31, 2001, the Company's principal source of liquidity was its
net working capital position of $17,266,000, including cash and marketable
securities of $20,065,000. The Company plans to invest its excess cash
primarily in short-term, high-grade U.S. corporate debt securities, U.S.
government and agency securities or money market funds. The Company's 2001 loss
from continuing operations included significant non-cash expenses, aggregating
$28,301,000, primarily consisting of depreciation and amortization, stock-based
compensation and write-offs of the Maptuit investment and digital
identification certificates. Net cash used by continuing operations in 2001 was
$27,015,000, primarily representing continued development and operating costs
relating to establishing the Company's Internet-related business.

The Company's near-term liquidity will be negatively impacted as the Company
continues its development stage activities. The Company began charging for its
ZixMail product and related services in the first quarter of 2001 and recently
announced two new products that should begin contributing to revenues in the
near-term. Under its reseller and distributor agreements with Entrust, Inc. and
AlphaOmega Soft Co., Ltd., the Company expects to receive minimum payments of
$5,350,000 through 2004, including $900,000 in 2002. The Company has taken
steps, in late 2001 and early 2002, to decrease its cash expenditure rate
including reducing personnel and decreasing expenditures for outside
consultants and discretionary advertising and promotion costs. As a result of
the cost reductions recently initiated, the Company's near-term expenditure
level is expected to average approximately $1,500,000 per month, down from
approximately $2,300,000 per month experienced in the last half of 2001. The
trend for additions to property and equipment continues to decline, with 2002
capital expenditures not expected to exceed $1,000,000.

The Company has made cash investments in Maptuit convertible debt and equity
securities totaling $5,000,000, which have been written off in the last half of
2001. There is currently no public market for the Maptuit equity securities and
the Company does not anticipate there being any near-term opportunity for
liquidating its investment. Investments of this nature are subject to
significant fluctuations in fair market value due to the volatility of the
equity markets and the significant business and investment risks inherent in
early stage privately-held enterprises. See Note 7 to the consolidated
financial statements.

The Company currently has no significant revenues; however, it believes
existing cash and marketable securities combined with scheduled installment
payments due from resellers and distributors are sufficient to sustain its
estimated level of operating expenditures through the end of the first quarter
of 2003. New revenue streams expected in 2002 should lengthen such time period.
We are considering various capital funding alternatives in order to strengthen
our financial position. These capital funding alternatives could involve one or
more types of equity securities, including convertible debt, common or
convertible preferred stock and warrants to acquire common or preferred stock.
Such equity securities could be issued at or below the then-prevailing market
price for our shares of common stock. There can be no assurances that the
Company will be able to raise additional capital on satisfactory terms if and
when needed. The Company currently has no existing borrowings or credit
facilities.

Critical Accounting Policies

In preparing its consolidated financial statements in conformity with
accounting principles generally accepted in the United States, the Company must
make a variety of estimates that affect the reported amounts and related
disclosures. The following accounting policies are currently considered most
critical to the preparation of the consolidated financial statements.

Software Development Costs

Costs incurred in the development and testing of software used in the
Company's Internet products and services related to research, project planning,
training, maintenance and general and administrative activities, and overhead
costs are expensed as incurred. The costs of relatively minor upgrades and
enhancements to the software are also expensed as incurred. Certain costs
incurred during software application development, including costs of materials,
services and payroll and payroll-related costs for employees directly
associated with the development project, qualify for capitalization. Due to the
uncertainty of the amount and timing of future net revenues to be generated
from the Company's Internet products and services, all development costs
incurred through December 31, 2001 have been expensed and are included in
research and development costs.

Impairment of Investments

The Company records impairment losses on investments when, in the Company's
judgment, events and circumstances indicate its investment has been impaired
and the decline in value is other than temporary. Realized and unrealized loss
on investments for 2000 represents an impairment write-down related to the
Company's equity investment in the publicly traded common stock of Lante
Corporation ("Lante") of $1,202,000. This write-down represented the decline in
market value that management believed was other than temporary due to the fact
that the market price of Lante's common stock had traded significantly below
the Company's carrying value for a period of almost five months and the outlook
for a recovery of this investment appeared remote for the near-term. Realized
and unrealized loss on investments in 2001 includes an additional loss of
$391,000 resulting from the disposition of the Lante shares. The Company has
also made cash investments in Maptuit convertible debt and equity securities
totaling $5,000,000. Investments of this nature are subject to the volatility
of the equity markets and the significant business and investment risks
inherent in early stage enterprises. Maptuit has been seeking third party debt
or equity financing to sustain its operations. Through February 27, 2002, no
financing has been secured, and it is uncertain whether Maptuit will be able to
raise the necessary funds required to execute its business plan such that the
Company would be able to recover its investment. Therefore, in the last half of
2001, the Company wrote off its $5,000,000 investment in Maptuit with a
corresponding charge to realized and unrealized loss on investments in the
Company's consolidated statements of operations. The Company's other
investments consist primarily of debt securities that are carried at amortized
cost, which approximates fair market value.

Property and Equipment

At December 31, 2001, a significant portion of the Company's total assets
(approximately 32%) consists of property and equipment. The net book value of
property and equipment totaled $10,263,000, of which

$7,219,000 was related to equipment in the Company's secure data center. The
data center equipment is being depreciated over a three-year useful life and
will be substantially depreciated by December 31, 2002. Management performs
periodic reviews of the carrying value of the data center equipment. To date,
no impairment write-downs have been recorded on the data center equipment as it
continues to be used in pursuit of the Company's business goals, and such
equipment is believed to have alternative uses which would allow the Company to
realize its carrying value. If the Company's plans change for the use of this
equipment and if such alternative future uses change, the Company may be
required to record an impairment charge.

Revenue Recognition

To date, the Company's revenues from secure email delivery services have
been derived from subscription fees. Subscription fees are initially recorded
as deferred revenue and recognized as revenues ratably over the subscription
period. In future periods, the Company expects to also generate revenues
through reseller arrangements. Under these arrangements, revenue will generally
be recognized as the Company provides the related services. Determination of
the timing of revenue recognition will be dependent on terms and conditions
specified in individual contracts and could involve a significant level of
judgment.

Recent Accounting Pronouncements

The Company adopted the provisions of Statement of Financial Accounting
Standards No. 141 ("FAS 141"), "Business Combinations," effective July 1, 2001.
FAS 141 eliminates pooling-of-interest accounting for business combinations and
changed the requirements for the recognition of intangible assets apart from
goodwill. Thus, any acquisition completed after the effective date must be
accounted for as a purchase. The adoption of FAS 141 did not have any impact on
the Company's results of operations or financial position.

The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets,"
effective January 1, 2002. FAS 142 requires that goodwill and certain
indefinite-lived intangible assets no longer be amortized, but will be tested
at least annually for impairment. At December 31, 2001, the Company's recorded
goodwill was fully amortized. Accordingly, the adoption of FAS 142 will not
have any impact on the Company's results of operations or financial position.

The Company adopted the provisions of Statement of Financial Accounting
Standards No. 144 ("FAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective January 1, 2002. FAS 144 supercedes Statement of
Financial Accounting Standards 121, ("FAS 121"), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." FAS 144
retains FAS 121's fundamental provisions while providing more guidelines on
estimating cash flows when performing a recoverability test, requires specific
classification of a long-lived asset or asset group to be disposed of other
than by sale and establishes more restrictive criteria to classify an asset or
asset group as "held for sale." The Company does not expect the adoption of FAS
144 will have a material effect on its results of operations or financial
position.

Risks and Uncertainties

The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995: Certain matters discussed in this report contain
statements that constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (we refer to it
as the "Exchange Act"). The words "expect," "estimate," "anticipate,"
"predict," "believe," "plan," "should," "goal" and similar expressions and
variations thereof are intended to identify forward-looking statements. We
caution you that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors.

In these risk factors, "we," "us," "our" and "ZixIt" refer to ZixIt
Corporation and its subsidiaries.

We have no significant revenues, and we may not be able to raise needed
funds.

We currently have no significant revenues; however, we believe $20,065,000
in cash and marketable securities at December 31, 2001, combined with scheduled
installment payments due from resellers and distributors of approximately
$1,700,000, are sufficient to sustain our estimated level of operating
expenditures through the end of the first quarter of 2003. We are considering
various capital funding alternatives in order to strengthen our financial
position. We cannot assure you that we will be able to raise additional capital
on satisfactory terms, if and when needed.

The market may not broadly accept our products and services, which would
prevent us from operating profitably.

We must be able to achieve broad market acceptance for our products and
services in order to operate profitably. We have not yet been able to do this.
To our knowledge, there are currently no secure Internet communications
businesses similar to ours, that currently operate at the scale that we would
require, at our current expenditure levels and proposed pricing, to become
profitable. There is no assurance that our products and services will become
generally accepted or that they will be compatible with any standards that
become generally accepted, nor is there any assurance that enough paying users
will ultimately be obtained to enable us to operate profitably.

Though we have established strategic and collaborative relationships with
several strategic marketing partners, we have not realized significant revenues
from these relationships and may not in the future.

One of our primary business strategies has been to enter into strategic or
other similar collaborative relationships to reach a larger customer base than
we can reach through our direct sales and marketing efforts. To date, these
strategic and collaborative business relationships have not yielded any
significant revenues.

Assuming we are successful in entering into business relationships that
yield revenues, we will want to maintain these relationships and enter into
additional relationships to successfully execute our business plan. If we are
unable to do so, we will have to devote substantially more resources to the
distribution, sale and marketing of our products and services than we would
otherwise.

Furthermore, our ability to achieve future growth will also depend on our
ability to continue to establish direct seller channels and to develop multiple
distribution channels. Failure to enter into productive reseller arrangements
could harm our business.

Competition in the secure messaging delivery business is expected to
increase, which could cause our business to fail.

ZixIt's products and services are targeted to the secure messaging delivery
market. Although there are many large, well-funded participants in the
information technology (IT) security industry, none currently participate in
the secure messaging delivery market. ZixIt's primary competitors in this
market are Tumbleweed Communications, CertifiedMail.com, PrivateExpress, and
Sigaba Corporation. ZixIt believes that the secure messaging delivery market is
immature, and, for the most part, unpenetrated, unlike many segments of the IT
security industry -- which are saturated. After several years of infrastructure
deployment and product development, ZixIt believes that it is the only provider
that has made the investments necessary to successfully penetrate the
relatively untapped secure messaging delivery market. ZixIt does not believe
that its primary competitors have made the investments required to match
ZixIt's infrastructure development and product offerings. Nevertheless, others
may, over time, make the necessary investments in infrastructure and product
offerings. These competitors may develop new technologies that are perceived as
being more secure, effective or cost efficient than our own. If ZixIt is not
successful in exploiting the technology advantage it believes it currently
holds, these competitors could successfully garner a significant share of the
market, to the exclusion of

ZixIt. Furthermore, increased competition could result in pricing pressures,
reduced margins or the failure of our business to achieve or maintain market
acceptance, any of which could harm our business.

Our inability to develop and introduce new secure e-messaging products and
related services and to implement technological changes could harm our business.

The emerging nature of the Internet and the secure Internet e-messaging
business and their rapid evolution, require us continually to develop and
introduce new products and services and to improve the performance, features
and reliability of our existing products and services, particularly in response
to competitive offerings. We have received no significant revenues from the
sale of any of our products and related services.

We also have under development new feature sets for our current product line
and are considering new secure e-messaging products. The success of new or
enhanced products and services depends on several factors -- primarily, market
acceptance. We may not succeed in developing and marketing new or enhanced
products and services that respond to competitive and technological
developments and changing customer needs. This could harm our business. We do
not currently anticipate using any significant portion of our cash resources to
acquire new technologies from third parties in connection with developing new
secure e-messaging products or new feature sets for our current products.

If the market for secure Internet electronic messaging does not continue to
grow, demand for our products and services will be adversely affected.

The market for secure Internet electronic messaging is at an early stage of
development. Continued growth of the secure Internet electronic messaging
market will depend to a large extent on the public recognizing the potential
threat posed by computer hackers and other unauthorized users. Failure of the
secure e-messaging market to grow could reduce demand for our products and
services, which would harm our business.

Capacity limits on our technology and network hardware and software may be
difficult to project, and we may not be able to expand and upgrade our systems
to meet increased use, which would result in reduced revenues.

While we have ample through-put capacity to handle our customers'
requirements for the medium term, at some point we may be required to expand
and upgrade our technology and network hardware and software. We may not be
able to accurately project the rate of increase in usage on our network. In
addition, we may not be able to expand and upgrade, in a timely manner, our
systems and network hardware and software capabilities to accommodate increased
traffic on our network. If we do not timely and appropriately expand and
upgrade our systems and network hardware and software, we may lose customers
and revenues.

Security interruptions to our secure data center could disrupt our business,
and any security breaches could expose us to liability and negatively impact
customer demand for our products and services.

Our business depends on the uninterrupted operation of our secure data
center. We must protect this center from loss, damage or interruption caused by
fire, power loss, telecommunications failure or other events beyond our
control. Any damage or failure that causes interruptions in our secure data
center operations could materially harm our business, financial condition and
results of operations.

In addition, our ability to issue digitally-signed certified time-stamps and
public encryption codes in connection with our products and services depends on
the efficient operation of the Internet connections between customers and our
data center. We depend on Internet service providers efficiently operating
these connections. These providers have experienced periodic operational
problems or outages in the past. Any of these problems or outages could
adversely affect customer satisfaction.

Furthermore, it is critical that our facilities and infrastructure remain
secure and the market perceives them to be secure. Despite our implementation
of network security measures, our infrastructure may be vulnerable to physical
break-ins, computer viruses, attacks by hackers and similar disruptions from
unauthorized tampering with our computer systems. In addition, we are
vulnerable to coordinated attempts to overload our systems with data, resulting
in denial or reduction of service to some or all of our users for a period of
time. We may not carry sufficient business interruption insurance to compensate
us for losses that may occur as a result of any of these events; therefore, it
is possible that we may have to use additional resources to address these
problems.

Messages sent through our ZixMail.net message portal will reside, for a
user-specified period of time, in our data center facilities. Also, since we
receive payments online for our ZixMail service, certain confidential customer
information is retained in our data center facilities. Any physical or
electronic break-ins or other security breaches or compromises of this
information could expose us to significant liability, and customers could be
reluctant to use our Internet-related products and services.

As was previously announced, we determined in June 2001 that credit card
databases at our independently operated subsidiary, Anacom Communications, Inc.
(we refer to it as "Anacom"), had been improperly accessed. As a result of this
improper access, we shut down the Anacom operations and Anacom ceased doing
business. The ZixMail and ZixMail.net systems and our secure data center
operations were entirely separate from the systems operated by Anacom. No ZixIt
technologies or operations were involved in the incident, nor are the Anacom
technologies involved being used in our "Zix" family of secure e-messaging
products and services. Accordingly, we do not anticipate that this breach will
have any lasting effect on the development and deployment of our secure
e-messaging products and related services. Although no claims have been
asserted against us with respect to this incident to date, claims could be
asserted in the future. We are unable to assess the amount of the liability, if
any, to Anacom or us, which may result from any claims that may be asserted.

We may have to defend our rights in intellectual property that we use in our
products and services, which could be disruptive and expensive to our business.

We may have to defend our intellectual property rights or defend against
claims that we are infringing the rights of others. Intellectual property
litigation and controversies are disruptive and expensive. Infringement claims
could require us to develop non-infringing products or enter into royalty or
licensing arrangements. Royalty or licensing arrangements, if required, may not
be obtainable on terms acceptable to us. Our business could be significantly
harmed if we are not able to develop or license the necessary technology.
Furthermore, it is possible that others may independently develop substantially
equivalent intellectual property, thus enabling them to effectively compete
against us.

Our products and services could contain unknown defects or errors.

We subject our products and services to quality assurance testing prior to
product release. To date, we have not become aware after product release of any
defect or error that materially affects their functionality. Nevertheless, our
products and services could contain undetected defects or errors. This could
result in loss of or delay in revenues, failure to achieve market acceptance,
diversion of development resources, injury to our reputation, litigation
claims, increased insurance costs or increased service and warranty costs. Any
of these could prevent us from implementing our business model and achieving
the revenues we need to operate profitably.

Public key cryptography technology is subject to risks.

Our products and services employ, and future products and services may
employ, public key cryptography technology. With public key cryptography
technology, a user has a public key and a private key, which are used to
encrypt and decrypt messages. The security afforded by this technology depends,
in large measure, on the integrity of a user's private key, which is dependent,
in part, on the application of certain mathematical

principles. The integrity of a user's private key is predicated on the
assumption that it is difficult to mathematically derive a user's private key
from the user's related public key. Should methods be developed that make it
easier to derive a user's private key, the security of encryption products
using public key cryptography technology would be reduced or eliminated and
such products could become unmarketable. This could require us to make
significant changes to our products, which could damage our reputation and
otherwise hurt our business. Moreover, there have been public reports of the
successful decryption of certain encrypted messages. This, or related,
publicity could adversely affect public perception of the security afforded by
public key cryptography technology, which could harm our business.

We depend on key personnel.

We depend on the performance of our senior management team -- including our
Chairman, President and Chief Executive Officer, John A. Ryan, and his direct
reports; our Founder, David P. Cook; and other key employees, particularly
highly skilled technical personnel. Our success also depends on our ability to
attract, retain and motivate these individuals. There is competition for these
personnel, and we face a tight employment market for the particular individuals
we need to attract. Other than for Messrs. Ryan and Cook, none of our employees
have employment contracts with us nor are there any agreements with members of
our senior management team or other key employees that prevent them from
leaving ZixIt at any time. In addition, we do not maintain key person life
insurance for any of our personnel. The loss of the services of any of our key
employees or our failure to attract, retain and motivate key employees could
harm our business.

We could be affected by government regulation.

Exports of software products using encryption technology are generally
restricted by the United States government (we refer to it as the "U.S.").
Although we have obtained U.S. government approval to export our ZixMail
product to almost all countries in the world, the list of countries to which
ZixMail cannot be exported could be revised in the future. Furthermore, some
foreign countries impose restrictions on the use of encryption products, such
as the ZixMail product. Failure to obtain the required governmental approvals
would preclude the sale or use of the ZixMail product in international markets.

Our stock price may be volatile.

The market price of our common stock has fluctuated significantly in the
past and is likely to fluctuate in the future. Also, the market prices of
securities of other Internet-related companies have been highly volatile and,
as is well known, have generally declined substantially and broadly.

Further issuances of equity securities may be dilutive to current
shareholders.

As noted above, we are considering various capital funding alternatives in
order to strengthen our financial position. These capital funding alternatives
could involve one or more types of equity securities, including convertible
debt, common or convertible preferred stock and warrants to acquire common or
preferred stock. Such equity securities could be issued at or below the
then-prevailing market price for our shares of common stock. In addition, we
incentivize employees and attract new employees by issuing options to purchase
our shares of common stock. The interest of our existing shareholders could be
diluted by stock option issuances to employees and any equity securities issued
in a capital funding financing. Moreover, we currently have on file
registration statements covering the resale of securities held by existing
holders of our common stock and holders of warrants or options to purchase
shares of our common stock.

A private investor owns a large percentage of our outstanding stock and
could significantly influence the outcome of actions.

George Weaver Haywood, a private investor, has beneficial ownership of
approximately 20% of our outstanding common stock, according to his recent
filings with the Securities and Exchange Commission (we

refer to it as the "SEC"). Mr. Haywood, in his most recent SEC filing, has
stated that our stock was not acquired for, and is not being held for, the
purpose of, or with the effect of, changing or influencing the control of
ZixIt. However, because of his large percentage ownership, Mr. Haywood could be
able to significantly influence all matters requiring approval by our
shareholders, including the election of directors and the approval of mergers
or other business combination transactions. Mr. Haywood's interests may not be
aligned with the interests of our other shareholders.

Terrorist attacks have contributed to economic instability in the U.S.;
continued terrorist attacks, war or other civil disturbances could lead to
further economic instability and depress our stock price.

On September 11, 2001, the U.S. was the target of terrorist attacks of
unprecedented scope. These attacks caused instability in the global financial
markets and contributed to volatility in the stock prices of U.S. publicly
traded companies. These attacks may lead to armed hostilities or to further
acts of terrorism and civil disturbances in the U.S. or elsewhere, which may
further contribute to economic instability in the U.S. and could harm our
business.

We may have liability for indemnification claims arising from the sale of
our previous businesses in 1998 and 1997.

We disposed of our remaining operating businesses in 1998 and 1997. In
selling those businesses, we agreed to provide customary indemnification to the
purchasers of those businesses for breaches of representations and warranties,
covenants and other specified matters. Although we believe that we have
adequately provided for future costs associated with these indemnification
obligations, indemnifiable claims could exceed our estimates.

We may encounter other unanticipated risks and uncertainties in the Internet
market or in developing new products and services, and we cannot assure you
that we will be successful in responding to any unanticipated risks or
uncertainties.

There are no assurances that we will be successful or that we will not
encounter other, and even unanticipated, risks. We discuss other operating,
financial or legal risks or uncertainties in our periodic filings with the SEC.
We are, of course, also subject to general economic risks.

NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This document contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, both as amended. All statements other than statements of
historical fact are "forward-looking statements" for purposes of federal and
state securities laws, including: any projections of earnings, revenues or
other financial items; any statements of the plans, strategies and objectives
of management for future operations; any statements concerning proposed new
products, services or developments; any statements regarding future economic
conditions or performance; any statements of belief; and any statements of
assumptions underlying any of the foregoing. Forward-looking statements may
include the words "may," "will," "estimate," "intend," "continue," "believe,"
"expect" or "anticipate" and other similar words. Such forward-looking
statements may be contained in the "Risk Factors" section above, among other
places.

Although we believe that the expectations reflected in any of our
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well
as any forward-looking statements, are subject to change and to inherent risks
and uncertainties, such as those disclosed in this document. We do not intend,
and undertake no obligation, to update any forward-looking statement.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Company does not believe that it faces material market risk with respect
to its cash investments and marketable securities, which totaled $20,065,000
and $50,290,000 at December 31, 2001 and 2000, respectively. These investments,
which mature at various dates through April 2002, primarily consist of
high-grade U.S. corporate debt securities and daily money market funds, and do
not include derivative financial instruments or derivative commodity
instruments, as such terms are defined by the SEC in applicable regulations.
The Company has not undertaken any additional actions to cover interest rate
market risk and is not a party to any interest rate market risk management
activities. A hypothetical ten percent change in market interest rates over the
next year would not materially impact the Company's operating results or cash
flows due to the short-term, high credit quality nature of the Company's
investments.

ITEM 8. Financial Statements and Supplementary Data.

The information required by this Item begins on page F-1 hereof.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.

None.

PART III

ITEM 10. Directors and Executive Officers of the Registrant.

There is no family relationship among any of our directors, executive
officers or significant employees. The following table sets forth, as of March
31, 2002, the names of our directors, executive officers and other significant
employees and their respective ages and positions:

Name Age Position
---- --- --------

David P. Cook(1)(3).................... 50 Director, Founder
Donald D. Druckenbrodt................. 48 Vice President, Technology Planning
Dennis F. Heathcote.................... 45 Vice President, North American Sales and Services
H. Wayne Huizenga...................... 64 Director, Co-Vice Chairman
Michael E. Keane(2)(4)................. 46 Director
Dr. G. Gary Liu........................ 47 Vice President and Chief Technical Officer
James S. Marston(2)(4)................. 68 Director
Wael Mohamed........................... 34 Vice President, Global Distribution
Dan Nutkis............................. 36 Vice President, Strategy and Products
Jeffrey P. Papows(1)................... 48 Director, Co-Vice Chairman
David J. Robertson..................... 43 Vice President, Engineering
John A. Ryan........................... 45 Director, Chairman, President and Chief Executive Officer
Antonio R. Sanchez, Jr. (1)(3)......... 59 Director
Dr. Ben G. Streetman(2)(3)(4).......... 62 Director
Ronald A. Woessner..................... 44 Senior Vice President, General Counsel and Secretary
Steve M. York.......................... 51 Senior Vice President, Chief Financial Officer and Treasurer

--------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Nominating Committee.
(4) Member of the Compensation and Stock Option Committee.

DAVID P. COOK was elected to our Board in December 1995 and currently holds
the position of Founder of ZixIt. He served as President and Chief Executive
Officer from April 1998 until November 2001 and as Chairman from April 1998
until October 2000. He previously served as Chairman and Chief Executive
Officer of ARBImetrics Corporation, a Dallas-based investment company that he
founded. Mr. Cook founded ZixIt (formerly known as Amtech Corporation) and
served as a director from 1984 until 1990, serving as Chairman of the Executive
Committee until 1990. Mr. Cook founded Blockbuster Entertainment Corporation
and was its Chief Executive Officer from its inception until 1987. Prior to
that, he was Chairman of Cook Data Services, Inc., a software company that he
also founded.

DONALD D. DRUCKENBRODT, Vice President, Technology Planning, rejoined our
company in January 1999. Mr. Druckenbrodt previously served as Vice President
of Amtech Systems Corporation, a former wholly-owned subsidiary of ZixIt
Corporation, from 1987 until 1990. Prior to rejoining ZixIt Corporation,
Mr. Druckenbrodt served as Vice President of OGRE Partners, Ltd., an oil and
gas economic modeling software firm, from 1992 until 1999. Mr. Druckenbrodt
also served as President of Blockbuster Computer Systems, Inc., a wholly-owned
subsidiary of Blockbuster Entertainment Corporation, from its inception until
1987.

DENNIS F. HEATHCOTE joined our company in December 2001 as Vice President,
North American Sales and Services. From May 1998 until June 2001, Mr. Heathcote
worked at Entrust, Inc. ("Entrust"), where he held a variety of senior sales
and management positions, including Vice President and General Manager of
Entrust.net, Inc., Entrust's business unit focused on providing e-business
trust solutions for wired and wireless

networks, from October 1999 until June 2001. In addition, Mr. Heathcote, a
Chartered Accountant, has more than 20 years of experience in senior sales,
finance and business administration roles in the software and technology
industry, including more than 10 years with IBM and IBM Global Services.

H. WAYNE HUIZENGA was elected director and Vice Chairman of our Board in May
2000 and has served as Co-Vice Chairman since November 2001. Mr. Huizenga has
been Chairman of AutoNation, Inc. since August 1995 and served as its Chief
Executive Officer from August 1995 until October 1996 and Co-Chief Executive
Officer from October 1996 until September 1999. Mr. Huizenga has also been
Chairman of Extended Stay America, Inc. since January 1995. Since May 1998, he
has been Chairman of Republic Services, Inc. and Chief Executive Officer from
May 1998 until December 1998. Since September 1996, he has been Chairman of
Boca Resorts, Inc. He owns the Miami Dolphins professional sports franchise, as
well as Pro Player Stadium, and is a director of NationsRent, Inc. and ANC
Rental Corporation. Mr. Huizenga was Chairman and Chief Executive Officer of
Blockbuster Entertainment Corporation from April 1987 until its merger with
Viacom, Inc. in September 1994. From September 1994 until October 1995, he
served as Vice Chairman of Viacom, Inc. and Chairman of Blockbuster
Entertainment Group, a division of Viacom, Inc. In January 1971, Mr. Huizenga
co-founded Waste Management, Inc. and served in various capacities, including
President, Chief Operating Officer and director, from its inception until 1984.

MICHAEL E. KEANE was elected to our Board in November 1997. Mr. Keane has
been Senior Vice President and Chief Financial Officer of UNOVA, Inc. since
November 1997. UNOVA, Inc. comprises the former industrial technology
businesses spun off from Western Atlas, Inc. in October 1997, where Mr. Keane
was also Senior Vice President and Chief Financial Officer from October 1996
until October 1997 and Vice President and Treasurer from March 1994 until
October 1996. Prior to that, he was Corporate Director, Pensions and Insurance,
for Litton Industries, Inc. from February 1991 until March 1994.

DR. G. GARY LIU became an employee of our company in January 1999 and was
subsequently appointed Vice President and Chief Technical Officer. From 1997
until beginning employment with ZixIt Corporation, Dr. Liu was President of
Securisys Corporation, an encryption, start-up enterprise that he founded. Dr.
Liu was also President of American Advanced Technology, Inc., a privately-held
telecommunications design consulting company, from its founding in January 1993
until its dissolution in January 1997. Dr. Liu has a doctorate degree in
physics from the California Institute of Technology (Caltech).

JAMES S. MARSTON was elected to our Board in September 1991. From September
1987 through February 1998, Mr. Marston served as a Senior, or Executive, Vice
President and the Chief Information Officer of APL Limited, a U.S.-based
intermodal shipping company. Between 1986 and 1987, Mr. Marston served as
President of AMR Technical Training Division, AMR Corporation. From 1982 until
1986, he was Vice President of Data Processing and Communications for American
Airlines, in which position he was in charge of the Sabre reservations system
and related technologies.

WAEL MOHAMED joined our company in February 2002 and serves as Vice
President, Global Distribution. Mr. Mohamed brings over 14 years of high-tech
sales and management experience, most recently serving as Senior Vice
President, Global Sales and Marketing of KLOCwork Solutions Inc. since July
2001. From October 1997 until July 2001, he worked for Entrust, where he held
several sales management positions, including Vice President of Sales, Entrust
Global Services and Vice President, Worldwide Sales of Entrust.net, Inc. As a
Vice President of Worldwide Sales, he was responsible for building an extensive
network of Entrust.net affiliate partners operating in 32 countries around the
world. Before joining Entrust, Mr. Mohamed held several key executive and
management positions at IBM Global Services from July 1996 until October 1997.
While at IBM Global Services, Mr. Mohamed managed a staff of over 100 employees
and over $200 Million in service revenue.

DAN NUTKIS joined our company in February 2002 as Vice President, Strategy
and Products. Prior to that, he was a consultant to PricewaterhouseCoopers LLP
in 2001, serving as head of health care for the firm's

subsidiary, beTRUSTed. Before working for PricewaterhouseCoopers, in January
2000 he founded (and served as Chief Executive Officer of) Medtegrity Inc., a
leading provider of health care industry-accepted identification,
authentication, security and privacy services. Prior to founding Medtegrity,
during 1999 Mr. Nutkis was Chairman of the Odin Group, the leading health care
information technology research firm. Prior to that, Mr. Nutkis worked at Ernst
& Young for over 10 years where he held many positions, including National
Director of the firm's Health Care Emerging Technology practice, and Chief
Executive Officer of ConnectedHealth.Net, one of the firm's knowledge
management subsidiaries.

JEFFREY P. PAPOWS was elected to our Board in March 2000 and currently
serves as Co-Vice Chairman. He served as Chairman from October 2000 until
November 2001, and during that time, he had direct responsibility for the sales
and marketing management of our products and services. Mr. Papows is currently
President and Chief Executive Officer of Maptuit Corporation and served as
Chairman of IT Factory, Inc. until December 2001. Prior to joining Maptuit
Corporation, Mr. Papows held a seven-year tenure with Lotus Development
Corporation, an IBM company, where he served as its President and Chief
Executive Officer from 1998 until 2000, President and Chief Operating Officer
from 1996 until 1998 and Senior Vice President Notes Product Division from 1993
until 1996. In 1998, Mr. Papows published Enterprise.com, a book on the effects
and global promise of the Internet on large companies, which has since been
reprinted in nine editions and six languages. Mr. Papows has also been a
keynote speaker at Fall Comdex, Comdex Japan and Comdex Mexico.

DAVID J. ROBERTSON joined our company in March 2002 as Vice President,
Engineering. Mr. Robertson has over 20 years of experience in the
telecommunications and Internet industries, with specific expertise in network
architecture, security and protocols, PBX and Key System design in circuit and
packet environments and broadband and cellular access systems. He has also
worked extensively in product areas involving 802.11, DECT and other unlicensed
wireless access standards. Mr. Robertson has contributed to the early stages of
Telecommunications Standards' definition for the Unlicensed Wireless Industry
in the United States and Canada and to the finalization of the ADSI standard
for enhanced telecommunications carrier service deployment. He participated in
pioneering efforts toward end-to-end voice quality standards for Quality of
Service in many wireline and wireless domains. He is a member of multiple
company advisory boards and serves with the City of Richardson Chamber of
Commerce.

JOHN A. RYAN joined our company as President and Chief Executive Officer and
was elected director and Chairman of our Board in November 2001. From January
1997 through January 2001, he served as President Chief Executive Officer, and
director of Entrust, a company for which he led the private placement in 1996
and which he took public in August 1998. Prior to that, Mr. Ryan held a number
of senior management positions in general management, marketing and sales, and
finance with Nortel Networks, with his most recent position being Vice
President and General Manager of Nortel's global multimedia and Internet
projects unit. Before joining Nortel, Mr. Ryan worked for Deloitte Touche LLP
and was awarded his Canadian Chartered Accountant designation in 1981. He has
also served as an advisory board member to Scopus Technologies. Prior to
joining ZixIt, Mr. Ryan formed ARM Technologies, a privately-held Internet
consulting and services company that he founded in February 2001. He also
currently serves as a director of Tilion Inc., a privately-held
Massachusetts-based company that focuses on "in-the-Net" analytics services
based on XML for supply chain transactions, and RIPTECH Inc., a privately-held,
managed security services company based in Washington, D.C. He is an advisory
board member to Mobelium, a privately-held Internet wireless services company
based in California, and is on the Board of Trustees for the Hart eCenter at
Southern Methodist University.

ANTONIO R. SANCHEZ, JR. was one of our early investors and was elected to
our Board in February 1993. Mr. Sanchez is Chairman and Chief Executive Officer
of Sanchez Oil & Gas Corporation. He also holds interests in banking, real
estate development, venture capital and various other investments. Mr. Sanchez
serves as a director of International Bank of Commerce ("IBC") and as a
director and stockholder of IBC's publicly traded holding company,
International Bancshares Corporation. Mr. Sanchez is also a member of the
University of Texas System Board of Regents and is a director of Conoco, Inc.

DR. BEN G. STREETMAN became a director in July 1998. Dr. Streetman is Dean
of the College of Engineering at The University of Texas at Austin and holds
the Dula D. Cockrell Centennial Chair in Engineering. He is a Professor of
Electrical and Computer Engineering and was the founding director of the
Microelectronics Research Center, The University of Texas at Austin, from 1984
until 1996. Dr. Streetman also serves as a director of National Instruments
Corporation and Global Marine, Inc.

RONALD A. WOESSNER joined our company in April 1992 as General Counsel and
was subsequently appointed Secretary and Senior Vice President. He was
previously a corporate and securities attorney with the Dallas-based law firm
of Johnson & Gibbs, P.C.

STEVE M. YORK joined our company in April 1990 as Vice President, Chief
Financial Officer and Treasurer and was subsequently appointed Senior Vice
President. Mr. York, a Certified Public Accountant, previously held various
financial management positions with commercial operating companies and was
employed by Arthur Young & Co. (now Ernst & Young).

Following the meeting, our Board of Directors will adopt a resolution fixing
the number of seats on our Board at six. This resolution will supercede all
prior resolutions regarding the number of seats on our Board.

Section 16(a) Beneficial Ownership Reporting Compliance

Under the securities laws of the U.S., our directors, officers and any
beneficial owner of more than 10% of our outstanding common stock
(collectively, "insiders") are required to report their initial ownership of
our common stock and any subsequent changes in their ownership to the SEC. The
SEC's rules require insiders to provide us with copies of all Section 16(a)
reports that the insiders file with the SEC. Specific due dates have been
established by the SEC, and we are required to disclose any failure to file by
those dates. Based solely upon our review of copies of Section 16(a) reports
that we received from insiders for their 2001 transactions and written
representations that no such additional reports were required to be filed with
the SEC, we believe that our insiders have complied with all Section 16(a)
filing requirements applicable to them during 2001.

Item 11. Executive Compensation.

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

Summary Compensation Table

The following table sets forth the compensation paid to our named executive
officers for services rendered to ZixIt Corporation for the periods indicated.

Long-Term Compensation
-----------------------------
Annual Compensation Awards Payouts
--------------------------- --------------------- -------
Base Other Number of All
Salary Bonus Annual Restricted Securities Other
(Cash and (Cash and Compen- Stock Underlying LTIP Compen-
Name and Principal Position Year Non-cash) Non-cash) sation Award Options Payouts sation(1)
--------------------------- ---- --------- --------- ------- ---------- ---------- ------- ---------

David P. Cook(2).......... 2001 $500,000 $-- $-- $-- -- -- $--
Founder 2000 -- -- -- -- 500,000 -- --
1999 -- -- -- -- -- -- --

Donald D. Druckenbrodt.... 2001 180,000 -- -- -- -- -- --
Vice President, 2000 144,000 -- -- -- 109,500 -- --
Technology Planning 1999 142,546 -- -- -- 50,000 -- 2,403

Steven M. Gersten(3)...... 2001 274,560 -- -- -- 200,000 -- --
Senior Vice President, 2000 -- -- -- -- -- -- --
Sales & Marketing 1999 -- -- -- -- -- -- --

Jeffrey P. Papows(4)...... 2001 150,000 -- -- -- -- -- --
Co-Vice Chairman 2000 31,250 -- -- -- 275,000 -- --
1999 -- -- -- -- -- -- --

J. Michael Poss(5)........ 2001 204,000 -- -- -- 40,000 -- --
Vice President, Sales 2000 127,500 -- -- -- 144,000 -- --
Operations 1999 -- -- -- -- -- -- --

John A. Ryan(6)........... 2001 37,500 1,000,000 -- -- 1,050,000 -- --
Chairman, President and 2000 -- -- -- -- -- -- --
Chief Executive Officer 1999 -- -- -- -- -- -- --

Ronald A. Woessner........ 2001 216,000 -- -- -- -- -- 8,123
Senior Vice President, 2000 150,000 -- -- -- 52,500 -- 4,960
General Counsel and 1999 150,000 -- -- -- -- -- 11,688
Secretary

Steve M. York............. 2001 216,000 -- -- -- 50,000 -- 2,975
Senior Vice President, 2000 193,000 -- -- -- -- -- 2,975
Chief Financial Officer 1999 193,000 -- -- 112,970 -- -- 5,093
and Treasurer

--------
(1) Represents our contributions to our 401(k) Retirement Plan or Employee
Stock Purchase Plan.
(2) Served as our President and Chief Executive Officer from April 1998 until
November 2001, at which time he was appointed "Founder."
(3) Separated from employment with ZixIt Corporation in November 2001.
(4) Served as our salaried Chairman from October 2000 until November 2001.
(5) Separated from employment with ZixIt Corporation in February 2002.
(6) Appointed Chairman, President and Chief Executive Officer in November 2001.
The bonus to Mr. Ryan

consisted of 152,672 shares of our common stock valued at $1,000,000. In the
event Mr. Ryan is terminated for "cause" or he resigns other than for "good
reason," as such terms are defined in his employment agreement, prior to the
first or second year anniversaries of employment, he must return to us
shares of our common stock equal to 100% and 50% of the 152,672 signing
bonus shares, respectively, or cash in the amount of $1,000,000 and
$500,000, respectively. Notwithstanding the foregoing, upon the occurrence
of an "accelerated vesting event" (as defined in his stock option
agreement), any obligation of Mr. Ryan to return such shares to us shall no
longer be in force.

Option Grants in 2001 to Named Executive Officers

We made the following stock option grants to our named executive officers
during the year ended December 31, 2001.

Potential Realizable Value at Assumed
Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
---------------------------------------------- -------------------------------------
% of Total
Number of Options Exercise
Securities Granted to Price
Underlying Employees Per Expiration
Name Options Granted in 2001 Share Date 0% 5% 10%
---- --------------- ---------- -------- ---------- -------- ---------- ----------

David P. Cook......... -- -- $ -- -- $ -- $ -- $ --
Donald D. Druckenbrodt -- -- -- -- -- -- --
Steven M. Gersten..... 200,000(1) 8.67 7.94 01/08/2011 -- 998,000 2,530,000
Jeffrey P. Papows..... -- -- -- -- -- -- --
J. Michael Poss(2).... 40,000(2) 1.73 7.00 08/16/2006 107,600 214,800 344,400
John A. Ryan.......... 50,000(3) 2.17 7.19 03/19/2006 -- 99,500 219,500
1,000,000(4) 43.35 5.24 11/13/2011 -- 3,000,000 7,880,000
Ronald A. Woessner.... -- -- -- -- -- -- --
Steve M. York......... 50,000(5) 2.17 5.25 12/11/2011 -- 165,000 418,500

--------
(1) The options were cancelled upon Mr. Gersten's separation from employment
with ZixIt Corporation in November 2001.
(2) Mr. Poss separated from employment with ZixIt Corporation in February 2002.
The options became fully vested in November 2001 due to the occurrence of
certain events.
(3) The options vest and become exercisable six months from the date of grant.
(4) The options become 50% vested on the first year anniversary of employment
and the balance vests pro-rata every three months during the second year of
employment. In the event of a "change in control" (as defined) of ZixIt
Corporation or the occurrence of other specified events, the options become
immediately exercisable.
(5) The options vest and become exercisable over three years. In the event of
termination under certain circumstances or a "change in control" (as
defined) of ZixIt Corporation or a material subsidiary of ZixIt Corporation
under specified circumstances, the options become immediately exercisable.

Aggregated Option Exercises in 2001 and Year-end Option Values

The following table sets forth information relating to the exercises of
stock options during the year ended December 31, 2001, and the value of
unexercised stock options held as of December 31, 2001 by each of our named
executive officers.

Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Option Exercises During 2001 December 31, 2001 December 31, 2001
---------------------------- ------------------------- -------------------------
Number of
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------

David P. Cook................ -- -- 2,170,244 333,333 $ -- $--
Donald D. Druckenbrodt....... -- -- 83,333 76,167 -- --
Steven M. Gersten(1)......... -- -- -- -- -- --
Jeffrey P. Papows............ -- -- 225,000 50,000 -- --
J. Michael Poss(2)........... -- -- 101,667 82,333 -- --
John A. Ryan................. -- -- 50,000 1,000,000 -- --
Ronald A. Woessner........... -- -- 127,500 25,000 79,060 --
Steve M. York................ -- -- 56,500 50,000 -- --

--------
(1) Separated from employment with ZixIt Corporation in November 2001.
(2) Separated from employment with ZixIt Corporation in February 2002.

Employment and Severance Agreements with Certain Executive Officers

We entered into a two-year employment agreement with Mr. Ryan, effective
November 16, 2001, which provides for a $300,000 annual salary, plus $200,000
cash bonus payable at the end of the first year of employment, and a cash bonus
opportunity of at least $200,000 payable at the end of the second year of
employment that is tied to the achievement of defined objectives. Mr. Ryan also
received a signing bonus of 152,672 shares of our common stock (valued at
$1,000,000). If Mr. Ryan's employment with us is terminated for "cause" or he
resigns other than for "good reason," as such terms are defined in his
employment agreement, prior to the first or second year anniversaries of
employment, he must return to us shares of our common stock equal to 100% and
50% of the 152,672 signing bonus shares, respectively, or cash in the amount of
$1,000,000 and $500,000, respectively. Notwithstanding the foregoing, upon the
occurrence of an "accelerated vesting event" (as defined in his stock option
agreement), any obligation of Mr. Ryan to return such shares to us shall no
longer be in force.

We entered into a three-year employment agreement with Mr. Cook, effective
as of December 26, 2000, which provided for a $500,000 annual salary. Effective
February 1, 2002, Mr. Cook waived the $500,000 annual salary under his
employment arrangement, and his current salary is a nominal $1.00 per year.

We are a party to severance agreements with Messrs. Druckenbrodt, Woessner
and York which provide for the payment to each of them of 12 months, 18 months
and 18 months, respectively, of each of their base salaries in the event each
has "good reason" (as defined) to resign his employment or if his employment is
terminated other than for "cause" (as defined). The severance agreements also
provide for the payment to Messrs. Druckenbrodt, Woessner and York of one and a
half times, two times and three times, respectively, each of their annual base
salaries in the event his employment terminates after a "change in control" (as
defined) of ZixIt Corporation. The severance agreements also contain
confidentiality and stock option acceleration provisions.

Compensation of Directors

On the day an outside director is first appointed or elected to our Board of
Directors, such director is granted nonqualified options to purchase 25,000
shares of our common stock, which vest six months from the grant date with an
exercise price equal to 100% of our common stock price on the grant date. Also,
in January of each year, each director that has served on our Board at least 12
consecutive months will receive a further grant of options determined according
to a specified formula, which provides that the eligible directors collectively
receive options for 1% of our outstanding common stock. The exercise price for
these options will be 120% of our common stock price on the grant date. These
annual options vest over three years. We pay a $15,000 retainer fee to outside
directors until they are eligible to receive the annual option grants. We
reimburse our directors for expenses they incur attending our Board or
committee meetings.

Compensation Committee Interlocks and Insider Participation

The Compensation and Stock Option Committee is comprised of three directors.
Michael E. Keane, James S. Marston, Jeffrey P. Papows and Dr. Ben G. Streetman
served on our Compensation and Stock Option Committee at various times during
the year ended December 31, 2001. None of Messrs. Keane, Marston or
Dr. Streetman is or was a current officer or employee of ZixIt Corporation. Mr.
Papows served as the salaried Chairman of our Board from October 2000 until
November 2001. Also, as noted below under "Certain Relationships and Related
Transactions," Mr. Papows is President and Chief Executive Officer of Maptuit
Corporation ("Maptuit") and served as Chairman of IT Factory, Inc. ("IT
Factory"). The committee met on four occasions during the year ended December
31, 2001. Other than Mr. Woessner, who serves as our representative on the
Board of Directors of Maptuit, we have no executive officers who serve as a
member of a board of directors or compensation committee of any other entity
that has one or more executive officers serving as a member of our Board or
Compensation and Stock Option Committee.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management.

Set forth below is information as of March 31, 2002 concerning:

. each stockholder known by us to beneficially own more than 5% of our
outstanding shares of common stock;

. the shareholdings of each of our directors and named executive officers;
and

. the shareholdings of all directors and executive officers as a group.

Security Ownership of Certain Beneficial Owners and Management Table

Amount and Nature
of Beneficial Ownership (1)(2)
----------------------------------------
Number of Shares Percentage of Total
Beneficial Owner Beneficially Owned Shares Outstanding (3)
---------------- ------------------ ----------------------

David P. Cook(4)............................................ 1,347,577 7.12%
Donald D. Druckenbrodt(5)................................... 159,675 *
George W. Haywood(6)........................................ 3,460,697 19.58%
642 Second Street
Brooklyn, New York 11215
Dennis F. Heathcote(7)...................................... 31,250 *
H. Wayne Huizenga(8)........................................ 178,481 1.0%
Michael E. Keane(7)......................................... 112,455 *
James S. Marston(7)......................................... 122,455 *
Jeffrey P. Papows(7)........................................ 250,000 1.39%
John A. Ryan(9)............................................. 202,672 1.14%
Antonio R. Sanchez, Jr.(10)................................. 2,154,954 12.11%
Dr. Ben G. Streetman(7)..................................... 62,147 *
Ronald A. Woessner(11)...................................... 164,024 *
Steve M. York(12)........................................... 196,191 1.1%
All directors and executive officers as a group (12 persons) 4,981,881 24.60%

--------
* Denotes ownership of less than 1%.

(1) Reported in accordance with the beneficial ownership rules of the SEC.
Unless otherwise noted, each stockholder listed in the table has both sole
voting and sole investment power over the common stock shown as
beneficially owned, subject to community property laws where applicable.
(2) Unless otherwise noted, the address for each beneficial owner is c/o ZixIt
Corporation, 2711 North Haskell Avenue, Suite 2300, LB 36, Dallas, Texas
75204-2960.
(3) Percentages are based on the total number of shares of our common stock
outstanding at March 31, 2002. Shares of our common stock that were not
outstanding but could be acquired upon exercise of an option or other
convertible security within 60 days of March 31, 2002 are deemed
outstanding for the purpose of computing the percentage of outstanding
shares beneficially owned by a particular person. However, such shares are
not deemed to be outstanding for the purpose of computing the percentage
of outstanding shares beneficially owned by any other person.
(4) Includes 1,253,577 shares that Mr. Cook has the right to acquire under
outstanding stock options that are currently exercisable or that become
exercisable within 60 days of March 31, 2002.
(5) Includes 159,500 shares that Mr. Druckenbrodt has the right to acquire
under outstanding stock options that are currently exercisable or that
become exercisable within 60 days of March 31, 2002.
(6) Includes 106,500 shares that are owned by family members of Mr. Haywood.
(7) This individual has the right to acquire these shares under outstanding
stock options that are currently exercisable or that become exercisable
within 60 days of March 31, 2002.

(8) Includes 143,062 shares that Mr. Huizenga has the right to acquire under
outstanding stock options and warrants that are currently exercisable or
that become exercisable within 60 days of March 31, 2002. Mr. Huizenga
disclaims beneficial ownership with respect to 54,166 shares.
(9) Includes 50,000 shares that Mr. Ryan has the right to acquire under
outstanding stock options that are currently exercisable or that become
exercisable within 60 days of March 31, 2002 and 152,672 shares that are
subject to forfeiture under certain circumstances.
(10) Of the 2,154,954 shares reported, (i) 1,633,025 shares are owned by Mr.
Sanchez directly, (ii) 9,375 shares are held by family members of Mr.
Sanchez, (iii) 91,123 shares, over which Mr. Sanchez exercises voting,
investment and disposition power, are held in trusts for which Mr. Sanchez
serves as trustee or co-trustee for the benefit of other persons, (iv)
262,100 shares, over which Mr. Sanchez exercises voting, investment and
disposition power, are held by a family limited partnership for which Mr.
Sanchez serves as managing general partner and (v) 39,376 shares are held
by a family trust of which Mr. Sanchez is a beneficiary. Also, includes
119,955 shares that Mr. Sanchez has the right to acquire under outstanding
stock options that are currently exercisable or that become exercisable
within 60 days of March 31, 2002.
(11) Includes 127,500 shares that Mr. Woessner has the right to acquire under
outstanding stock options that are currently exercisable or that become
exercisable within 60 days of March 31, 2002. Mr. Woessner disclaims
beneficial ownership with respect to 27,611 shares.
(12) Includes 141,500 shares that Mr. York has the right to acquire under
outstanding stock options that are currently exercisable or that become
exercisable within 60 days of March 31, 2002.

ITEM 13. Certain Relationships and Related Transactions.

In January 2001, we entered into a two-year agreement with IT Factory
whereby IT Factory agreed to market our products and services to their
customers in return for our agreement to pay a specified portion of revenues
earned by us, which are associated with IT Factory's customers. In February
2001, we paid IT Factory $300,000 and committed to pay an additional $250,000
in February 2002 to support IT Factory's marketing efforts. Additionally, we
granted IT Factory a performance-based stock option whereby IT Factory had the
right to purchase up to 109,529 shares of our common stock. We subsequently
cancelled the agreement, including the options and the payment commitment.
Separately, we paid IT Factory $420,000 in 2001 for certain software
development projects. Mr. Papows, a director of ZixIt Corporation since March
2000 and our Chairman from October 2000 until November 2001, served as Chairman
of IT Factory until December 2001.

In December 2000, we purchased approximately 9% of the equity ownership of
Maptuit for $3,000,000 in cash and committed to a follow-on investment of
$2,000,000. Accordingly, in July 2001, we made an additional $2,000,000 cash
investment in Maptuit and received a promissory note convertible into Maptuit
equity securities. The note bears interest at prime plus 1%, is due in July
2006 and automatically converts into Maptuit equity securities at the same
price per share obtained if a third-party equity financing arrangement is
completed, as defined. There is no readily determinable market value for our
investments in Maptuit since Maptuit is privately-held. Investments of this
nature are subject to significant fluctuations in fair market value due to the
volatility of the equity markets and the significant business and investment
risks inherent in early-stage enterprises. We record impairment losses when, in
our judgment, events and circumstances indicate our investment has been
impaired. Maptuit has been seeking third-party debt or equity financing to
sustain its operations. To date, Maptuit has not secured additional financing,
and it is uncertain whether Maptuit will be able to raise the necessary funds
required to execute its business plan such that we will recover our investment.
Therefore, in the third and fourth quarters of 2001, we wrote off the
$5,000,000 investment. Maptuit, an early-stage company, is an Internet
application service provider that supplies wireline and wireless Internet
location-based services. Mr. Papows serves as the President and Chief Executive
Officer of Maptuit and holds a minority equity interest in Maptuit.

Mr. York, our Senior Vice President, Chief Financial Officer and Treasurer,
was indebted to us at December 31, 2001 in the principal amount of $90,000.
This amount represents money loaned by us to fund the exercise of retention
incentive options related to certain of our shares held by Mr. York. Mr. York's
indebtedness

is represented by a promissory note that bears interest at the rate of 4.66%
per annum. The note is secured by the shares issued upon exercise of the
retention incentive options and is due September 2002 (unless becoming due
earlier under certain circumstances described in the note).

In the fourth quarter of 2000, we entered into certain technology and
marketing agreements with Entrust. Mr. Ryan, our Chairman, President and Chief
Executive Officer, was Chief Executive Officer of Entrust when such agreements
were executed and currently holds a minority equity interest in Entrust.

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)(1) Financial Statements

See Index to Consolidated Financial Statements on page F-1 hereof.

(a)(2) Financial Statement Schedules

All schedules for which provision is made in the applicable accounting
regulations of the SEC have been omitted because of the absence of the
conditions under which they are required or because the information required is
included in the consolidated financial statements or notes thereto.

(a)(3) Exhibits

Exhibit
No. Description
--- -----------

3.1* -- Restated Articles of Incorporation of ZixIt, dated December 4, 2001.
3.2* -- Restated Bylaws of ZixIt, dated November 8, 2001.
4.1 -- Specimen certificate for common stock of ZixIt. Filed as Exhibit 4.1 to ZixIt's Annual Report on
Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.
10.1 -- 1990 Stock Option Plan of ZixIt (Amended and Restated as of September 1999). Filed as Exhibit
10.1 to ZixIt'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 ZixIt (Amended and Restated as of September 1999). Filed as Exhibit
10.2 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999,
and incorporated herein by reference.
10.3 -- 401(k) Retirement Plan of ZixIt and related Adoption Agreement. Filed as Exhibit 10.5 to ZixIt's
Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by
reference.
10.4 -- 1995 Long-Term Incentive Plan of ZixIt (Amended and Restated as of September 20, 2000). Filed
as Exhibit 10.3 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000, and incorporated herein by reference.
10.5 -- 1996 Employee Stock Purchase Plan of ZixIt (Amended and Restated as of July 1, 2000). Filed as
Exhibit 10.2 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000, and incorporated herein by reference.
10.6 -- ZixIt's 1999 Directors' Stock Option Plan (Amended and Restated as of January 1, 2000). Filed as
Exhibit 10.5 to ZixIt's Annual Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference.
10.7 -- ZixIt's 2001 Employee Stock Option Plan, dated May 31, 2001. Filed as Exhibit 10.1 to ZixIt's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001, and incorporated
herein by reference.
10.8 -- ZixIt's 2001 Stock Option Plan, effective as of May 15, 2001. Filed as Exhibit 4.1 in ZixIt's
Registration Statement on Form S-8 (Commission No. 333-62604), dated June 8, 2001, and
incorporated herein by reference.
10.9 -- Stock Option Agreement, effective as of April 29, 1998, between David P. Cook and ZixIt. Filed
as Exhibit 10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1998, and incorporated herein by reference.

Exhibit
No. Description
--- -----------

10.10 -- Amendment No. 1 to Stock Option Agreement, dated February 18, 2000, between David P. Cook
and ZixIt. Filed as Exhibit 10.8 to ZixIt's Annual Report on Form 10-K for the year ended
December 31, 1999, and incorporated herein by reference.
10.11 -- Amendment No. 2 to Stock Option Agreement, dated May 2, 2000, between David P. Cook and
ZixIt. Filed as Exhibit 10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2000, and incorporated herein by reference.
10.12 -- Amendment No. 3 to Stock Option Agreement, dated November 2, 2000, between David P. Cook
and ZixIt. Filed as Exhibit 10.10 to ZixIt's Annual Report on Form 10-K for the year ended
December 31, 2000, and incorporated herein by reference.
10.13* -- Stock Option Agreement, effective as of December 26, 2000, between David P. Cook and ZixIt.
10.14 -- Employment Agreement, effective as of December 26, 2000, between David P. Cook and ZixIt.
Filed as Exhibit 10.11 to ZixIt's Annual Report on Form 10-K for the year ended December 31,
2000, and incorporated herein by reference.
10.15 -- Stock Option Agreement, effective as of November 14, 2001, between John Ryan and ZixIt. Filed
as Exhibit 4.2 in ZixIt's Registration Statement on Form S-8 (Commission No. 333-74890), dated
December 11, 2001, and incorporated herein by reference. Portions of this exhibit were omitted
pursuant to a request for confidential treatment that was filed with the SEC on November 26,
2001. On December 5, 2001, the SEC approved the filing of this exhibit omitting the portions for
which confidential treatment was requested. The omitted information has been filed with the SEC.
10.16 -- Employment Agreement, effective as of November 14, 2001, between John Ryan and ZixIt. Filed
as Exhibit 4.1 in ZixIt's Registration Statement on Form S-8 (Commission No. 333-74890), dated
December 11, 2001, and incorporated herein by reference.
10.17* -- Severance Agreement, dated February 25, 2002, between ZixIt and Steve M. York.
10.18* -- Severance Agreement, dated February 25, 2002, between ZixIt and Ronald A. Woessner.
10.19* -- Form of Severance Agreement between ZixIt and Don Druckenbrodt, Gary Liu and Mike Poss.
10.20 -- Sublease Agreement, dated February 12, 1999, between Fidelity Corporate Real Estate, L.L.C.
and ZixIt Operating Corporation. Filed as Exhibit 10.13 to ZixIt's Annual Report on Form 10-K
for the year ended December 31, 1998, and incorporated herein by reference.
10.21 -- Sublease Agreement, dated May 8, 2000, between Rosewood Resources, Inc. and ZixIt. Filed as
Exhibit 10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000, and incorporated herein by reference.
10.22* -- Lease Agreement, dated July 10, 1998, between Dallas Galleria Limited and Amtech Corporation
d/b/a AMTC Corporation.
10.23 -- Common Stock and Warrant Purchase Agreement, dated April 11, 2000, between H. Wayne
Huizenga and his assigns and ZixIt. Filed as Exhibit 2.1 to ZixIt's Form 8-K, dated April 12,
2000, and incorporated herein by reference.
10.24 -- Letter Amendment, dated April 27, 2000, to the Common Stock and Warrant Purchase
Agreement, dated April 11, 2000, between H. Wayne Huizenga and his assigns and ZixIt. Filed as
Exhibit 2.2 to ZixIt's Form 8-K, dated May 3, 2000, and incorporated herein by reference.
10.25 -- Distribution Agreement, dated August 17, 2000, between Yahoo! Inc. and ZixIt. Filed as Exhibit
10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000,
and incorporated herein by reference.
10.26 -- Marketing and Distribution Agreement, effective November 6, 2000, between ZixIt and Entrust,
Inc. Filed as Exhibit 10.4 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000, and incorporated herein by reference.

Exhibit
No. Description
--- -----------

10.27 -- Enterprise and CA Services Agreement, effective November 6, 2000, between ZixIt and Entrust,
Inc. Filed as Exhibit 10.5 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000, and incorporated herein by reference.
10.28 -- International Distribution Agreement, dated June 6, 2001, between ZixIt and AlphaOmega Soft
Co., Ltd. Filed as Exhibit 10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2001, and incorporated herein by reference.
10.29 -- International Distribution Agreement, dated October 25, 2001, between ZixIt and 911 Computer
Co., Ltd. Filed as Exhibit 10.1 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2001, and incorporated herein by reference.
10.30 -- Investment Agreement, effective December 6, 2000, between Maptuit Corporation and ZixIt. Filed
as Exhibit 10.23 to ZixIt's Annual Report on Form 10-K for the year ended December 31, 2000,
and incorporated herein by reference.
10.31 -- Convertible Promissory Note of Maptuit Corporation, dated July 11, 2001. Filed as Exhibit 10.2 to
ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001, and
incorporated herein by reference.
10.32 -- Security Agreement, dated July 11, 2001, between Maptuit Corporation and ZixIt. Filed as Exhibit
10.3 to ZixIt's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001, and
incorporated herein by reference.
21.1* -- Subsidiaries of ZixIt.
23.1* -- Consent of Independent Auditors.
24.1 -- Power of Attorney (included on page 20 of this Form 10-K).

--------
* Previously filed.

(b) Reports on Form 8-K

No reports of the Registrant on Form 8-K have been filed with the SEC during
the three months ended December 31, 2001.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, on May 24, 2002.

ZIXIT CORPORATION

By: /s/ STEVE M. YORK
-----------------------------
Steve M. York
Senior Vice President,
Chief Financial Officer and
Treasurer

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on May 24, 2002.

Signature Title
--------- -----

* Chairman, President, Chief
----------------------------- Executive Officer and
(John A. Ryan) Director (Principal
Executive Officer)

/s/ STEVE M. YORK Senior Vice President, Chief
----------------------------- Financial Officer and
(Steve M. York) Treasurer (Principal
Financial and Accounting
Officer)

* Founder and Director
-----------------------------
(David P. Cook)

* Co-Vice Chairman and Director
-----------------------------
(H. Wayne Huizenga)

* Director
-----------------------------
(Michael E. Keane)

* Director
-----------------------------
(James S. Marston)

* Co-Vice Chairman and Director
-----------------------------
(Jeffrey P. Papows)

* Director
-----------------------------
(Antonio R. Sanchez, Jr.)

* Director
-----------------------------
(Dr. Ben G. Streetman)

By: /s/ STEVE M. YORK
-------------------------
(Steve M. York)
Attorney-in-Fact

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors........................................................................ F-2

Consolidated Balance Sheets at December 31, 2001 and 2000............................................. F-3

Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 and for the
cumulative period from January 1, 1999 through December 31, 2001.................................... F-4

Consolidated Statements of Stockholders' Equity and Comprehensive Net Loss for the years ended
December 31, 2001, 2000 and 1999.................................................................... F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 and for the
cumulative period from January 1, 1999 through December 31, 2001.................................... F-6

Notes to Consolidated Financial Statements............................................................ F-7

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
ZixIt Corporation

We have audited the accompanying consolidated balance sheets of ZixIt
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ZixIt
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

ERNST & YOUNG LLP

Dallas, Texas
January 30, 2002

F-2

ZIXIT CORPORATION
(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

December 31,
---------------------------
2001 2000
------------- ------------

ASSETS

Current assets:
Cash and cash equivalents................................................. $ 8,857,000 $ 13,347,000
Marketable securities..................................................... 11,208,000 36,943,000
Other current assets...................................................... 2,108,000 1,942,000
------------- ------------
Total current assets.................................................. 22,173,000 52,232,000
Investment in Maptuit Corporation............................................ -- 3,000,000
Property and equipment, net.................................................. 10,263,000 19,400,000
Other noncurrent assets, net................................................. -- 4,045,000
------------- ------------
$ 32,436,000 $ 78,677,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses..................................... $ 3,506,000 $ 2,431,000
Liabilities related to discontinued operations............................ 1,056,000 1,116,000
Deferred revenues......................................................... 345,000 --
------------- ------------
Total current liabilities............................................. 4,907,000 3,547,000
Commitments and contingencies................................................
Stockholders' equity:
Preferred stock, $1 par value, 10,000,000 shares authorized; none
outstanding............................................................. -- --
Common stock, $0.01 par value, 175,000,000 shares authorized;
19,861,118 issued and 17,557,854 outstanding in 2001; 19,327,563
issued and 17,035,663 outstanding in 2000............................... 199,000 193,000
Additional capital........................................................ 177,119,000 180,128,000
Unearned stock-based compensation......................................... (2,536,000) (14,615,000)
Treasury stock, at cost; 2,303,264 shares in 2001 and 2,291,900 shares in
2000.................................................................... (11,414,000) (11,314,000)
Accumulated other comprehensive loss...................................... -- (169,000)
Accumulated deficit (includes deficit accumulated during the development
stage of $139,979,000 in 2001 and $83,233,000 in 2000).................. (135,839,000) (79,093,000)
------------- ------------
Total stockholders' equity............................................ 27,529,000 75,130,000
------------- ------------
$ 32,436,000 $ 78,677,000
============= ============

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

F-3

ZIXIT CORPORATION
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended December 31,
----------------------------------------
Cumulative During
Development Stage
(From January 1, 1999
Through
2001 2000 1999 December 31, 2001)
------------ ------------ ------------ ---------------------

Revenues.............................. $ 317,000 $ 394,000 $ 99,000 $ 810,000
Cost of revenues...................... (14,996,000) (10,821,000) (4,289,000) (30,106,000)
Research and development expenses..... (9,019,000) (8,661,000) (23,548,000) (41,228,000)
Selling, general and administrative
expenses............................ (29,892,000) (32,162,000) (12,407,000) (74,461,000)
Investment and other income........... 2,187,000 3,130,000 3,533,000 8,850,000
Realized and unrealized loss on
investments......................... (5,391,000) (1,202,000) -- (6,593,000)
------------ ------------ ------------ -------------
Loss from continuing operations before
income taxes........................ (56,794,000) (49,322,000) (36,612,000) (142,728,000)
Income taxes.......................... -- -- 807,000 807,000
------------ ------------ ------------ -------------
Loss from continuing operations....... (56,794,000) (49,322,000) (35,805,000) (141,921,000)
Discontinued operations............... 48,000 441,000 1,453,000 1,942,000
------------ ------------ ------------ -------------
Net loss.............................. $(56,746,000) $(48,881,000) $(34,352,000) $(139,979,000)
============ ============ ============ =============
Basic and diluted earnings (loss) per
common share:
Continuing operations.............. $ (3.32) $ (3.03) $ (2.35)
Discontinued operations............ -- 0.03 0.10
------------ ------------ ------------
Net loss........................... $ (3.32) $ (3.00) $ (2.25)
============ ============ ============
Weighted average shares outstanding... 17,083,037 16,266,196 15,244,291
============ ============ ============

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

F-4

ZIXIT CORPORATION
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE NET LOSS

Accumulated
Common Stock Unearned other
------------------- Additional stock-based Treasury comprehensive
Shares Amount capital compensation stock loss
---------- -------- ------------ ------------ ------------ -------------

Balance, December 31, 1998................ 17,384,437 $174,000 $ 88,544,000 $ (95,000) $(11,314,000) $ --
Exercise of stock options for cash..... 245,492 2,000 1,619,000 -- -- --
Unearned employee stock-based
compensation.......................... -- -- 3,587,000 (3,587,000) -- --
Unearned stock-based compensation
for service providers................. -- -- 13,501,000 (13,501,000) -- --
Stock issuable for purchase of Anacom
Communications........................ -- -- 7,500,000 (7,500,000) -- --
Amortization of unearned stock-based
compensation.......................... -- -- -- 14,187,000 -- --
Other.................................. -- -- (11,000) -- -- --
Net loss............................... -- -- -- -- -- --
---------- -------- ------------ ------------ ------------ ---------
Balance, December 31, 1999................ 17,629,929 176,000 114,740,000 (10,496,000) (11,314,000) --
Stock issued for cash in private
placement, net of issuance costs...... 916,667 9,000 43,775,000 -- -- --
Exercise of stock options for cash..... 327,417 3,000 2,239,000 -- -- --
Unearned employee stock-based
compensation.......................... -- -- 16,894,000 (16,894,000) -- --
Unearned stock-based compensation
for service providers................. 147,848 2,000 (690,000) 752,000 -- --
Stock issued for purchase of Anacom
Communications........................ 83,663 1,000 (224,000) 223,000 -- --
Amortization of unearned stock-based
compensation.......................... -- -- -- 11,800,000 -- --
Stock issued to Entrust................ 222,039 2,000 3,398,000 -- -- --
Other.................................. -- -- (4,000) -- -- --
Comprehensive net loss:
Net loss............................ -- -- -- -- -- --
Unrealized loss on marketable
securities......................... -- -- -- -- -- (169,000)

Comprehensive net loss.............. -- -- -- -- -- --
---------- -------- ------------ ------------ ------------ ---------
Balance, December 31, 2000................ 19,327,563 193,000 180,128,000 (14,615,000) (11,314,000) (169,000)
Exercise of stock options for cash..... 27,500 -- 222,000 -- -- --
Unearned employee stock-based
compensation.......................... 152,672 2,000 973,000 (975,000) -- --
Unearned stock-based compensation
for service providers................. -- -- 49,000 (49,000) -- --
Cancellation of agreement to issue
stock for purchase of Anacom
Communications........................ -- -- (4,725,000) 4,725,000 -- --
Amortization of unearned stock-based
compensation.......................... -- -- -- 8,378,000 -- --
Stock issued to Entrust................ 353,383 4,000 396,000 -- -- --
Other.................................. -- -- 76,000 -- (100,000) --
Comprehensive net loss:
Net loss............................ -- -- -- -- -- --
Realized loss on marketable
securities......................... -- -- -- -- -- 169,000

Comprehensive net loss..............
---------- -------- ------------ ------------ ------------ ---------
Balance, December 31, 2001................ 19,861,118 $199,000 $177,119,000 $ (2,536,000) $(11,414,000) $ --
========== ======== ============ ============ ============ =========

Retained
earnings Total
(accumulated stockholders'
deficit) equity
------------- -------------

Balance, December 31, 1998................ $ 4,140,000 $ 81,449,000
Exercise of stock options for cash..... -- 1,621,000
Unearned employee stock-based
compensation.......................... -- --
Unearned stock-based compensation
for service providers................. -- --
Stock issuable for purchase of Anacom
Communications........................ -- --
Amortization of unearned stock-based
compensation.......................... -- 14,187,000
Other.................................. -- (11,000)
Net loss............................... (34,352,000) (34,352,000)
------------- ------------
Balance, December 31, 1999................ (30,212,000) 62,894,000
Stock issued for cash in private
placement, net of issuance costs...... -- 43,784,000
Exercise of stock options for cash..... -- 2,242,000
Unearned employee stock-based
compensation.......................... -- --
Unearned stock-based compensation
for service providers................. -- 64,000
Stock issued for purchase of Anacom
Communications........................ -- --
Amortization of unearned stock-based
compensation.......................... -- 11,800,000
Stock issued to Entrust................ -- 3,400,000
Other.................................. -- (4,000)
Comprehensive net loss:
Net loss............................ (48,881,000) (48,881,000)
Unrealized loss on marketable
securities......................... -- (169,000)
------------
Comprehensive net loss.............. -- (49,050,000)
------------- ------------
Balance, December 31, 2000................ (79,093,000) 75,130,000
Exercise of stock options for cash..... -- 222,000
Unearned employee stock-based
compensation.......................... -- --
Unearned stock-based compensation
for service providers................. -- --
Cancellation of agreement to issue
stock for purchase of Anacom
Communications........................ -- --
Amortization of unearned stock-based
compensation.......................... -- 8,378,000
Stock issued to Entrust................ 400,000
Other.................................. -- (24,000)
Comprehensive net loss:
Net loss............................ (56,746,000) (56,746,000)
Realized loss on marketable
securities......................... -- 169,000
------------
Comprehensive net loss.............. (56,577,000)
------------- ------------
Balance, December 31, 2001................ $(135,839,000) $ 27,529,000
============= ============

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

F-5

ZIXIT CORPORATION
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Cumulative
During
Development
Stage (From
January 1, 1999
Year ended December 31, Through
----------------------------------------- December 31,
2001 2000 1999 2001)
------------ ------------ ------------- ---------------

Cash flows from operating activities:
Loss from continuing operations............................ $(56,794,000) $(49,322,000) $ (35,805,000) $(141,921,000)
Adjustments to reconcile loss from continuing operations
to net cash used by operating activities:
Depreciation and amortization............................ 10,799,000 9,928,000 3,476,000 24,203,000
Stock-based compensation................................. 8,378,000 11,800,000 12,315,000 32,493,000
Loss on Lante Corporation common stock................... 391,000 1,202,000 -- 1,593,000
Write-off of investment in Maptuit Corporation........... 5,000,000 -- -- 5,000,000
Write-off of digital identification certificates......... 3,000,000 -- -- 3,000,000
Other non-cash expenses.................................. 733,000 131,000 -- 864,000
Changes in assets and liabilities, excluding divestiture
of businesses:
Other assets........................................... (193,000) (601,000) (943,000) (1,737,000)
Current liabilities.................................... 1,671,000 480,000 126,000 2,277,000
------------ ------------ ------------- -------------
Net cash used by continuing operations................... (27,015,000) (26,382,000) (20,831,000) (74,228,000)
Net cash provided (used) by discontinued operations...... (12,000) 409,000 (1,855,000) (1,458,000)
------------ ------------ ------------- -------------
Net cash used by operating activities................ (27,027,000) (25,973,000) (22,686,000) (75,686,000)
Cash flows from investing activities:
Purchases of property and equipment, net................... (1,174,000) (7,625,000) (23,165,000) (31,964,000)
Purchases of marketable securities......................... (23,642,000) (37,250,000) (119,150,000) (180,042,000)
Sales and maturities of marketable securities.............. 49,155,000 33,994,000 112,893,000 196,042,000
Investment in Maptuit Corporation.......................... (2,000,000) (3,000,000) -- (5,000,000)
Purchase of Anacom Communications.......................... -- -- (2,500,000) (2,500,000)
Proceeds from sales of businesses, net of cash sold........ -- 581,000 5,304,000 5,885,000
------------ ------------ ------------- -------------
Net cash provided (used) by investing activities..... 22,339,000 (13,300,000) (26,618,000) (17,579,000)
Cash flows from financing activities:
Proceeds from private placement of common stock, net of
issuance costs........................................... -- 43,784,000 -- 43,784,000
Proceeds from exercise of stock options.................... 222,000 2,242,000 1,621,000 4,085,000
------------ ------------ ------------- -------------
Net cash provided by financing activities............ 222,000 46,026,000 1,621,000 47,869,000
Effect of exchange rate changes on cash and cash
equivalents............................................... (24,000) (4,000) (11,000) (39,000)
------------ ------------ ------------- -------------
Increase (decrease) in cash and cash equivalents............ (4,490,000) 6,749,000 (47,694,000) (45,435,000)
Cash and cash equivalents, beginning of year................ 13,347,000 6,598,000 54,292,000 54,292,000
------------ ------------ ------------- -------------
Cash and cash equivalents, end of year...................... $ 8,857,000 $ 13,347,000 $ 6,598,000 $ 8,857,000
============ ============ ============= =============
Supplemental cash flow information:
Income taxes paid.......................................... $ -- $ -- $ 486,000

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

F-6

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation--The accompanying consolidated financial statements of
ZixIt Corporation include the accounts of the Company and its wholly-owned
subsidiaries. Intercompany balances and transactions have been eliminated.

During 1998, the Company sold all of its operating businesses and,
accordingly, the assets and liabilities, operating results and cash flows of
these businesses have been classified as discontinued operations in the
accompanying financial statements.

Since 1999, the Company has been developing and marketing products and
services that bring privacy, security and convenience to Internet users.
ZixMail(TM) is a secure email application and messaging service that enables
Internet users worldwide to easily send encrypted, digitally-signed
communications to any email address in the world, even if the recipient does
not subscribe to ZixMail. The Company did not begin to charge for the use of
ZixMail until the first quarter of 2001. Successful development of a
development stage enterprise, particularly Internet-related businesses, is
costly and highly competitive. The Company's growth depends on the timely
development and market acceptance of its products and services. A development
stage enterprise involves risks and uncertainties, and there are no assurances
that the Company will be successful in its efforts. The Company currently has
no significant revenues and utilization of cash resources continues at a
substantial level. The Company has taken steps, in late 2001 and early 2002, to
decrease its cash expenditure rate including reducing personnel and decreasing
expenditures for outside consultants and discretionary advertising and
promotion costs. As a result of the cost reductions recently initiated, the
Company's near-term expenditure level is expected to average approximately
$1,500,000 per month, down from approximately $2,300,000 per month experienced
in the last half of 2001. The Company believes its existing cash and marketable
securities combined with scheduled installment payments due from resellers and
distributors are sufficient to sustain its estimated level of operating
expenditures through the end of the first quarter of 2003. New revenue streams
expected in 2002 should lengthen such time period. The Company is considering
various capital funding alternatives in order to strengthen the Company's
financial position, but there can be no assurances that the Company will be
able to raise additional capital on satisfactory terms if and when needed.

Cash investments and marketable securities--Cash investments with maturities
of three months or less when purchased are considered cash equivalents. Cash
and cash equivalents at December 31, 2001 primarily consist of high-grade daily
money market funds. Marketable securities, which are available-for-sale, are as
follows:

2001 2000
----------- -----------

U.S. corporate debt securities................... $10,946,000 $18,918,000
U.S. government agency debt securities........... -- 17,273,000
Lante Corporation common stock................... -- 501,000
Certificate of deposit........................... 262,000 251,000
----------- -----------
$11,208,000 $36,943,000
=========== ===========

Investments in debt securities are carried at amortized cost, which
approximates fair market value. Marketable securities held on December 31, 2001
mature on various dates through April 2002. Investment income includes income
from cash investments and marketable debt securities totaling $1,687,000,
$3,130,000 and $3,533,000 for the years 2001, 2000 and 1999, respectively.

Derivatives and hedging activities--At December 31, 2001 and 2000, the
Company did not have any instruments or contracts which were classified as
derivatives. Derivatives are financial instruments or contracts

F-7

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

with prescribed characteristics which are recognized on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings.

Property and equipment--Property and equipment are recorded at cost and
depreciated or amortized using the straight-line method over their estimated
useful lives as follows: computer equipment and software--3 years; leasehold
improvements--5 year lease term; and office equipment, furniture and
fixtures--5 years.

Goodwill--Goodwill of $2,429,000, which resulted from the October 1999
acquisition of Anacom Communications, Inc., was being amortized over two years
using the straight-line method until its carrying value was written-off in June
2001 (Note 3). Goodwill amortization was $894,000 in 2001, $1,228,000 in 2000
and $307,000 in 1999. The $894,000 net carrying value for goodwill at December
31, 2000 is included in other noncurrent assets.

Software development costs--Costs incurred in the development and testing of
software used in the Company's Internet products and services related to
research, project planning, training, maintenance and general and
administrative activities, and overhead costs are expensed as incurred. The
costs of relatively minor upgrades and enhancements to the software are also
expensed as incurred. Certain costs incurred during software application
development, including costs of materials, services and payroll and
payroll-related costs for employees directly associated with the development
project, qualify for capitalization. Due to the uncertainty of the amount and
timing of future net revenues to be generated from the Company's Internet
products and services, all development costs incurred through December 31, 2001
have been expensed and are included in research and development costs.

Long-lived assets--The Company reviews the original assumptions and
rationale utilized in the establishment of the carrying value and estimated
life of certain long-lived assets. The carrying value would be adjusted to fair
value if facts and circumstances indicating an impairment were present.

Revenue recognition--Revenues are recorded when services are rendered.
Subscription fees billed or received from customers in advance are recorded as
deferred revenue and recognized as revenues ratably over the subscription
period. Presently, the Company's subscription service includes the delivery of
licensed software, customer support and the secure email services. The customer
generally electronically downloads the software over the Internet or the
customer is provided a diskette for general enterprise deployment.
Subscriptions to date have generally been annual non-refundable contracts with
no automatic renewal provisions. The subscription period begins on the date
specified by the parties.

Advertising expense--Advertising costs are expensed as incurred and totaled
$4,452,000 in 2001, $10,267,000 in 2000 and none in 1999.

Stock-based employee compensation--As permitted by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for stock-based compensation plans under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. Compensation expense for
employee stock options, if any, is measured as the excess of the quoted market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock.

F-8

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Earnings per share--Basic earnings per share is computed by dividing
earnings (loss) by the weighted average number of common shares outstanding
(the denominator) for the period. The computation of diluted earnings per share
is similar to basic earnings per share, except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the potentially dilutive common shares had been issued.

The amounts presented for basic and diluted earnings (loss) per share in the
accompanying statements of operations have been computed by dividing the
applicable earnings (loss) by the weighted average number of common shares
outstanding. The two presentations are equal in amounts because the assumed
exercise of common stock equivalents would be antidilutive, due to a loss from
continuing operations being reported for each period presented. The following
table sets forth antidilutive securities which were outstanding at the dates
set forth below and have been excluded from the computation of diluted earnings
(loss) per share:

Year ended December 31,
-----------------------------
2001 2000 1999
--------- --------- ---------

Stock options......................................... 6,837,341 5,104,190 5,679,542
Warrants.............................................. 2,138,890 2,138,890 --
Stock issuable for purchase of Anacom Communications.. -- 119,667 189,948
--------- --------- ---------
Total antidilutive securities excluded............. 8,976,231 7,362,747 5,869,490
========= ========= =========

Comprehensive income (loss)--Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," establishes standards for reporting
comprehensive income (loss) and its components in the financial statements.
Comprehensive income (loss), as defined, includes all changes in equity (net
assets) during a period from non-owner sources. In 2000, the difference between
net loss and total comprehensive net loss was due to an unrealized loss on
marketable securities, which was considered to be temporary. In 2001, the loss
was realized upon the sale of the related marketable securities.

Use of estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Management reviews its estimates on an ongoing basis,
including those related to discontinued operations and the carrying value of
long-lived assets, and revises such estimates based upon currently available
facts and circumstances.

Recent accounting pronouncements--The Company adopted the provisions of
Statement of Financial Accounting Standards No. 141 ("FAS 141"), "Business
Combinations," effective July 1, 2001. FAS 141 eliminates pooling-of-interest
accounting for business combinations and changed the requirements for the
recognition of intangible assets apart from goodwill. Thus, any acquisition
completed after the effective date must be accounted for as a purchase. The
adoption of FAS 141 did not have any impact on the Company's results of
operations or financial position.

F-9

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Reclassifications--Certain prior year amounts have been reclassified to
conform with the 2001 presentation.

2. PROPERTY AND EQUIPMENT

2001 2000
------------ ------------

Computer equipment and software.............. $ 26,321,000 $ 25,848,000
Leasehold improvements....................... 4,565,000 4,474,000
Office equipment, furniture and fixtures..... 999,000 961,000
------------ ------------
31,885,000 31,283,000
Less accumulated depreciation and
amortization............................... (21,622,000) (11,883,000)
------------ ------------
$ 10,263,000 $ 19,400,000
============ ============

The Company's continuing operations include depreciation and amortization
expense related to property and equipment of $9,905,000 in 2001, $8,700,000 in
2000 and $3,169,000 in 1999.

3. STOCKHOLDERS' EQUITY

Stock Issued to Entrust, Inc.

In November 2000, the Company entered into an Enterprise and CA Services
Agreement with Entrust, Inc. ("Entrust") whereby the Company issued 222,039
shares of the Company's common stock to Entrust in exchange for licenses to use
certain software packages, future technical support and the right to issue a
specified number of digital identification certificates to users of the
Company's ZixMail products. These shares were subject to transfer restrictions
which lapsed in four equal quarterly installments ending in December 2001. The
agreement provided that if the aggregate value of the shares on the dates the
restrictions lapsed was less than the transaction value of $3,400,000, the
Company would be obligated to fund the deficiency by electing to pay cash or
issue additional shares of stock valued at the then-current fair market value
of the Company's common stock. Accordingly, an additional 296,533 shares of the
Company's common stock were issued in December 2001. The digital identification
certificates valued at $3,000,000 were written-off to cost of revenues in the
fourth quarter of 2001, as these certificates did not enter into sales and
marketing plans established by the Company's new executive management team.
Additionally, under a Marketing and Distribution Agreement with Entrust, the
Company issued 56,850 shares of the Company's common stock to Entrust valued at
$400,000 upon completion of the integration of the ZixMail service option into
the Entrust/Express(R) product in August 2001. The Company expects Entrust will
market the integrated product and the Company and Entrust will share in the
related revenues. Under this agreement, Entrust has guaranteed the Company
minimum annual payments of $500,000 for 2001, $1,000,000 for 2002, $1,250,000
for 2003 and $1,500,000 for 2004. At December 31, 2001, the $500,000 minimum
annual payment for 2001, collected in 2002, is included in other current assets
with a corresponding increase in other income.

F-10

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Anacom Communications, Inc.

In October 1999, the Company purchased all of the outstanding shares of
Anacom Communications, Inc. ("Anacom"), a privately-held provider of real-time
transaction processing services to Internet merchants. Consideration consisted
of a cash payment of $2,500,000, primarily recorded as goodwill, and common
stock, valued at a mimimum of $7,500,000, to be delivered in two annual
installments beginning October 2000, assuming continued employment by the
former owners. The minimum value of the common stock issuable pursuant to the
purchase agreement of $7,500,000 is treated as compensation for financial
accounting purposes and was being charged to operating costs and general
corporate expenses over two years with a corresponding increase in
stockholders' equity. Financial accounting rules require the minimum number of
common shares issuable be revalued on each subsequent reporting date until
performance is complete with a cumulative catch-up adjustment recognized for
any changes in their intrinsic value in excess of $7,500,000. Based on the
Company's common stock price of $8.75 per share at December 31, 2000 and $39.63
per share at December 31, 1999, the intrinsic value of these shares on those
dates was $1,662,000 (less than the minimum $7,500,000) and $7,529,000,
respectively. Accordingly, the Company's results of operations for 2000 and
1999 include non-cash charges of $3,611,000 and $937,000, respectively, for
amortization of the market value of the common shares issuable. In October
2000, 83,663 shares were delivered to the former owners, which included 13,382
shares in excess of the minimum required for that delivery date.

On June 20, 2001, the Company reported that the credit card databases at
Anacom had been improperly accessed and fraudulent transactions had been
processed, causing Anacom to advise its merchant customer base to transfer
their electronic commerce transactions to other payment gateways for
processing. Since its acquisition, Anacom had been operated as an independent
subsidiary and managed by its former owners. Later in June 2001, the Company
ceased all operations at Anacom, and the former owners of Anacom separated from
employment with Anacom. As a result, the October 2001 final installment of the
Company's common stock issuable to the former owners in connection with the
purchase of Anacom, which aggregated $4,725,000, was canceled. These events
resulted in a non-recurring net reduction in operating costs of approximately
$3,000,000 in the second quarter of 2001. This reduction was primarily due to
the reversal of previously recorded unvested stock-based compensation expense,
including $1,800,000 previously recorded in 2001, related to the canceled
installment totaling $3,800,000, partially offset by severance costs and asset
write-downs, including goodwill. Substantially all of the Company's revenues
since 1999 have been generated by Anacom. The Company is currently unable to
assess the amount of the liability, if any, to Anacom or the Company, which may
result from the unauthorized access to Anacom's databases.

Private Placement of Equity Securities

In May 2000, the Company sold, in a private placement, newly issued equity
securities to an investor group led by H. Wayne Huizenga and received cash
totaling $44,000,000 in three installments. In exchange, the Company issued to
the investor group 916,667 shares of its common stock at $48.00 per share,
ten-year warrants to purchase 916,667 shares of the Company's common stock at
$57.60 per share and four-year warrants to purchase 1,222,223 shares of the
Company's common stock at $12.00 per share. The four-year warrants were
reallocated from options with an exercise price of $7.00 per share previously
held by Mr. David P. Cook, the Company's founder and chief executive officer at
the time of the private placement, and became exercisable on May 1, 2001.

Employee and Director Stock Options

The Company has non-qualified stock options outstanding to employees and
directors under various stock option plans. Options granted under these plans
are generally not less than the fair market value at the date of

F-11

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

grant and, subject to termination of employment, generally expire ten years
from the date of grant. Employee options are generally exercisable in
installments over two to five years or have been accelerated due to the
Company's common stock trading at appreciated price targets. Initial grants to
new directors are generally exercisable six months from the date of the grant,
with annual follow-on formula grants vesting annually over three years. Option
grants to employees and directors generally contain accelerated vesting
provisions upon the occurrence of a change of control, as defined in the
applicable option agreements. At December 31, 2001, 1,075,928 shares of common
stock were available for future grants under the Company's stock option plans.

In January 1999, certain outside directors were granted options to acquire
151,000 shares of common stock under a plan that was approved by the Company's
stockholders in September 1999. The Company recognized a non-cash compensation
expense of $3,335,000, which is included in operating costs and general
corporate expenses, based on the excess of the fair market value of the
Company's common stock on the date of plan approval, which was $32.75, over the
exercise price of the options of $10.65, which was 120% of the fair market
value of the Company's common stock on the date of grant.

In April 1998, Mr. Cook entered into an employment arrangement with the
Company whereby he received an option to acquire 4,254,627 shares of the
Company's common stock. The option exercise price is $7.00 per share, which was
twice the closing price of the Company's common stock on the date of grant. The
options have a five-year term and vested quarterly over two years. In the year
options are exercised, taxable compensation realized by Mr. Cook in excess of
$1,000,000 is not deductible by the Company for federal income tax purposes.
During 2000 and 2001, Mr. Cook reallocated options to acquire 807,127 shares of
the Company's common stock to certain of the Company's employees and a
director. These reallocated options have a five-year term, vest by April 2003
and have exercise prices ranging from $7.00 to $13.75 per share as compared to
Mr. Cook's exercise price of $7.00 per share. Non-cash compensation expense of
$16,815,000 is being recognized over the vesting periods ($9,047,000 in 2001
and $6,178,000 in 2000), representing the intrinsic value of the reallocated
options based upon the difference between the fair market value of the
Company's common stock on the dates the options were reallocated and the
respective option exercise prices.

In November 2001, Mr. John A. Ryan was appointed Chairman, President and
Chief Executive Officer of the Company and received a bonus of 152,672 shares
of the Company's common stock valued at $1,000,000. Such stock-based
compensation is being amortized over two years using the straight-line method.
In the event Mr. Ryan is terminated for cause, as defined, or resigns for any
reason other than for good reason, as defined, prior to November 16, 2002, at
the time of such employment termination, Mr. Ryan is required to return to the
Company 152,672 shares or $1,000,000 in cash. If such employment termination
occurs between November 15, 2002 and November 16, 2003, Mr. Ryan is required to
return to the Company 76,336 shares or $500,000 in cash.

F-12

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following is a summary of stock option transactions for 2001, 2000 and
1999:

Weighted Average
Shares Exercise Price
---------- ----------------

Outstanding at December 31, 1998......... 5,007,197 $ 6.98
Granted at market price............... 400,000 $20.79
Granted at prices less than market.... 175,924 $13.26
Cancelled............................. (9,753) $ 6.05
Exercised............................. (230,492) $ 7.51
----------
Outstanding at December 31, 1999......... 5,342,876 $ 8.20
Granted at market price............... 1,156,630 $20.41
Granted at prices less than market.... 657,127 $ 9.01
Cancelled............................. (1,932,526) $ 7.90
Exercised............................. (327,417) $ 6.76
----------
Outstanding at December 31, 2000......... 4,896,690 $11.41
Granted at market price............... 1,156,556 $ 7.38
Granted at prices greater than market. 1,000,000 $ 5.24
Granted at prices less than market.... 150,000 $ 7.00
Cancelled............................. (518,127) $ 9.38
Exercised............................. (27,500) $ 9.14
----------
Outstanding at December 31, 2001......... 6,657,619 $ 9.85
==========

Summarized information about stock options outstanding at December 31, 2001
is as follows:

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

$ 3.56-$ 7.00. 4,597,260 4.4 $ 6.26 2,773,827 $ 6.74
$ 7.19-$16.50. 1,242,905 5.8 $ 9.66 500,449 $ 9.70
$18.44-$35.00. 595,250 6.7 $24.64 428,085 $24.52
$36.94-$73.75. 222,204 8.1 $45.57 92,234 $50.53
--------- ---------
6,657,619 3,794,595
========= =========

There were 2,902,007 and 3,796,572 exercisable options at December 31, 2000
and 1999, respectively.

The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in
accounting for its employee stock options. Accordingly, the Company does not
record compensation expenses for its employee stock option grants unless the
market price exceeds the exercise price on the date of grant. Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation,"encourages adoption of a fair-value based method for
valuing the cost of stock-based compensation; however, it allows companies to
continue to use the intrinsic value method under APB 25 and disclose pro forma
results and earnings per share in accordance with SFAS 123. Under SFAS 123,
compensation cost is measured at the grant date based upon the value of the
award and is recognized over the vesting period. As required, the pro forma
disclosures include only options granted since January 1, 1995. Because the
Company's stock options have

F-13

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

characteristics significantly different from those of traded options and
because changes in the subjective input assumptions to the option valuation
models can materially affect their estimated fair value, in management's
opinion, the existing valuation methods do not necessarily provide a reliable
single measure of the fair value of its stock options. Had compensation cost
for the Company's stock-based compensation been determined consistent with SFAS
123, the Company's net loss and loss per share would have been as follows:

2001 2000 1999
------------ ------------ ------------

Net loss:
As reported................... $(56,746,000) $(48,881,000) $(34,352,000)
Pro forma..................... $(67,371,000) $(58,166,000) $(36,530,000)
Basic and diluted loss per share:
As reported................... $ (3.32) $ (3.00) $ (2.25)
Pro forma..................... $ (3.94) $ (3.58) $ (2.40)

The Company used the Black-Scholes option pricing model to determine the
fair value of grants made during 2001, 2000 and 1999. The following weighted
average assumptions were applied in determining the pro forma compensation cost:

2001 2000 1999
----- ------ ------

Risk-free interest rate............... 3.85% 6.22% 4.97%
Expected option life.................. 2.7 years 2.7 years 2.8 years
Expected stock price volatility....... 138% 118% 96%
Expected dividend yield............... -- -- --
Fair value of options:
Granted at market price............ $5.74 $13.92 $11.86
Granted at prices exceeding market. $3.49 -- --
Granted at prices less than market. $7.61 $30.64 $24.66

Third Party Stock Options

Lante Corporation

The Company entered into an agreement in February 1999 with Lante
Corporation ("Lante"), a third party Internet services company who develops
technology-based solutions for electronic markets, to assist the Company in
developing software for its new Internet-related businesses. In exchange for
the services provided by Lante, the Company paid discounted fees of $11,282,000
during 1999, included in research and development expenses, and initially
issued options to purchase 500,000 shares of the Company's common stock to
Lante at an exercise price of $7.62 per share, the closing price of the
Company's common stock on the date of the agreement. Upon completion of Lante's
engagement in November 1999, the terms of the original stock option were
revised whereby Lante received a fully vested option to acquire up to 166,666
shares of the Company's common stock at an exercise price of $7.62 per share
("Lante Option"). Pursuant to an agreement executed simultaneously with the
Lante Option, the Company received a fully vested option to acquire up to
400,000 shares of Lante's common stock at $7.00 per share ("ZixIt Option").
However, the number of shares of common stock issuable upon the cashless
exercise of either of the options could not exceed a number of shares having a
fair market value, as determined in accordance with a formula, at the time of
exercise of $12,000,000 in the aggregate. The fair value of the Lante Option
upon the completion of Lante's engagement was $8,787,000 using the
Black-Scholes option valuation model, and has been included in research and
development expenses. For financial accounting purposes, this non-cash charge
represents the final valuation for the Lante Option and no further

F-14

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

accounting treatment is required. The Company valued the ZixIt Option on the
date of grant at $1,872,000, using the Black-Scholes option valuation model,
and reduced its research and development expenses in 1999 by such amount. In
2000, the Company exercised the ZixIt Option to acquire shares of Lante common
stock and received 320,802 shares. Also in 2000, Lante exercised the Lante
Option and received 142,848 shares of the Company's common stock. Realized and
unrealized loss on investments for 2000 represents a write-down of the
Company's equity investment in Lante of $1,202,000, representing the decline in
market value that management believed was other than temporary and in 2001
includes a loss of $391,000 for the disposition of the Lante shares.

Other

The Company has issued options to third party service providers to purchase
up to 200,000 shares of the Company's common stock at a weighted average
exercise price of $29.09 per share. These options vest over periods of up to 42
months and have expiration dates ranging from four to eight years. The
Company's continuing operations in 2001, 2000 and 1999 include non-cash charges
of $1,035,000, $1,238,000 and $805,000, respectively, for amortization of the
fair value of options issued to third party service providers, as determined
using the Black-Scholes option valuation model, over their respective service
or vesting periods. The unamortized value of these options at December 31, 2001
is not significant.

4. INCOME TAXES

Components of the income taxes related to continuing operations are as
follows:

2001 2000 1999
---- ---- --------

Federal income tax benefit:
Current....................................... $ -- $ -- $807,000
Deferred...................................... -- -- --
---- ---- --------
$ -- $ -- $807,000
==== ==== ========

A reconciliation of the expected U.S. tax benefit to income taxes related to
continuing operations is as follows:

2001 2000 1999
------------ ------------ ------------

Expected tax benefit at U.S.
statutory rate............. $ 19,294,000 $ 16,769,000 $ 12,448,000
Unbenefitted U.S. losses, net (19,297,000) (16,749,000) (10,418,000)
Unbenefitted tax credits..... -- -- (1,819,000)
Other........................ 3,000 (20,000) 596,000
------------ ------------ ------------
$ -- $ -- $ 807,000
============ ============ ============

F-15

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's deferred tax assets and liabilities as of December 31, 2001 and 2000
are as follows:

2001 2000
------------ ------------

Deferred tax assets:
Nondeductible reserves................ $ 620,000 $ 639,000
U.S. net operating loss carryforwards. 36,038,000 19,751,000
Tax credit carryforwards.............. 1,397,000 2,808,000
Stock option compensation............. 7,814,000 4,358,000
Start-up costs........................ 1,727,000 2,320,000
Intangible assets..................... 356,000 2,049,000
Investment in equity securities....... 1,751,000 301,000
Other assets.......................... 1,824,000 --
------------ ------------
Total deferred tax assets......... 51,527,000 32,226,000
Deferred tax liabilities:
Other, net............................ -- 277,000
------------ ------------
Net deferred tax assets.................. 51,527,000 31,949,000
Less valuation allowance................. (51,527,000) (31,949,000)
------------ ------------
Net deferred taxes....................... $ -- $ --
============ ============

The Company has fully reserved its net deferred tax assets in 2001 and 2000
due to the uncertainty of future taxable income. The Company has U.S. net
operating loss carryforwards of $105,993,000 which begin to expire in 2019. Tax
credit carryforwards of $1,397,000 consist of research tax credits which are
available through 2021 and alternative minimum tax credits which do not expire.
The net operating loss carryforwards include $9,155,000 resulting from the
exercise of non-qualified stock options for which a tax benefit of $3,113,000
will be credited to additional capital when recognized.

5. COMMITMENTS

The Company's continuing operations includes office rental expenses of
$1,038,000, $780,000 and $505,000, for 2001, 2000 and 1999, respectively. At
December 31, 2001, future minimum lease payments under noncancelable operating
leases are $845,000, $759,000 and $498,000 for 2002, 2003 and 2004,
respectively.

In the third quarter of 2000, the Company entered into an agreement with
Yahoo! Inc. ("Yahoo!") to provide Yahoo! Mail users with the option to send
encrypted email messages through the Company's ZixMail.net messaging portal.
The Company has remaining future commitments to Yahoo! under this agreement
totaling $3,350,000, payable in installments through August 2002. The minimum
payments of $6,000,000 are being amortized over two years beginning in December
2000. In addition, the Company pays Yahoo! a specified portion of revenues
earned by the Company which are associated with Yahoo! users.

The Company has severance agreements with certain employees which would
require the Company to pay approximately $3,000,000 if all such employees
separated from employment with the Company following a change of control, as
defined in the severance agreements.

F-16

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6. DISCONTINUED OPERATIONS

Prior to 1999, the Company operated in one industry segment, the provision
of systems and solutions for the intelligent transportation, electronic
security and other markets. The Company's operations included the design,
manufacturing, installation and support of hardware and software products
utilizing the Company's wireless data and security technologies. The businesses
comprising this industry segment, the Transporation Systems Group, Cotag
International and Cardkey Systems, were sold during 1998 in three separate
transactions. These businesses are presented as Discontinued Operations in the
accompanying financial statements.

The gain on sale of discontinued operations includes $48,000, $341,000 and
$872,000 in 2001, 2000 and 1999, respectively, for the reduction of estimated
future costs for various indemnification issues associated with the disposal of
these businesses. The gain also includes $100,000 and $581,000 in 2000 and
1999, respectively, for contingent sales proceeds. There were no income taxes
recorded on these gains.

Liabilities related to discontinued operations of $1,056,000 and $1,116,000
at December 31, 2001 and 2000, respectively, consist of estimated future costs
for various indemnification issues associated with the disposal of these
businesses.

7. RELATED PARTY TRANSACTIONS

In December 2000, the Company purchased approximately 9% of the equity
ownership of Maptuit Corporation ("Maptuit") for $3,000,000 in cash and
committed to make a follow-on investment. Accordingly, in July 2001, the
Company made an additional $2,000,000 cash investment in Maptuit and received a
promissory note convertible into Maptuit equity securities. The note bears
interest at prime plus 1%, is due in July 2006 and automatically converts into
Maptuit equity securities at the same price per share obtained if a third party
equity financing arrangement is completed, as defined. Maptuit, an early stage
company, is an Internet application service provider that supplies wireline and
wireless Internet location-based services. Built upon a comprehensive database
of the street network of North America, Maptuit provides address matching,
route generation, step-by-step directions, map rendering and real-cost
proximity searching services. Mr. Jeffrey P. Papows, a director of the Company
since March 2000 and the Company's chairman of its board of directors from
October 2000 to November 2001, serves as the president and chief executive
officer of Maptuit and holds a minority equity interest in Maptuit. There is no
readily determinable market value for the Company's investments in Maptuit
since Maptuit is privately held. Investments of this nature are subject to
significant fluctuations in fair market value due to the volatility of the
equity markets and the significant business and invesment risks inherent in
early stage enterprises. The Company records impairment losses when, in the
Company's judgment, events and circumstances indicate its investment has been
impaired. Maptuit has been seeking third party debt or equity financing to
sustain its operations. To date, no financing has been secured, and it is
uncertain whether Maptuit will be able to raise the necessary funds required to
execute its business plan such that the Company would be able to recover its
investment. Therefore, in the last half of 2001, the Company wrote off its
$5,000,000 investment in Maptuit and recorded a corresponding investment loss,
included in realized and unrealized loss on investments in the Company's
consolidated statement of operations.

In January 2001, the Company granted IT Factory, Inc. ("IT Factory") a
performance-based stock option whereby IT Factory could purchase up to 109,529
shares of the Company's common stock, at $9.13 per share, based upon the number
of customer email addresses it secured for the Company in 2001. In addition,
the Company paid IT Factory $300,000 in 2001 and committed to pay $250,000 in
2002 to support IT Factory's marketing efforts. IT Factory did not earn any
performance-based stock options in 2001, and the Company has subsequently
canceled the agreement, including the 2002 commitment for marketing support.
Separately, the Company paid IT Factory $420,000 in 2001 for certain software
development projects. Mr. Papows served as chairman of IT Factory until
December 2001.

F-17

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In the fourth quarter of 2000, the Company and Entrust entered into certain
technology and marketing agreements (Note 3). Mr. Ryan, the Company's chairman,
president and chief executive officer, was chief executive officer of Entrust
when such agreements were executed and currently holds a minority equity
interest in Entrust.

During 1999, the Company engaged Lante to assist the Company in the
development of new Internet products (Note 3). The chairman and major
stockholder of Lante was a director of the Company from March 1999 to June 2000.

In 1999, the Company engaged Public Strategies, Inc. ("PSI"), an
international strategic communications firm, to assist in the marketing of the
Company's new Internet products and services. During 2000 and 1999, the Company
paid PSI $447,000 and $770,000, respectively, for services performed and
related expenses. The chairman of PSI was a director of the Company from August
1998 to March 2000.

In May 1998, the Company acquired Petabyte Corporation ("Petabyte"), a
digital data distribution start-up enterprise founded by Mr. Cook, the
Company's founder and chief executive officer at the time of the transaction.
In consideration of the sale of Petabyte, the Company paid Mr. Cook $200,000
and agreed to pay Mr. Cook four annual payments of $200,000 each. In March
1999, the Company returned to Mr. Cook title to a Petabyte patent covering
certain digital data distribution concepts, while retaining a use license to
the patent for a nominal one-time payment. In connection with the return of the
title, the Company's future payments to Mr. Cook, totaling $800,000, were
eliminated.

8. EMPLOYEE BENEFIT PLANS

The Company has a retirement savings plan structured under Section 401(k) of
the Internal Revenue Code covering substantially all employees. Under the plan,
contributions are voluntarily made by employees, and the Company may provide
contributions based on the employees' contributions. The Company's continuing
operations includes $80,000, $61,000 and $32,000 in 2001, 2000 and 1999,
respectively, for contributions to this plan.

The Company has an employee stock purchase plan for substantially all
employees that meet minimum service requirements. The plan provides for the
purchase of up to 300,000 previously issued shares of the Company's common
stock. The employee contributes 85% of the purchase price through payroll
deduction with the difference paid by the Company. Since inception of the plan
in 1996, a total of 172,895 shares have been purchased including 12,856, 4,608
and 3,597 shares purchased in 2001, 2000 and 1999, respectively.

9. CONTINGENCIES

On December 30, 1999, the Company and ZixCharge.com, Inc., a wholly-owned
subsidiary of the Company, filed a lawsuit against Visa U.S.A., Inc. and Visa
International Service Association (collectively "Visa") in the 192/nd /Judicial
District Court of Dallas County, Texas, which alleges that Visa undertook a
series of actions that interfered with its ZixCharge prospective business
relationships and disparaged the Company, its products, its management and its
stockholders. The suit, which is scheduled for trial in July 2002, seeks
monetary damages and such other relief as the court deems appropriate. The
Company believes it is unlikely that any Visa member banks would enter into any
ZixCharge sponsorship agreements until the Visa litigation is resolved.
Moreover, the resolution of the lawsuit could have a material effect on the
Company's ability to market the ZixCharge system.

F-18

ZIXIT CORPORATION
(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company is involved in legal proceedings that arise in the ordinary
course of business. In the opinion of management, the outcome of pending legal
proceedings will not have a material adverse affect on the Company's
consolidated financial statements.

As discussed in Note 3, the Company is currently unable to assess the amount
of the liability, if any, to Anacom or the Company, which may result from the
unauthorized access to Anacom's databases.

10. INTERNATIONAL DISTRIBUTION AGREEMENTS

In June 2001, the Company entered into an agreement with AlphaOmega Soft
Co., Ltd. ("AlphaOmega") whereby AlphaOmega became the exclusive distributor
for the ZixMail service in Japan for three years. The Company is to provide a
Japanese language version of ZixMail for AlphaOmega. A revenue sharing
arrangement provides for AlphaOmega to pay the Company a specified portion of
the subscription fees charged to AlphaOmega's customers. Pursuant to this
agreement, the Company is to receive minimum payments totaling $1,200,000
through March 2004, of which $100,000 was received in 2001.

In October 2001, the Company entered into an agreement with 911 Computer
Co., Ltd. ("911") whereby 911 became the exclusive distributor for the ZixMail
service in South Korea for two years. Pursuant to the agreement, the Company
and 911 are to share the related revenues, with 911 agreeing to pay the Company
minimum installment payments totaling $2,000,000 over the term of the
agreement, of which $100,000 was received in 2001. Currently, 911 is in default
of the agreement for the failure to pay scheduled installment payments totaling
$614,000. If the agreement is renegotiated rather than canceled, the Company
expects the minimum installment payments to be substantially reduced.

11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the quarterly results of operations for the
years ended December 31, 2001 and 2000:

Quarter Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------

2001
Revenues....................... $ 104,000 $ 123,000 $ 36,000 $ 54,000
Cost of revenues............... (3,274,000) (3,259,000) (2,647,000) (5,816,000)
Loss from continuing operations (13,610,000) (11,394,000) (12,440,000) (19,350,000)
Net loss....................... (13,562,000) (11,394,000) (12,440,000) (19,350,000)
Net loss per share............. (0.80) (0.67) (0.73) (1.13)

2000
Revenues....................... $ 96,000 $ 92,000 $ 99,000 $ 107,000
Cost of revenues............... (2,907,000) (2,446,000) (2,753,000) (2,715,000)
Loss from continuing operations (11,136,000) (9,764,000) (16,022,000) (12,400,000)
Net loss....................... (11,136,000) (9,456,000) (15,956,000) (12,333,000)
Net loss per share............. (0.72) (0.58) (0.96) (0.73)

The quarter ended June 30, 2001 includes a non-recurring net reduction in
operating costs of $3,000,000 as a result of ceasing all operations at Anacom
(Note 3). The quarter ended September 30, 2001 includes a $1,500,000 write-down
of the investment in Maptuit (Note 7). The quarter ended December 31, 2001
includes a $3,500,000 write-off of the remaining investment in Maptuit (Note 7)
and a $3,000,000 write-off of digital identification certificates (Note 3).

F-19