UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-K





(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, 2008


or





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





Commission
File Number 000-51720





InferX
Corporation


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
            
            54-1614664(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            
            (I.R.S.
      Employer Identification No.)1818
      Library Street, Suite 500
              Reston,
      Virginia
            
            20190(Address
      of Principal Executive Offices)
            
            (Zip
      Code)





Registrant’s
telephone number, including area code: (703) 956-3561





Securities
registered pursuant to Section 12(b) of the Act:





Title
      of each class
            
            Name
      of each exchange on which registeredNone





Securities
registered pursuant to Section 12(g) of the Act:





Common
stock, $.0001 par value


(Title of
Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes  ̈   No
x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes  ̈   No
x





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 (§229.405 of this chapter) 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.   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer    ̈
                Accelerated
      filer    ̈Non-accelerated
      filer    ̈
                Smaller
      reporting company   x(Do
      not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).    Yes o   No
x





As of
June 30, 2008, the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by the average bid and asked price of our
common stock was $473,581.





As of
April  14, 2009, 17,738,510 shares of common stock, $0.001 par value
per share, were issued and outstanding.





Documents
Incorporated By Reference:   None







Table of
Contents




PagePART IItem
      1.
                                                                                                                  Business
                                                                                                                  
                                                                                                                  2Item
      1A.
                                                                                                                  Risk
      Factors
                                                                                                                  
                                                                                                                  9Item
      2.
                                                                                                                  Properties
                                                                                                                  
                                                                                                                  13Item
      3.
                                                                                                                  Legal
      Proceedings
                                                                                                                  
                                                                                                                  13Item
      4.
                                                                                                                  Submission
      of Matters to a Vote of Security Holders
                                                                                                                  
                                                                                                                  14PART IIItem
      5.
                                                                                                                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                                                                                  
                                                                                                                  14Item
      6.
                                                                                                                  Selected
      Financial Data
                                                                                                                  
                                                                                                                  14Item
      7.
                                                                                                                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                                                                  
                                                                                                                  14Item
      7A.
                                                                                                                  Quantitative
      and Qualitative Disclosures About Market Risk
                                                                                                                  
                                                                                                                  22Item
      8.
                                                                                                                  Financial
      Statements and Supplementary Data
                                                                                                                  
                                                                                                                  22Item
      9.
                                                                                                                  Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                                                                                                                  
                                                                                                                  22Item
      9A(T)
                                                                                                                  Controls
      and Procedures
                                                                                                                  
                                                                                                                  22Item
      9B.
                                                                                                                  Other
      Information
                                                                                                                  
                                                                                                                  24PART IIIItem
      10.
                                                                                                                  Directors,
      Executive Officers and Corporate Governance
                                                                                                                  
                                                                                                                  25Item
      11.
                                                                                                                  Executive
      Compensation
                                                                                                                  
                                                                                                                  27Item
      12.
                                                                                                                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                                                                                  
                                                                                                                  28Item
      13.
                                                                                                                  Certain
      Relationships and Related Transactions, and Director
      Independence
                                                                                                                  
                                                                                                                  29Item
      14.
                                                                                                                  Principal
      Accounting Fees and Services
                                                                                                                  
                                                                                                                  30PART IVItem
      15.
                                                                                                                  Exhibits
      and Financial Statement Schedules
                                                                                                                  
                                                                                                                  30SIGNATURES





1





SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS





Certain
statements in this Annual Report on Form 10-K, including statements under “Item
1. Business,” and “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” contain 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, although the safe harbor under those statutes
do not apply to companies such as InferX that issue penny
stock.  Forward-looking statements include, among other things,
business strategy and expectations concerning industry conditions, market
position, future operations, margins, profitability, liquidity and capital
resources. Forward-looking statements generally can be identified by the use of
terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate”
or “believe” or similar expressions or the negatives thereof. These expectations
are based on management’s assumptions and current beliefs based on currently
available information. Although we believe that the expectations reflected in
such statements are reasonable, we can give no assurance that such expectations
will be correct. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this annual
report on Form 10-K. Our operations are subject to a number of uncertainties,
risks and other influences, many of which are outside our control, and any one
of which, or a combination of which, could cause our actual results of
operations to differ materially from the forward-looking
statements.





PART
I




Item
1.   Business




We
develop and market enterprise software that performs privacy preserving
predictive analysis on computer databases. Predictive analytics is the analysis
of historical and current information to identify trends and patterns to predict
likely future outcomes. Our products simultaneously analyze data in multiple
remote locations with disparate formats without the need to move the data to a
central data warehouse, thereby preserving the privacy and security of the data.
Our technology can be used to identify and predict risks and opportunities in
near real time for many applications, including homeland security, fraud and
intrusion detection, and customer relationship management, or CRM. For example,
our technology could help identify high risk cargo containers, identify
fraudulent insurance claims or identify opportunities for cross selling and
customer retention.




Historically,
we have derived nearly all of our sales revenues under federal government
contracts. Under these contracts, we performed research and development that
enabled us to retain ownership of the intellectual property, which led to the
creation of our current products. Due to the relatively small and uncertain
margins associated with fixed price government contracts and the inherent limit
of the market size, in fiscal 2002 we began to develop our software as a
commercial product, concentrating on building specific applications that we
believed would meet the needs of potential new customers. In fiscal 2003, we
sold two commercial software licenses. However, since fiscal 2004, all of our
revenues have derived from government contracts. Currently, we have one contract
with the Department of Veterans Affairs.




Recent
Events




On March
16, 2009 we executed an agreement to merge with The Irus Group, a business
intelligence and corporate performance management solution provider that
provides planning an budgeting solutions to financial services firms and
government organizations.  At the effective time of the merger, the
InferX board of directors agrees to appoint Vijay Suri, The Irus Group
President, as President and CEO of InferX and to have Vijay Suri fill a vacancy
on our Board of Directors. Under the terms of the merger agreement, the issued
and outstanding shares of The Irus Group common stock will be automatically
converted into the right to receive 70% of our issued and outstanding shares of
common stock. In addition, effectiveness of the merger agreement is conditioned
upon (i) our restructuring existing debt by converting the existing debt and
warrants to common stock with the intention of having no more than 57-60 million
shares of our common stock outstanding prior to effecting a reverse split of not
less than 1:10, (ii) our using its best efforts to reduce its accounts payable
by 70%, (iii) Vijay Suri and Ray Piluso, executive employees of The Irus Group,
each executing an employment agreement with us and (iv) additional customary
closing conditions relating to the delivery of financial statements, closing
certificates as to representations and warranties, and the delivery of any
required consents or government approvals.  The merger is expected to
be completed by June 30, 2009.


2


Corporate
History




Our
company was incorporated in Delaware in May 2005 under the name Black Nickel
Acquisition Corp. I. From inception to October 2006, we were a “shell
company” with no business or operations and only nominal assets. In October
2006, we acquired and merged with InferX Corporation, a Virginia corporation
formed in 1992 (“InferX
Virginia”), and succeeded to its business as our sole line of business.
In connection with the merger, we changed our name to “InferX
Corporation.”




InferX
Virginia was formed in August 2006 by the merger of the former InferX
Corporation, a Delaware corporation (“InferX
Delaware”), with and into Datamat Systems Research, Inc., a Virginia
corporation and an affiliate of InferX Delaware through common ownership (“Datamat”),
pursuant to which Datamat was the surviving corporation and changed its name to
“InferX Corporation.” Datamat was formed in 1992 as a professional services
research and development firm, specializing in technology for distributed
analysis of sensory data relating to airborne missile threats under contracts
with the Missile Defense Agency and other Department of Defense (“DoD”)
contracts. InferX Delaware was formed in 1999 to commercialize Datamat’s missile
defense technology to build applications of real time predictive analytics. The
original technology was developed in part with grants by the Missile Defense
Agency.




Market
Opportunity




We
believe that the demand for predictive analytics technology, in general, has
increased in the last several years. Moreover, the need for advanced predictive
analytics to analyze data in multiple remote locations has significantly
increased due to the heightened security concerns after the events of September
11, 2001 and the proliferation of databases across the intelligence community
and federal agencies. Our key executives have been working with the federal
government for several years and have gained insight into the need for advanced
predictive analytics software and the required capabilities of that software,
particularly within the Department of Homeland Security (“DHS”).
Prior to joining InferX, one of our key executives was tasked by the Office of
the Inspector General to assess all of the analytics systems within DHS. His
findings, some of which have been publicly released, show that there is a
significant need for advanced predictive analytics technology that is privacy
preserving and that analyzes data in multiple remote locations and predicts
risks and opportunities in near real time. For example, DHS needs the ability to
identify prospective terrorist threats by analyzing sensitive information
contained in disparate databases maintained by different organizations, such as
consumer and demographic information maintained by companies like Acxiom
Corporation, consumer credit information maintained by companies like Experian
and financial transaction information maintained by the United States Department
of the Treasury Financial Crimes Enforcement Network (“FinCEN”),
all without jeopardizing the secrecy of the underlying information.




In
addition, our management has evaluated a number of activities where national and
homeland security related concerns will require predictive analysis software. We
believe that cargo security, particularly involving shipments through ports, as
part of the international supply chain presents a need for predictive analytics
software, with both government and private industry as potential purchasers of
such software. Accordingly, we have developed a cargo security solution based on
our technology that can simultaneously analyze data from manufacturers,
distributors, shippers, port operators, customs authorities and others in the
supply chain to identify shipments that pose a higher security risk and merit
greater scrutiny or additional screening. We have completed and are currently
marketing our cargo security solution.




As a
result of the United States’ efforts, particularly through Customs and Border
Protection under DHS, to secure the international supply chain and the need for
the international community to adopt cargo security standards to ship cargo
through U.S. ports, we believe that there will be a significant international
market for our solution.


3


We
believe our products have a broad application in many other verticals in the
areas of fraud detection, risk analysis and customer retention. Specific
examples of potential uses of our products are as follows:




•
            Financial
      Services: Increase customer retention; optimization of cross selling;
      detection of money laundering; and fraud
  detection.




•
            Insurance:
      Increase customer profitability; fraud detection; optimization of cross
      selling; and customer compliance.




•
            Healthcare:
      Optimal treatment analysis; clinical drug trial analysis; analysis of
      medical images; and healthcare fraud and abuse
  detection.




•
            Retail:
      Promotion effectiveness analysis; product placement analysis; optimization
      of cross selling; and sales force
optimization.




Our
Product Offerings




InferAgent®




Our
flagship product is InferAgent. InferAgent was originally developed to analyze
distributed sensor data from different locations for the Missile Defense Agency,
an agency within the DoD. Lockheed Martin has successfully used InferAgent to
analyze sensor data for a classified military project for target discrimination
and acquisition.




InferAgent
can analyze data in multiple geographic locations, in near real time without
ever moving the data. InferAgent uses the Internet and private Intranets to
analyze information from multiple locations. We use encrypted pointers to the
data, which cannot be used to expose the data they represent, to move
information across the network, thereby preserving the security and privacy of
the databases.




As a
result of the analysis, InferAgent can detect and predict risks and
opportunities for both commercial and government customers. InferAgent is a
generic solution that analyzes data in any structured data format. Based upon
the trends and interrelations among the data, it can identify any kind of risk
or opportunity that is relevant to the application.




For
example, in national and homeland security applications, InferAgent could
identify terrorism risks in the international supply chain – this is our cargo
security application. InferAgent can analyze order data maintained by importers,
customer order history and other data maintained by manufacturers, shipping
manifests maintained by shipping companies, customer information maintained by
freight forwarders. By analyzing these disparate databases using our technology,
InferAgent can detect anomalies and other predictors of increased risk that
would help port operators identify incoming shipments that should be subjected
to increased scrutiny.




In the
financial services sector, InferAgent could identify opportunities for cross
selling or transactions that are likely tied to money laundering, fraud or other
illegal activity. InferAgent can analyze large databases of consumer credit
history and demographic information maintained by companies like Acxiom and
Experian together with a company’s internal customer history database to help
the company identify products or services it does not currently offer but that
its customers would likely be interested in buying. Analyzing consumer credit
history and demographic information together with financial transaction
information maintained by FinCEN could detect suspicious transactions or
individuals who are engaging in suspicious financial transactions.




We
believe that InferAgent has placed us at the forefront of a new category of
technology called “privacy preserving analytics.” Members of our management have
attended two academic conferences focused on privacy preserving analytics and
conducted research of competing solutions on the market in development. To our
knowledge, none of our competitors has a product that can simultaneously analyze
data in multiple locations while maintaining the security and privacy of the
underlying information. With InferAgent, privacy is preserved because the data
is not moved.


4


InferTextTM




Based on
InferAgent’s distributed architecture, InferText is designed to analyze
unstructured content, such as documents, email and other types of text. Unlike
traditional, keyword search based approaches to unstructured content, InferText
transforms unstructured content into a format that facilitates the discovery of
meaningful relationships among documents. We launched the commercial release of
InferText in December 2007.




InferClusterTM




Clustering
refers to the partitioning of data into groups such that data within the same
group are more similar to each other than data in different groups. Clustering
makes it easier to recognize outliers and other anomalies in the data. We
believe that this has become an increasingly essential data analysis task.
InferCluster automatically identifies similarities and performs this clustering
without the need for user intervention. For example, in the financial services
industry, clustering could group wire transfers according to various
characteristics – amount, country of origin, date – and by revealing anomalous
transactions, lead to the identification of money laundering
activity.




InferCluster
is designed to automatically perform clustering on distributed data, which we
believe no other clustering solution currently does. InferCluster uses the same
distributed architecture as InferAgent. We launched the commercial release of
InferCluster in December 2007.




Distributed
Data Analytics Platform (D2A), used to concurrently analyze data using
InferAgent, InferText  and InferCluster.




InferSearch
, new product for providing new search capability for search of open source
internet data (Mini context based Google type search with
precision).


5


Patents
and Trademarks




We
developed our technology primarily under Small Business Innovative Research
contracts with the federal government. These government contracts allowed us to
retain ownership of the intellectual property. Our technology is protected by
the following patents:




Patent
                  
                  Information
                  
                  Dates
                  
                  StatusInferView
                  
                  Full
      application
                    US
      Serial: 10/617,054
                  
                  Filed
      July 2003
                  
                  PublishedInferAgent
                  
                  US
      Patent No.:  7,308,436
                  
                  Filed
      July 2003, Issued December 2007
                    Expires
      April 2024
                  
                  IssuedA
      hybrid Bayesian decision tree for classification
                  
                  Full
      application
                    US
      Serial: 11/090,364
                  
                  Filed
      March 2005
                  
                  PublishedInferCluster
                  
                  Full
      application
                    US
      Serial:
                    11/904,982
                  
                  Filed
      September 2007
                  
                  PendingInferText
                  
                  Full
      application
                    US
      Serial:
                    11/904,674
                  
                  Filed
      September 2007
                  
                  PendingSupply
      Chain Risk Assessment Application
                  
                  Full
      application
                    US
      Serial:
                    12/069,948
                  
                  Filed
      February 2008
                  
                  Pending




Our
InferView patent protects the product’s unique graphical user interface that
helps visualize decision making models.




The
InferAgent patent covers the architecture, algorithms and framework underlying
InferAgent’s distributed data mining processes.




The
hybrid Bayesian decision tree for classification patent describes our method for
increasing the speed of decision making.




Our
InferCluster Patent protects our unique method of automatically identifying
similarities and performing clustering without the need for user
intervention.




The
InferText patent covers the method for transforming unstructured content into a
format that facilitates the discovery of meaningful relationships among
documents and other data.


6


The
Supply Chain Risk Assessment Application patent covers our methods of applying
our technology to cargo risk assessment.




Competition




The
market for our solutions is intensely competitive and is constantly changing.
Our competitors vary in the size and scope of the products and services they
offer. We encounter competition from a number of sources,
including:




•
            predictive
      modeling companies;




•
            CRM
      solutions providers;




•
            business
      intelligence solutions providers;
and




•
            software
      companies supplying modeling, rules or analytic development
      tools.




Companies
such as SAS Institute Inc., SPSS Inc., Fair Isaac Corporation, Angoss Software
Corp., Megaputer Intelligence, Inc. and Insightful Corporation offer stand-alone
software systems that perform predictive analysis on single desktops and
servers. InferAgent can operate on multiple, geographically-dispersed
computers.




Oracle
Corporation and Teradata  provide analytical tools that only operate
with their respective proprietary database products. InferAgent can operate with
multiple databases, regardless of the underlying database format.




Companies
such as Infoglide Software Corporation, International Business Machines
Corporation, Knowledge Computing Corporation, Exegy, Inc. and Dulles Research,
LLC, market software that can perform discovery over networks and distributed
data sources. However, we believe that their software has no predictive analytic
capabilities and generally provides only for discrete pattern matching, such as
matching of names, phone numbers, IP addresses, etc.




We
believe our products offer the following advantages compared to our
competition:




•
            access
      and mine remote data




•
            provide
      predictive analysis where many future risks and opportunities can be
      identified




•
            work
      with multiple databases in different
formats




•
            integration
      of both structured and unstructured
analysis




•
            preserve
      the privacy of data




•
            maintain
      the security and ownership of data




•
            eliminate
      the need for creating data
warehouses




•
            provide
      near real time analysis and
prediction




We
believe access to additional data sources beyond those in a data warehouse
provides a better basis for more accurate analysis. Also, we believe that the
elimination of the need for a data warehouse will result in cost and time
savings and reduce on-going support and maintenance expenses. Accordingly, we
believe using our systems can result in a significant return on
investment.


7


Sales
and Marketing




We have
used outside consultants to assist us in developing our marketing and collateral
material, branding and Web design and content creation. We also use outside
consultants to help develop market and media awareness campaigns along with
public relations strategies. We are not substantially dependent on our
relationship with these outside consultants to accomplish our marketing
plans.




We have
positioned InferX as a leading provider of Privacy Preserving Real-Time
Analytics solutions. With the assistance of our public relations firm, we have
positioned key members of InferX management as industry experts where we provide
expert analysis to the technical and media communities.




Although
we currently have no contractual relationship, we have also worked with Northrop
Grumman and Lockheed Martin, both of which we believe have substantial
credibility within DHS. Both companies use our software, and we believe our
previous work with them will allow us to explore potential business
opportunities with them on possible future DHS contracts at a minimal cost. We
also have developed a network of business development and marketing
professionals who work directly with large systems integrators, such as
Raytheon, General Dynamics, SAIC and others.




Our sales
strategy is to identify potential customers by targeting entities where there is
a need for advanced analyses and data privacy is a significant concern. Our
early focus is on the following:




1.
            components
      of DHS that are analyzing intelligence, detecting terrorist activities and
      detecting criminal activities or
patterns;




2.
            other
      U.S. federal government departments where focus is
  on:




·
            detecting
      fraud, waste and abuse;




·
            detecting
      criminal activities; or




·
            improving
      service or performance;




3.
            international
      supply chain participants, such as importers, sea carriers, sea ports and
      terminal operators;




4.
            the
      financial community in need of advanced CRM solutions;
  and




5.
            commercial
      enterprises that we expect would be early adopters of advanced analytics
      technologies, such as financial services and insurance
    firms.




In 2008
we focused on building relationships with channel partners that are leading
systems integrators, application developers and platform partners, to generate
sales to high-volume data content owners both domestically and abroad. The
channel partners will be compensated by substantial product discounts that are
consistent in the industry.  We entered into a memorandum of
understanding in November 2008 to work with The Irus Group.




Through
2009, we plan to expand our sales and marketing force to seven
employees.




Customers




Government
contracts are currently our sole source of revenue. For the past two years,
payments under contracts with the Missile Defense Agency have accounted for
substantially all of our revenues from operations. We expect that government
contracts will continue to be a significant source of our revenues for the
foreseeable future.


8


Research
and Development




We have
developed a company wide research and development plan which focuses on
continued development and enhancement of the features and performance of our
current products. We also have a detailed plan for the development of new
product offerings. Three of our eight employees devote at least a portion of
their time to research and development activities. During the last two fiscal
years, our employees devoted approximately 25% of their time to research and
development activities.  Historically, our research and development
has been performed pursuant to government contracts under which we retained the
intellectual property rights to the technology.




Employees




We have
five employees and two consultants: three full-time employees, two of whom
devote at least a portion of their time to sales and marketing and two part time
executive employees, and one part-time administrative employee. Two of our
employees are members of management.  To the best of our knowledge, we
are in compliance with local prevailing wage, contractor licensing and insurance
regulations. None of our employees is represented by any collective bargaining
agreement, and our relationship with our employees is good.




Item
1A.  Risk Factors




Investing
in our securities involves a high degree of risk.  Before investing in
our securities, you should carefully consider the risks and uncertainties
described below and the other information in this filing before deciding to
purchase our common stock. If any of these risks or uncertainties actually
occurs, our business, financial condition or future operating results could be
materially harmed. In that case, the price of our common stock could decline and
you could lose part or all of your investment.




Risks
Related to Our Operating Results and Business




The
likelihood of successfully implementing our business plan cannot be predicted
from our limited operating history.




Although
our predecessor entity commenced operations in January 1992, we entered our
current business based on software product sales in April 2000 and achieved our
first sale in 2003. Since then, our software product sales have totaled less
than $1,000,000. Therefore, there is limited historical basis on which to
determine whether we will be successful in implementing our business
plan.




The
market for our products and services is new and evolving and a viable market may
never develop or may take longer to develop than we anticipate.




Our
software and services represent what we believe is a novel entry in an emerging
market, and we do not know the extent to which our targeted customers will want
to purchase them. The development of a viable market for our products may be
impacted by many factors which are out of our control, including customer
reluctance to try new products and services and the existence and emergence of
products and services marketed by better-known competitors.




If a
viable market fails to develop or develops more slowly than we anticipate, we
may be unable to recover the losses we will have incurred to develop our
products and services and may be unable to achieve profitability.




We
operate in a competitive market which could constrain our future growth and
profitability.




We
operate in a competitive environment, competing for customers with software
companies, consulting firms and others. Many of our competitors offer
complimentary products and/or services that we do not offer. Moreover, some of
our competitors are much larger than we are, have proven products and services
and may have the marketing and sales capabilities to commercialize competing
products and services more effectively than we can.


9


The
industry in which we operate is characterized by rapid technological changes,
and our continued success will depend upon our ability to react to such
changes.




The
markets for our products and services are characterized by rapidly changing
technology. The introduction of products or services embodying new technology
can render our existing products and services obsolete and unmarketable and can
exert price pressures on existing products and services. It is critical to our
success for us to be able to anticipate changes in technology and to
successfully develop and introduce new, enhanced and competitive products and
services on a timely basis. We cannot assure you that we will successfully
develop new products or services or introduce new applications for existing
products and services, that new products and applications will achieve market
acceptance or that the introduction of new products, services or technological
developments by others will not render our products and services obsolete. Our
inability to develop products and services that are competitive in technology
and price and meet customer needs could have a material adverse effect on our
business, financial condition or results of operations.




Our
management controls a substantial percentage of our stock and therefore has the
ability to exercise substantial control over our affairs.




As of the
date of this filing, our directors and executive officers beneficially owned
4,843,463 shares, or approximately 36%, of our outstanding common stock in the
aggregate. Because of the large percentage of stock held by our directors and
executive officers, these persons could influence the outcome of any matter
submitted to a vote of our stockholders.




The
loss of our executive officers and certain other key personnel could hurt our
business.




Our
success wholly depends upon the personal efforts and abilities of our Chairman
of the Board, officers and other key personnel, B.K. Gogia, and Jerzy Bala. The
loss of or unavailability of the services of either one of these two individuals
would have a material adverse effect on our business prospects and/or potential
earning capacity.




We
may not be able to hire and retain qualified technical personnel.




Competition
for qualified personnel in the computer software industry is intense, and we may
not be successful in attracting and retaining such personnel. Failure to attract
qualified personnel could harm the proposed growth of our business. In addition,
companies in our industry whose employees accept positions with competitors
frequently claim that the competitors have engaged in unfair hiring practices.
We may receive such notices in the future as we seek to hire qualified personnel
and such notices may result in material litigation and related disruption to our
operations.




We
may not be able to protect important intellectual property, and we could incur
substantial costs defending against claims that our products infringe on the
proprietary rights of others.




We
currently have three patent applications pending and we have filed two
provisional patents recently. While we believe that we have a proprietary
position in component technologies for our products, our ability to compete
effectively will depend, in part, on our ability to protect our proprietary
technologies, processes and designs, to secure patents for the applications we
have pending and to protect those patents that we may secure. We do not know
whether any of our pending patent applications will be issued or, if issued,
that the claims allowed are or will be sufficiently broad to protect our
technology or processes. Even if all of our patent applications are issued and
are sufficiently broad, our patents may be challenged or
invalidated.


10


We could
incur substantial costs in prosecuting or defending patent infringement suits or
otherwise protecting our intellectual property rights. While we have attempted
to safeguard and maintain our proprietary rights, we do not know whether we have
been or will be completely successful in doing so.




We
may face liability claims from future customers if our software malfunctions or
contains undetected defects.




Our
products have in the past contained, and may in the future contain, undetected
or unresolved errors when first introduced, as new versions are released, or
otherwise. Despite extensive testing, errors, defects or failures may be found
in our current or future products or enhancements after they have been installed
by customers. If this happens, we may experience delay in or loss of market
acceptance and sales, diversion of development resources, injury to our
reputation or increased service costs, any of which could have a material
adverse effect on our business, financial condition and results of operations.
Moreover, because our products are designed to provide critical data analysis
services, we may receive significant liability claims. Although we intend to
obtain product liability insurance covering certain damages arising from
implementation and use of our products, our insurance may not cover all claims
sought against us. Liability claims could require us to spend significant time
and money in litigation or to pay significant damages. As a result, any such
claims, whether or not successful, could seriously damage our reputation and
business.




We
must ensure the protection and privacy of customer data.




We rely
on complex encryption algorithms and technology to secure customer
data.  We believe our products protect the security and privacy of
customer data by transmitting encrypted pointers to customer data, rather than
the data itself, across the Internet and existing dedicated transmission
lines.  However, if customer data is misappropriated or
unintentionally disclosed as a result of an actual or perceived failure of our
software, our reputation, and ultimately our business, would be seriously
harmed, and we could face liability claims.




We
currently are dependent on contracts with the federal government for all of our
revenues.




Revenues
derived from federal government contracts accounted for all of our revenues
since fiscal 2004. We expect that government contracts will continue to be a
significant source of our revenues for the foreseeable future. Our business
generated from government contracts may be adversely affected if:




•
            levels
      of government expenditures and authorizations for national and homeland
      security related programs decrease, remain constant or shift to programs
      in areas where we do not provide products and
  services;




•
            we
      are prevented from entering into new government contracts or extending
      existing government contracts based on violations or suspected violations
      of procurement laws or regulations;




•
            we
      are not granted security clearances that are required to sell our products
      or services or such security clearances are revoked;
  or




•
            our
      reputation or relationship with government agencies is
      impaired.




Most of
our contracts with the government, including our current contract with the
Department of Veterans Affairs, contain standard provisions that provide for
termination at the convenience of the government pursuant to which we are
entitled to recover costs incurred, settlement expenses, and profit on work
completed prior to termination.


11


If
we fail to comply with complex procurement laws and regulations, we may be
subject to civil and criminal penalties and administrative
sanctions.




We must
comply with laws and regulations relating to the formation, administration and
performance of government contracts. These laws and regulations affect how we do
business with government agencies and may impose added costs on our business.
For example, we are subject to the Federal Acquisition Regulations, which
comprehensively regulate the formation, administration and performance of
federal government contracts, and to the Truth in Negotiations Act, which
requires certification and disclosure of cost and pricing data in connection
with contract negotiations.




If a
government review or investigation uncovers improper or illegal activities, we
may be subject to civil and criminal penalties and administrative sanctions,
including termination of contracts, forfeiture of profits, suspension of
payments, fines and suspension or debarment from doing business with government
agencies, which could materially and adversely affect our business, financial
condition and results of operations. In addition, a government may reform its
procurement practices or adopt new contracting rules and regulations that could
be costly to satisfy or that could impair our ability to obtain new
contracts.




Risks
Related to Our Common Stock




Currently,
there is a limited trading market for our common stock, which may adversely
impact your ability to sell your shares and the price you receive.




There is
currently a limited trading market for our common stock and a more active
trading market for our common stock may never develop or be sustained. The
market price of our common stock may be significantly affected by factors such
as actual or anticipated fluctuations in our operating results, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the shares of developmental stage
companies, which may materially adversely effect the market price of our common
stock without regard to our operating performance. These fluctuations may also
cause short sellers to enter the market from time to time in the belief that we
will have poor results in the future. We cannot predict the actions of market
participants and, therefore, can offer no assurances that the market for our
common stock will be stable or appreciate over time. Furthermore, for companies
such as us whose securities are quoted on the OTC Bulletin Board, it is more
difficult (1) to obtain accurate quotations, (2) to obtain coverage for
significant news events because major wire services generally do not publish
press releases about such companies, and (3) to obtain needed capital. These
factors may negatively impact your ability to sell shares of our common stock
and the price you receive.




Our
common stock is deemed to be a “penny stock,” which may make it more difficult
for you to sell your shares.




Our
common stock is subject to the “penny stock” rules adopted under Section 15(g)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The
penny stock rules apply to companies whose common stock is not listed on the
NASDAQ Stock Market or another national securities exchange and trades at less
than $5.00 per share or that have tangible net worth of less than $5,000,000
($2,000,000 if the company has been operating for three or more years). These
rules require, among other things, that brokers who trade penny stock to persons
other than “established customers” complete certain documentation, make
suitability inquiries of investors and provide investors with certain
information concerning trading in the security, including a risk disclosure
document and quote information under certain circumstances. Many brokers have
decided not to trade penny stocks because of the requirements of the penny stock
rules and, as a result, the number of broker-dealers willing to act as market
makers in such securities is limited. Remaining subject to the penny stock rules
should be expected to have an adverse effect on the market for our common stock
by reducing the number of potential investors. This may make it more difficult
for investors in our common stock to sell shares to third parties or to
otherwise dispose of them. This could cause our stock price to
decline.


12


We
need to raise additional capital, but that capital may not be
available.




Our
existing capital is insufficient to fund our operations beyond the second
quarter of 2009. We believe the anticipated revenues from potential customer
contracts along with the sale of a limited amount of equity will enable us to
meet our financial obligations as they become due. However, we are not
generating sufficient revenues to increase our working capital or to carry out
our proposed business objectives and continue to operate as a going concern
beyond the near term, and we need to obtain additional financing or reduce our
expenses by curtailing our operations.




We cannot
assure you that we will be successful or that our operations will generate
sufficient revenues, if any, to meet the expenses of our operations. Although we
are seeking additional financing, such financing may not be available or, if
available, may not be available on satisfactory terms. Additionally, the nature
of our business activities may require the availability of additional funds in
the future due to more rapid growth than is forecast, and thus, we may need
additional capital or credit lines to continue that rate of business growth. We
may encounter difficulty in obtaining these funds and/or credit lines. Moreover,
even if additional financing or credit lines were to become available, it is
possible that the cost of such funds or credit would be high and possibly
prohibitive.




If we
were to decide to obtain such additional funds by equity financing in one or
more private or public offerings, current stockholders would experience a
corresponding decrease in their percentage ownership.




Our
independent registered public accounting firm has expressed substantial doubt
regarding our ability to continue as a going concern.




Our
audited financial statements for the years ended December 31, 2008 and 2007 have
been prepared under the assumption that we will continue as a going concern. Our
independent registered public accounting firms have issued their report dated
March 23, 2009 in connection with the audit of our financial statements for the
years ended December 31, 2008 and 2007 that included an explanatory paragraph
describing the existence of conditions that raise substantial doubt about our
ability to continue as a going concern due to our having sustained operating
losses and capital deficits from operations. The fact that we have received this
“going concern opinion” from our independent registered public accounting firm
will likely make it more difficult for us to raise capital on favorable terms
and could hinder, to some extent, our operations. Additionally, if we are not
able to continue as a going concern, it is likely that stockholders will lose
all of their investment. Our financial statements do not include any adjustments
that might result from the outcome of this uncertainty.




Item
      2.
            Properties




We lease
office space at 1818 Library Street, Suite 500, Reston, Virginia pursuant to a
month-to-month lease agreement. Our lease provides for a monthly rental of
approximately $1500.00. The space can accommodate approximately five staff. We
believe that our facilities are adequate for our needs and that additional space
is readily available should we need it.




Item
      3.
            Legal
      Proceedings




Arnold
Worldwide, Inc., the landlord of InferX at its former premises at 1600
International Drive, Suite 110, McLean, Virginia 22102 , commenced an unlawful
detainer action against InferX in the General District Court of Fairfax County,
seeking (i) damages, including rent due under the sublease between InferX and
Arnold Worldwide, late fees due under the sublease, and attorney’s fees due
under the sublease for approximately $94,555; and (ii) an order for possession
of the Premises.  The case was dismissed without prejudice in May 2008
subject to a series of payments promised by InferX. InferX has paid
approximately $30,000 leaving a deficiency of approximately $65,000. We agreed
to the entry of a Consent Order of Possession that allowed Arnold Worldwide to
take possession of the premises since we wanted to reduce our expenses as much
as possible and find less expensive office space.  The lease for the
premises at 1600 International Drive terminated November 30,
2008.


13


Item
      4.
            Submission
      of Matters to a Vote of Security
Holders




None.




PART
II




Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchase of Equity Securities




Market
Information




Our
common stock has been quoted on the OTC Bulletin Board under the symbol “IFRX”
since December 5, 2007.




The
following table sets forth the high and low closing bid quotations for our
common stock for each calendar quarter since December 5, 2007 as reported by the
Pink Sheets. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.




Bid
      Price Per ShareHigh
                  
                  
                  Low2007October
      1 through December 31
                  
                  
                  .53
                  
                  
                  
                  .102008January
      1 through March 31
                  
                  
                  .55
                  
                  
                  
                  .21April
      1 through June 30
                  
                  
                  .32
                  
                  
                  
                  .04July
      1 through September 30
                  
                  
                  .06
                  
                  
                  
                  .01October
      1 through December 31
                  
                  
                  .03
                  
                  
                  
                  .00




Holders




As of
April 14, 2009, there were 41 record holders of 17,738,510 issued and
outstanding shares of our common stock.




Dividends




We do not
intend to pay cash dividends on our common stock for the foreseeable future, but
currently intend to retain any future earnings to fund the development and
growth of our business. The payment of dividends if any, on the common stock
will rest solely within the discretion of the Board of Directors and will
depend, among other things, upon our earnings, capital requirements, financial
condition, and other relevant factors. We have not paid or declared any
dividends upon our common stock since inception.




Item
      6.
            Selected
      Financial Data




Not
applicable.




Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations




The
information set forth and discussed in this Management’s Discussion and Analysis
is derived from our financial statements and the related notes.  You
should read the following discussion of our financial condition and results of
operations together with the audited financial statements and the notes thereto
included in this Annual Report on Form 10-K for the year ended December 31,
2008. This discussion contains forward-looking statements that reflect our
plans, estimates and beliefs. Our actual results may differ materially from
those anticipated in these forward-looking statements, including those set forth
in this Annual Report on Form 10-K.


14


Overview





Our
company was formed in May 2005 to pursue a business combination. On October 24,
2006, we acquired InferX Corporation, a Virginia corporation (“InferX
Virginia”), and on October 27, 2006 we merged InferX Virginia into our company
and changed our name to “InferX Corporation.” After the acquisition of InferX
Virginia, we succeeded to its business as our sole line of business. InferX
Virginia was formed in August 2006 by the merger of the former InferX
Corporation, a Delaware corporation (“InferX Delaware”), with and into Datamat
Systems Research, Inc., a Virginia corporation and an affiliate of InferX
Delaware (“Datamat”), pursuant to which Datamat was the surviving corporation
and changed its name to “InferX Corporation.”





Datamat
was formed in 1992 as a professional services research and development firm,
specializing in technology for distributed analysis of sensory data relating to
airborne missile threats under contracts with the Missile Defense Agency and
other DoD contracts.  InferX Delaware was formed in 1999 to
commercialize Datamat’s missile defense technology to build applications of real
time predictive analytics. The original technology was developed in part with
grants by the Missile Defense Agency.




Historically,
we have derived nearly all of our sales revenues under federal government
contracts. Under these contracts, we performed research and development that
enabled us to retain ownership of the intellectual property, which led to the
creation of our current products. Due to the relatively small and uncertain
margins associated with fixed price government contracts and the inherent limit
of the market size, in fiscal 2002 we began to develop our software as a
commercial product, concentrating on building specific applications that we
believed would meet the needs of potential new customers. In fiscal 2003, we
sold two commercial licenses. However, since fiscal 2004, all of our revenues
have derived from government contracts. Currently, we have one contract with the
Department of Veterans Affairs.




Results
of Operations and Financial Condition




Fiscal
Years Ended December 31, 2008 and 2007




Revenue
for the year ended December 31, 2008 was  $80,934, a decrease
of  $290,159  from  $371,093 for the same period
in 2007. This was a result of a decrease in  federal contracts related
to the Company’s core competencies.




Direct
costs for the year ended December 31, 2008 were $273,383 compared to $372,680
for the same period in 2007, a decrease of $99,297.  The decrease in
direct costs in 2008 resulted primarily from fewer contract
requirements.




Operating
expenses, which include indirect labor, professional fees, advertising,
consulting and general and administrative, decreased $331,740 from $1,690,750
for the year ended December 31, 2007 to  $1,359,010 for the same
period in 2008.  The decrease is the result of the following: a
decrease in indirect and overhead labor and fringes of $82,532 resulting from
reduced costs related to in staffing in 2007; adecrease in professional services
of $365,185, consisting primarily of reduced legal and filing costs related to
public filings; an increase in share based compensation of $20,732 as a result
of options issued under the Company’s option plan; a decrease in travel of
$21,559 due to decreased  sales  activity; an increase in
rental expense related to our lease agreement in 2008 of $21,837; increase in
General and Administrative costs of $127,804; and a decrease in depreciation and
impairment of $15,261.


15


Liquidity
and Capital Resources




We had
cash of approximately $0 at December 31, 2008 and a working capital deficit
of  $1,859,458. During the year ended December 31, 2008, we used
approximately $510,614 from our operations. The primary areas of funding were
the proceeds received from the issuance of promissory notes and warrants in 2008
as well as from operating activities – the increase in accounts payable and
accrued expenses.  In October 2006, we completed a private placement
in which the investors paid $.50 per share of common stock, and also received
one five-year warrant with an exercise price of $.50 and one five-year warrant
with an exercise price of $.62. We sold 2,329,392 units in the private placement
(including $362,196 in cancellation of indebtedness and accrued interest under
outstanding bridge loans), resulting in gross cash proceeds of approximately
$802,500. In April 2007, we and holders of our Class A warrants agreed to reduce
the exercise price of 80% of the Class A warrants to $.25 per share for a period
of two weeks. We received approximately $407,000 from the exercise of 1,629,513
warrants. In November 2007, the holders of our Class A warrants exercised an
additional 444,879 warrants resulting in gross cash proceeds of approximately
$222,000. In March 2008, we sold three convertible notes in the aggregate
principal amount of $237,500. These convertible notes accrue interest at the
rate of 9.9% per annum and are convertible into our common stock at 50% of the
closing bid price of the common stock on the date of conversion.In June 2008, we sold
convertible notes in the aggregate principal amount of $45,000. These
convertible notes accrue interest at the rate of 9.9% per annum and are
convertible into our common stock at a fixed price of $0.10 per share of common
stock on the outstanding principal and accrued interest on the date of
conversion.




We have
entered into a merger agreement with The Irus Group that has generated some
additional revenue  and we expect to pursue additional business
opportunities together prior to the effective time of the merger.  We
expect to reduce some of our overhead costs by combining offices and personnel
functions to reduce the expected increase in staff for anticipated
sales.  We will need to generate significant additional revenue to
support our projected increases in staffing and other operating expenses, which
we cannot give any assurance we will be able to accomplish. Our current
operating expenditures are approximately $125,000 per month to support our
operations, and under our projected growth plan, we expect to double that amount
to approximately $250,000 per month by the end of fiscal 2009. Along with
revenues from our existing contracts, we believe that we will need to raise
capital to address the reduction in debt required for the merger to become
effective and to allow us to stay in business.  We estimate that we
will require approximately $1,000,000 in additional capital to sustain our
operations at their current level through fiscal 2009 and that we will require
as much as $3,000,000 in additional revenues or $1,500,000 in additional funding
to achieve our projected growth plan.




Although
we believe the additional capital we will require will be provided either
through new equity investment, the exercise of warrants, debt and/or increased
revenue, we cannot assure you that the equity investment will be made, warrants
will be exercised, we can obtain debt at acceptable terms or that we can
generate sufficient revenue to maintain projected operating levels. Accordingly,
we may need to try to secure additional equity or debt financing which we cannot
assure you would be available to us at prices that would be acceptable. Our
failure to generate such revenue, reduce expenses or obtain necessary financing
could impair our ability to stay in business and raises substantial doubt about
our ability to remain as a going concern.




Critical
Accounting Policies




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. We rely on historical experience and on other assumptions
we believe to be reasonable under the circumstances in making our judgments and
estimates. Actual results could differ from those estimates. We consider our
critical accounting policies to be those that are complex and those that require
significant judgments and estimates, including the following: recognition of
revenue, capitalization of software development costs and income
taxes.


16


Principles
of Consolidation




The
consolidated financial statements include those of the Company and its
wholly-owned subsidiary. All intercompany accounts and transactions have been
eliminated in consolidation.




Use
of Estimates




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.




Cash
and Cash Equivalents




The
Company considers all highly liquid debt instruments and other short-term
investments with a maturity of three months or less, when purchased, to be cash
equivalents.




The
Company maintains cash and cash equivalent balances at one financial institution
that is insured by the Federal Deposit Insurance Corporation.





Allowance
for Doubtful Accounts




The
Company provides an allowance for doubtful accounts, which is based upon a
review of outstanding receivables as well as historical collection information.
Credit is granted to substantially all customers on an unsecured basis. In
determining the amount of the allowance, management is required to make certain
estimates and assumptions.




Fixed
Assets




Fixed
assets are stated at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets; computer and medical
equipment – 5 years, and furniture and fixtures – 5 years.




When
assets are retired or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and repairs is
charged to income as incurred; significant renewals and betterments are
capitalized. Deduction is made for retirements resulting from renewals or
betterments.




Computer
Software Development Costs




During
2008 and 2007, the Company capitalized certain software development costs. The
Company capitalizes the cost of software in accordance with SFAS 86 once
technological feasibility has been demonstrated, as the Company has in the past
sold, leased or otherwise marketed their software, and plans on doing so in the
future. The Company capitalizes costs incurred to develop and market their
privacy preserving software during the development process, including payroll
costs for employees who are directly associated with the development process and
services performed by consultants. Amortization of such costs is based on the
greater of (1) the ratio of current gross revenues to the sum of current and
anticipated gross revenues, or (2) the straight-line method over the remaining
economic life of the software, typically five years. It is possible that those
anticipated gross revenues, the remaining economic life of the products, or
both, may be reduced as a result of future events. The Company has not developed
any software for internal use. The Company commencing January 1, 2008, placed
additional costs of software development from prior years into service, which is
being amortized over a three year period.




Recoverability
of Long-Lived Assets




The
Company reviews the recoverability of its long-lived assets on a periodic basis
whenever events and changes in circumstances have occurred which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company’s ability to recover the carrying value of its long-lived assets
from expected future cash flows from its operations on an undiscounted basis. If
such assets are determined to be impaired, the impairment recognized is the
amount by which the carrying value of the assets exceeds the fair value of the
assets. Fixed assets to be disposed of by sale are carried at the lower of the
then current carrying value or fair value less estimated costs to
sell.


17


Revenue
Recognition




The
Company generates revenue from professional services rendered to customers as
well as from application management support contracts with governmental units.
The Company’s revenue is generated under time-and-material contracts and
fixed-price contracts.




Time-and-Material
Contracts




Time-and-material
contracts revenue is generated whereby costs are generally incurred in
proportion with contracted billing schedules and revenue is recognized as
services are performed, with the corresponding cost of providing those services
reflected as direct costs. The customers are billed in accordance with the
contracts entered into. Such method is expected to result in reasonably
consistent profit margins over the contract term.




Fixed-Price
Contracts




Revenue
from firm-fixed-price contracts is recognized upon achievement of the milestones
contained in the contracts in accordance with the provisions of Staff Accounting
Bulletin 104. Revenue is not recognized until collectibility is assured, which
does not take place until completion of the particular milestone. Costs are
recognized as services are performed.




The
Company does not derive revenue from projects involving multiple
revenue-generating activities. If a contract would involve the provision of
multiple service elements, total estimated contract revenue would be allocated
to each element based on the fair value of each element.




The
amount of revenue allocated to each element would then be limited to the amount
that is not contingent upon the delivery of another element in the future.
Revenue for each element would then be recognized depending upon whether the
contract is a time-and-materials contract or a fixed-price, fixed-time
contract.




Stock-Based
Compensation




On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) published
Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
123R”).  SFAS 123R requires that compensation cost related to
share-based payment transactions be recognized in the financial statements.
Share-based payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee share purchase plans.  The provisions of SFAS
123R, as amended, are effective for small business issuers beginning as of the
next interim period after December 15, 2005.  The Company has adopted
these provisions as of January 1, 2006 and this adoption did not have a material
effect on the Company’s operations.




On
January 1, 2006, the Company adopted the provisions of FAS No. 123R “Share-Based
Payment” (“FAS 123R”) which requires recognition of stock-based compensation
expense for all share-based payments based on fair value. Prior to January 1,
2006, the Company measured compensation expense for all of its share-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) and related interpretations. The Company has provided pro
forma disclosure amounts in accordance with FAS No. 148, “Accounting for
Stock-Based Compensation – Transition and Disclosure – an amendment of FASB
Statement No. 123” (“FAS 148”), as if the fair value method defined by FAS No.
123, “Accounting for Stock Based Compensation” (“FAS 123”) had been applied to
its stock-based compensation.





The
Company has elected to use the modified–prospective approach method. Under that
transition method, the calculated expense in 2006 is equivalent to compensation
expense for all awards granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair values estimated in accordance with the
original provisions of FAS 123. Stock-based compensation expense for all awards
granted after January 1, 2006 is based on the grant-date fair values estimated
in accordance with the provisions of FAS 123R. The Company recognizes these
compensation costs, net of an estimated forfeiture rate, on a pro rata basis
over the requisite service period of each vesting tranche of each award. The
Company considers voluntary termination behavior as well as trends of actual
option forfeitures when estimating the forfeiture rate.


18


The
Company’s options issued in January and December 2008 were considered stock
based compensation (see Note 7).




Concentrations




The
Company has derived all of its revenue for the years ended December 31, 2008 and
2007 from one customer. Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist principally of
accounts receivable. To date, accounts receivable have been derived from
contracts with agencies of the federal government. Accounts receivable are
generally due within 30 days and no collateral is required.




Segment
Reporting




The
Company follows the provisions of SFAS 131, “Disclosures about Segments of an
Enterprise and Related Information.” This standard requires that companies
disclose operating segments based on the manner in which management
disaggregates the Company in making internal operating decisions. The Company
believes that there is only one operating segment.





Fair
Value of Financial Instruments (other than Derivative Financial
Instruments)





The
carrying amounts reported in the consolidated balance sheet for cash and cash
equivalents, and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments.  For
the notes payable, the carrying amount reported is based upon the incremental
borrowing rates otherwise available to the Company for similar
borrowings.




Convertible
Instruments





The
Company reviews the terms of convertible debt and equity securities for
indications requiring bifurcation, and separate accounting, for the embedded
conversion feature. Generally, embedded conversion features, where the ability
to physical or net-share settle the conversion option is not within the control
of the Company, are bifurcated and accounted for as a derivative financial
instrument. Bifurcation of the embedded derivative instrument requires
allocation of the proceeds first to the fair value of the embedded derivative
instrument with the residual allocated to the debt instrument. The resulting
discount to the face value of the debt instrument is amortized through periodic
charges to interest expense using the Effective Interest Method.




Income
Taxes




Under
Financial Accounting Standards Board Statement No. 109, “Accounting for Income
Taxes,” the liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.




Uncertainty
in Income Taxes




In July
2006, the FASB issued Interpretation No. 48 (FIN No. 48), “Accounting for
Uncertainty in Income Taxes.” This interpretation requires recognition and
measurement of uncertain income tax positions using a “more-likely-than-not”
approach. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. Management has adopted FIN 48 for 2007, and they evaluate their tax
positions on an annual basis, and have determined that as of December 31, 2008,
no additional accrual for income taxes is necessary.


19




(Loss)
Per Share of Common Stock




Basic net
(loss) per common share (“EPS”) is computed using the weighted average number of
common shares outstanding for the period. Diluted earnings per share includes
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants. Common stock equivalents
are not included in the computation of diluted earnings per share when the
Company reports a loss because to do so would be anti-dilutive for the periods
presented.




Research
and Development




Research
and development costs are expensed as incurred. In addition, research and
development costs  have been included in indirect labor
and  in direct labor and subcontractor costs for the years ended
December 31, 2008 and 2007, respectively.




Recent
Issued Accounting Standards




In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.”
This standard defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosure about
fair value measurements. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Early adoption is
encouraged. The adoption of SFAS 157 has not had a material impact on the
consolidated financial statements.




In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No.
115”, (“FAS 159”) which permits entities to choose to measure many financial
instruments and certain other items at fair value at specified election dates. A
business entity is required to report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. This statement is expected to expand the use of fair value
measurement. FAS 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.




In
December 2006, the FASB Staff issued FSP EITF - 00-19-2, “Accounting for Registration Payment
Arrangements” (“EITF
00-19-2”). EITF 00-19-2 addresses an issuer’s accounting for registration
payment arrangements. EITF 00-19-2 specifies that the contingent obligation to
make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately
recognized and measured in accordance with SFAS No. 5, Accounting for
Contingencies. EITF 00-19-2 is effective for financial statements issued for
fiscal years beginning after December 15, 2006, and interim periods within those
fiscal years. Application of EITF 00-19-02 resulted in an adjustment in January
2007 reclassifying the derivative liability to additional paid-in capital and
retained earnings. The adjustment reduced the derivative liability by $1,031,703
and increased additional paid-in capital by $547,086 and increased retained
earnings by $484,617 which was the cumulative-effect adjustment resulting from
the adoption of this standard.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (SFAS 160). SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, changes in a parent’s ownership of a noncontrolling interest,
calculation and disclosure of the consolidated net income attributable to the
parent and the noncontrolling interest, changes in a parent’s ownership interest
while the parent retains its controlling financial interest and fair value
measurement of any retained noncontrolling equity investment. SFAS 160 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. Management does not believe that the adoption of SFAS No. 160 has
had an impact on the Company’s consolidated financial position, results of
operations or cash flows.


20





In
December 2007, the FASB issued SFAS 141R,Business Combinations (“SFAS 141R”), which replaces
FASB SFAS 141,Business
Combinations. This Statement retains the fundamental requirements in SFAS
141 that the acquisition method of accounting be used for all business
combinations and for an acquirer to be identified for each business combination.
SFAS 141R defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date that the acquirer achieves control.  SFAS 141R will require
an entity to record separately from the business combination the direct costs,
where previously these costs were included in the total allocated cost of the
acquisition.  SFAS 141R will require an entity to recognize the assets
acquired, liabilities assumed, and any non-controlling interest in the acquired
at the acquisition date, at their fair values as of that date.  This
compares to the cost allocation method previously required by SFAS No.
141.





SFAS 141R
will require an entity to recognize as an asset or liability at fair value for
certain contingencies, either contractual or non-contractual, if certain
criteria are met.  Finally, SFAS 141R will require an entity to
recognize contingent consideration at the date of acquisition, based on the fair
value at that date.  This Statement will be effective for business
combinations completed on or after the first annual reporting period beginning
on or after December 15, 2008.  Early adoption of this standard is not
permitted and the standards are to be applied prospectively
only.  Upon adoption of this standard, there would be no impact to the
Company’s results of operations and financial condition for acquisitions
previously completed.  The adoption of SFAS No. 141R has not had a
material effect on the Company’s consolidated financial position, results of
operations or cash flows.





In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expenses
the current view of the staff that it will accept a company’s election to use
the simplified method discussed in Staff Accounting Bulletin No. 107, “Share Based Payment”, (“SAB 107”), for estimating
the expected term of “plain
vanilla” share options regardless of whether the company has sufficient
information to make more refined estimates. SAB 110 became effective for the
Company on January 1, 2008. The adoption of SAB 110 has not had a material
impact on the Company’s financial position.





In April
2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets”. This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets”. The Company was required to adopt FSP 142-3 on October 1, 2008. The
guidance in FSP 142-3 for determining the useful life of a recognized intangible
asset shall be applied prospectively to intangible assets acquired after
adoption, and the disclosure requirements shall be applied prospectively to all
intangible assets recognized as of, and subsequent to, adoption. The Company
does not believe FSP 142-3 will materially impact their financial position,
results of operations or cash flows.





In May
2008, the FASB issued FSP Accounting Principles Board 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company does not believe that the adoption of FSP APB 14-1 will have
a material effect on its financial position, results of operations or cash
flows.




In June
2008, the Emerging Issues Task Force issued EITF No. 07-05, “Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF
07-05”), which supersedes the definition in EITF 06-01 for periods beginning
after December 15, 2008. The objective of EITF 07-05 is to provide guidance for
determining whether an equity-linked financial instrument (or embedded feature)
is indexed to an entity’s own stock and it applies to any freestanding financial
instrument or embedded feature that has all the characteristics of a derivative
in FSAB 133, for purposes of determining whether that instrument or embedded
feature qualifies for the first part of the scope exception in paragraph 11(a)
of SFAS 133 (“the Paragraph 11(a) Exception”). EITF 07-05 also applies to any
freestanding financial instrument that is potentially settled in an entity’s own
stock, regardless of whether the instrument s within the scope of EITF 00-19.
The Company is determining what impact, if any, EITF 07-05 will have on its
financial position, results of operations and cash flows.


21


In June
2008, the Emerging Issues Task Force issued EITF 08-04, “Transition Guidance for
Conforming Changes to EITF 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”
(“EITF 08-04”). EITF 08-04 is effective for years ending after December 15,
2008. The overall objective of EITF 08-04 is to conform the requirements of EITF
00-27 and FASB 150 with EITF 98-5 to provide for consistency in application of
the standard. The Company has computed and recorded a beneficial conversion
feature in connection with certain of their prior financing arrangements and
does not believe that EITF 08-04 will have a material effect on that
accounting.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date and
are not expected to have a material impact on the condensed consolidated
financial statements upon adoption.





Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk




Not
applicable




Item
8.  Financial Statements and Supplementary Data




The
information required by this item appears following Item 15 of this report and
is incorporated herein by reference.




Item
9.  Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure




None.




Item
9A(T).        Controls and
Procedures




Evaluation
of disclosure controls and procedures.




Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of
December 31, 2008.  Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are not effective due to the existence of material weaknesses in our
internal control over financial reporting, discussed below.




Management’s
Report on Internal Control Over Financial Reporting.




Internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act), is a process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, or
persons performing similar functions, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.  Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, and in consultation with our
board of directors, has established and maintained policies and procedures
designed to maintain the adequacy of our internal control over financial
reporting that it believes are appropriate in light of our limited activities,
personnel and resources as a development stage company, and includes those
policies and procedures that:




22




(1)  Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect transactions and dispositions of our assets;




(2)  Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and




(3)  Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the financial statements.




Our
management has evaluated the effectiveness of our internal control over
financial reporting as of December 31, 2008 based on the criteria established in
a report entitled Internal Control—Integrated Framework, issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”).




Based on
our assessment, management has concluded that our internal controls over
financial reporting were not effective as of December 31, 2008 due to the
existence of several material weaknesses in our internal control over financial
reporting, discussed below. Our Board of Directors has reviewed the results of
management’s assessment. In addition, on a quarterly basis we will evaluate any
changes to our internal control over financial reporting to determine if
material changes occurred.




Material
Weaknesses in Internal Controls




During
the conduct of our assessment of internal control over financial reporting, we
identified two material weaknesses and have advised the Board of Directors that
the following material weaknesses existed at December 31, 2008. As defined by
the Public Company Accounting Oversight Board Auditing Standard No. 5, a
“material weakness” is a control deficiency or a combination of control
deficiencies such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis.




The
material weaknesses exist in (i) the lack of independent oversight by an audit
committee of independent members of the Board of Directors and (ii) the lack of
segregation of duties in the financial reporting and compliance functions. Due
to the lack of resources, we have not taken any substantial steps towards
resolving the material weaknesses described above.  We expect to do so
upon effectiveness of the merger with The Irus Group and raising additional
funds in conjunction with the merger.




While
these material weaknesses did not have an effect on our reported results or
result in the restatement of any previously issued financial statements or any
other related disclosure, they nevertheless constituted deficiencies in our
controls. In light of these material weaknesses and the requirements enacted by
the Sarbanes-Oxley Act of 2002, and the related rules and regulations adopted by
the SEC, our Chief Executive Officer and Chief Financial Officer concluded that,
as of December 31, 2008, our controls and procedures needed improvement and were
not effective at a reasonable assurance level. Despite those deficiencies in our
internal controls, management believes that there were no material inaccuracies
or omissions of material fact in this annual report.




The
elimination of the material weaknesses identified above will be among our
highest priorities once we have sufficient resources to devote.




We cannot
provide any assurance that neither we nor our independent auditors will in the
future identify further material weaknesses or significant deficiencies in our
internal control over financial reporting that we have not discovered to
date.




23




Inherent
Limitations on Effectiveness of Controls




Our
management, including the CEO and CFO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that
the control system’s objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions of deterioration
in the degree of compliance with policies or procedures.




This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.




Changes
in internal control over financial reporting.




During
the last fiscal quarter, there was no change in our internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




Item
      9B.
            Other
      Information




None.


24




PART
III




Item
10. Directors, Executive Officers and Corporate Governance




The
following table sets forth the name, age, position and term of directorship, as
applicable, of each of our directors and executive officers. Directors are
elected annually. Officers are selected by the Board of Directors and serve at
the pleasure of the Board.




Name
      and Position
              
              Age
              
              Director
      SinceB.K.
      Gogia
                President
      and Chairman of the Board of Directors
              
              57
              
              2006Michael
      D. Brown1
                President
      and Chief Executive Officer
              
              54
              
              –Dr.
      Jerzy W. Bala
                Chief
      Technical Officer and
                a
      Director
              
              49
              
              2006Scott
      B. Parliament2
                Chief
      Financial Officer and
                a
      Director
              
              51
              
              2006Jesus
      Mena3
                Chief
      Strategy Officer
              
              61
              
              –




1 On May
9, 2008, Michael D. Brown was removed from our Board of Directors by written
consent of our stockholders, and the employment agreement of Mr. Brown, our
former President and Chief Executive Officer, was terminated.




2 On May
9, 2008, Scott B. Parliament  was removed from our Board of Directors
by written consent of our stockholders, and the employment agreement of Mr.
Parliament, our former Chief Financial Officer, was terminated.




3Jesus
Mena resigned as our Chief Strategy Officer during fiscal year
2008.




Management
Biographies




B.K. Gogia
– Mr. Gogia has been a director of InferX since our acquisition of InferX
Virginia in October 2006 and was our President and Chief Executive Officer from
October 2006 through March 17, 2008. Mr. Gogia was the founder of and had been
President, CEO and Director of InferX Virginia since its inception in 1992.
Prior to the formation of InferX Virginia, Mr. Gogia was Technical
Director/Software Manager with Science Applications International Corporation
(SAIC), and held senior technical positions with L3 Corporation and Lockheed
Martin Corporation. Mr. Gogia began his career as a systems engineer and
software developer with Data General Corporation in the field of compilers and
operating systems.





25




Mr. Gogia
holds a Bachelors degree from the University of Delhi, India; a Masters degree
with a major in Computer Science from New York Institute of Technology; and a
postgraduate management degree with a major in Marketing from the Institute of
Marketing & Management. In 2004, Mr. Gogia was chosen to participate in a
Mindshare program for CEOs of the most promising technology companies in the
Greater Washington area.




Jerzy W. Bala,
Ph.D. – Dr. Jerzy Bala has been Chief Technical Officer and a director of
InferX since our acquisition of InferX Virginia in October 2006. Dr. Bala had
been employed by InferX Virginia since 1994 as Chief Scientist and was appointed
Chief Technical Officer of InferX Virginia in May 2006 and a director in
September 2006. Dr. Bala defines short and long term technology directions for
the products, business cases for new markets, oversees research and development
of future products and existing products, and manages intellectual property for
InferX.




From May
2002 to October 2002, Dr. Bala consulted with Mitre Corporation, a federally
funded research and development corporation (FFRDC) in its Data Exploitation and
Information Management Group in development of data mining techniques for
network intrusion detection sponsored by the National Security Agency; and
subsequent development of data exploitation techniques for command and control
in simulations in operations other than war for the U.S. Marine
Corps.




From
September 1998 to May 2000, Dr. Bala served as Visiting Research Professor with
the School of Information Technology, George Mason University, and was the
recipient of a Fellowship in Computational Science and Engineering – National
Science Foundation New Technologies Program in the Division of Advanced
Scientific Computing.




Dr. Bala
holds a Ph.D. in Computer Science from George Mason University, an MSc in
Computer Engineering and a BSc in Electrical Engineering from AGH University of
Science and Technology in Poland. Dr. Bala’s Doctoral Dissertation Thesis was in
“Learning to Recognize Visual Concepts,” with his Advisor, Professor Ryszard
Michalski, a cofounder of Machine Learning as a discipline.




Dr. Bala
has over 70 peer reviewed publications in conference proceedings and journals
and other numerous technical papers to its credit.




There are
no family relationships among the officers and directors.




Compliance
with Section 16(a) of the Securities Exchange Act




Based
solely upon a review of Forms 3 and 4 furnished under Rule 16a-3(e) of the
Securities Exchange Act during its most recent fiscal year, Forms 5 furnished
with respect to our most recent fiscal year and any written representations
received from persons required to file such forms, the following persons -
either officers, directors or beneficial owners of more than ten percent of any
class of equity we have registered pursuant to Section 12 of the Securities
Exchange Act –no person failed to file on a timely basis reports required by
Section 16(a) of the Securities Exchange Act .




Code
of Ethics




We have
not adopted a Code of Ethics, but we intend to do so in 2009.




Audit,
Nominating and Compensation Committees




Our Board
of Directors does not have standing audit, nominating or compensation
committees, and our Board of Directors performs the functions that would
otherwise be delegated to such committees. We have not obtained directors and
officers insurance required by the quality of independent directors who we seek
to have join our Board of Directors.  We are in the process of pricing
directors and officers insurance. Accordingly, we anticipate that our Board of
Directors will be able to attract qualified independent directors to serve on
the Board and ultimately form standing audit, nominating and compensation
committees.




26




Item
      11.
            Executive
      Compensation




The
following Summary Compensation Table below sets forth the compensation paid to
B.K. Gogia, as President and Chief Executive Officer, during the fiscal year
ended December 31, 2008.  No other executive officer had compensation
exceeded $100,000 in the fiscal year ended December 31, 2008.




SUMMARY
COMPENSATION TABLE




Name and Principal
                            Position
                          
                          Year
                          
                          Salary ($)
                          
                          
                          Bonus ($)
                          
                          
                          Stock
                            Awards
                            ($)
                          
                          
                          Option
                            Awards
                            ($)
                          
                          
                          Nonequity
                            Incentive Plan
                            Compensation
                            ($)
                          
                          
                          Nonqualified
                            Deferred
                            Compensation
                            Earnings
                            ($)
                          
                          
                          All Other
                            Compensation
                            ($)
                          
                          
                          Total
                            ($)B.K.
      Gogia
                          
                          2008
                          
                          
                          180,000
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          25,649
                          (1)
                          
                          
                          205,649President
      and Chief
                            Executive
      Officer
                            (PEO)
                          
                          2007
                          
                          
                          180,000
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          1,961
                          
                          
                          
                          –
                          
                          
                          
                          –
                          
                          
                          
                          25,649
                          (1)
                          
                          
                          207,610




(1)
            Consists
      of automobile allowance in the amount of  $9,942, and life
      insurance premiums for which we are not the beneficiary in the amount
      of  $15,707.




In May
2006, we entered into employment agreements with our two executive officers,
B.K. Gogia  and Dr. Jerzy W. Bala. The employment agreement with Dr.
Bala has a term of three years, and Mr. Gogia’s agreement has a term of five
years. Each of these employment agreements are terminable by the company during
the term with or without cause. The employment agreements are terminable by the
executives for “good reason”, including a material breach of the employment
agreement not cured within 15 days. Upon termination for “good reason” by the
executive or by the company without cause, Dr. Bala’s severance payment would be
for nine months and Mr. Gogia’s severance payment would be the greater of two
years or the remaining term of his employment agreement. Under their employment
agreements each of the employees is eligible for a bonus upon achieving
objectives determined by management for each executive for achieving certain
performance targets. For the fiscal year ended December 31, 2008 and 2007, each
executive agreed that no performance targets would be set and no bonuses would
be paid.




We
have a 401(k) plan for which we provide no matching funds. In October 2007, we
adopted a qualified stock option plan that will include up to 2,200,000 shares
of our common stock. No other retirement, pension, or profit sharing
exists.




OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END




Option
      Awards
                  
                  Stock
      AwardsNumber
      of
                      Securities
                      Underlying
                      Unexercised
                      Options
                      (#)
                  
                  
                  Number
      of
                      Securities
                      Underlying
                      Unexercised
                      Options
                      (#)
                  
                  
                  Equity
                    Incentive
                    Plan Awards
                    :
                    Number
      of
                    Securities
                    Underlying
                    Unexercised
                    Unearned
                    Options
                  
                  
                  Option
                    Exercise
                    Price
                  
                  Option
                    Expiration
                  
                  Number of
                    Shares
      or
                    Units
      of
                    Stock That
                    Have
      Not
                    Vested
                  
                  
                  Market
                    Value of
                    Shares or
                    Units
      of
                    Stock That
                    Have
      Not
                    Vested
                  
                  
                  Equity Incentive
                    Plan
      Awards:
                    Number
      of
                    Unearned
                    Shares,
      Units
                    or
      Other
                    Rights
      That
                    Have
      Not
                    Vested
                  
                  
                  Equity
                    Incentive
                    Plan Awards
                    :
                    Market
      or
                    Payout
      Value
                    of
      Unearned
                    Shares,
      Units
                    or
      Other
                    Rights
      That
                    Have
      Not
                    VestedName
                  
                  Exercisable
                  
                  
                  Unexercisable
                  
                  
                  
                  (#)
                  
                  
                  ($)
                  
                  Date
                  
                  
                  (#)
                  
                  
                  ($)
                  
                  
                  
                  (#)
                  
                  
                  ($)B.K.
      Gogia
                  
                  
                  10,000
                  (1)
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  $
                  0.50
                  
                  10/23/17
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –




(1)
            Includes
      5,000 shares underlying options granted to Mr. Gogia’s
    spouse.




27




The table
entitled “DIRECTOR COMPENSATION” and the discussion related to the tables have
been omitted because no compensation required to be reported in that table was
awarded to, earned by or paid to any of the directors in any of the covered
fiscal years.




Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters




The
following table sets forth, as of April 14, 2009, certain information concerning
the beneficial ownership of common stock by (i) each person known by the company
to be the owner of more than 5% of the outstanding common stock, (ii) each
director, (iii) each Named Executive Officer, and (iv) all directors and
executive officers as a group. In general, “beneficial ownership” includes those
shares a director or executive officer has the power to vote or the power to
transfer, and stock options and other rights to acquire common stock that are
exercisable currently or become exercisable within 60 days. Except as indicated
otherwise, the persons named in the table below have sole voting and investment
power with respect to all shares shown as beneficially owned by them. The
calculation of the percentage owned is based on 17,738,510 shares outstanding
(plus, with respect only to each holder of securities that are exercisable for
or convertible into common stock within 60 days, shares underlying such
securities). The address of each of the directors and executive officers listed
below is c/o InferX Corporation, 1818 Library Street, Suite 500, Reston,
Virginia 20190 unless otherwise indicated.




Name
      and Address
                
                Amount
      and Nature
                    of
      Beneficial Ownership
                
                
                Percentage
      of
                    Outstanding
                    Shares
      OwnedB.K.
      Gogia
                
                
                4,263,079
                (1)
                
                
                31.5
                %Jerzy
      W.
      Bala
                
                
                580,384
                (2)
                
                
                4.3
                %Robert
      B. Prag
                  2455
      El Amigo Road
                  Del
      Mar, CA
      92014
                
                
                668,150
                (3)
                
                
                4.9
                %John
      Lemak
                  Sandor
      Capital Master Fund, L.P.
                  2828
      Routh Street, Suite 500
                  Dallas,
      TX
      75201
                
                
                1,357,580
                (4)
                
                
                9.9
                %Lacuna
      Venture Fund LLLP
                  c/o
      Lacuna Ventures
                  1100
      Spruce Street, Suite 202
                  Boulder,
      CO
      80302
                
                
                2,896,428
                (5)
                
                
                19.9
                %All
      directors and executive
                  officers
      as a group (2
      persons)
                
                
                4,843,463
                (1)
      (2)
                
                
                35.8
                %








(1)
            Includes
      177,330 shares owned directly by Mr. Gogia’s daughter, 177,330 shares
      owned directly by Mr. Gogia’s son, and 35,466 shares owned directly by Mr.
      Gogia’s spouse. Also includes 5,000 shares underlying currently
      exercisable options owned directly by Mr. Gogia and 5,000 shares
      underlying currently exercisable options owned directly by Mr. Gogia’s
      spouse. Mr. Gogia disclaims beneficial ownership of all shares owned
      directly by others.




(2)
            Includes
      5,000 shares underlying currently exercisable options owned directly by
      Dr. Bala.




(3)
            Based
      upon information provided to or otherwise known by the company
      and  contained in the amended Schedule 13G filed by Mr. Prag on
      November 3, 2006. By their terms, the warrants held by Mr. Prag are not
      exercisable to the extent that exercise would result in Mr. Prag’s
      beneficial ownership of greater than 4.99% of the company’s issued and
      outstanding common stock. If all of his warrants were exercisable in full,
      Mr. Prag would beneficially own 875,118 shares of common stock, which
      would represent beneficial ownership of approximately 6.37% of the
      company’s issued and outstanding common
stock.




28




(4)
            Based
      upon information provided to or otherwise known by the company
      and  contained in the Schedule 13G filed by Sandor Capital
      Advisors, LLC, a Texas limited liability company (“Sandor Advisors”), and
      Mr. Lemak, the principal of Sandor Advisors, on November 1, 2006. Includes
      357,173 shares directly owned by Mr. Lemak. Also includes 182,033 of the
      1,020,908 shares issuable upon the exercise of warrants owned by Sandor
      Advisors and held by Sandor Capital Master Fund, L.P. (“Sandor Capital”)
      (713,940 shares) and Mr. Lemak (306,968 shares), in the aggregate, that
      are exercisable within 60 days. By their terms, the warrants held by
      Sandor Capital and Mr. Lemak are not exercisable to the extent that
      exercise by either of them would result in the joint beneficial ownership
      by Sandor Advisors and Mr. Lemak of greater than 9.99% of the company’s
      issued and outstanding common stock. If all of the warrants were
      exercisable in full, Sandor Advisors and Mr. Lemak would jointly
      beneficially own 2,196,455 shares of common stock, which would represent
      beneficial ownership of approximately 15.09% of the company’s issued and
      outstanding common stock. Mr. Lemak makes investment decisions on behalf
      of Sandor Advisors.




(5)
            Based
      upon information provided to or otherwise known by the company
      and  contained in the Schedule 13G filed by Lacuna Venture Fund
      LLLP (“Lacuna Venture Fund”), Lacuna Ventures GP LLLP (“Lacuna GP”) and
      Lacuna, LLC (“Lacuna LLC,” and, together with Lacuna Venture Fund and
      Lacuna GP, the “Lacuna Entities”) on November 3, 2006. Also includes
      1,024,021 of the 1,800,000 shares issuable upon the exercise of warrants
      owned by the Lacuna Entities that are exercisable within 60 days. By their
      terms, the warrants held by Lacuna Venture Fund are not exercisable to the
      extent that exercise would result in the Lacuna Entities’ beneficial
      ownership of greater than 19.99% of the company’s issued and outstanding
      common stock. If all of the warrants were exercisable in full, the Lacuna
      Entities would beneficially own 3,672,407 shares of common stock, which
      would represent beneficial ownership of approximately 23.95% of the
      company’s issued and outstanding common stock.  Rawleigh Ralls
      makes investment decisions on behalf of each of the Lacuna
      Entities.




Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence




Bridge
Loan




In May
2006, certain investors provided a bridge loan to InferX Virginia in the
aggregate principal amount of $350,000 (the “Bridge
Loan”). Robert B. Prag, John Lemak and Sandor Capital Master Fund, L.P.
(“Sandor Capital”), who beneficially owns greater than 5% of our issued and
outstanding shares of common stock, provided $50,000, $50,000 and $100,000,
respectively, of the Bridge Loan. In consideration for the Bridge Loan, the
investors received shares of InferX Virginia common stock convertible into an
aggregate of 250,000 shares of common stock upon the consummation of our
acquisition of InferX Virginia. Mr. Prag was issued 35,714 of these shares, Mr.
Lemak was issued 35,714 of these shares and Sandor Capital was issued 71,429 of
these shares. Upon the consummation of the acquisition, the entire principal
amount of the Bridge Loan, plus interest accrued at the rate of 8% per annum,
was repaid by the company, including the payment of $50,000 plus interest to Mr.
Prag, $50,000 plus interest to Mr. Lemak and $100,000 plus interest to Sandor
Capital. In lieu of payment in cash upon the consummation of the acquisition,
Mr. Prag purchased 103,484 units, Mr. Lemak purchased 103,484 units and Sandor
purchased 206,970 units in the October 2006 private placement in consideration
of his cancellation of the entire principal amount of his Bridge Loan plus
accrued interest, totaling $51,742, $51,742 and $103,485,
respectively.




Registration
Rights




In
connection with our acquisition of InferX Virginia, the October 2006 private
placement, and certain other agreements, we have agreed to file registration
statements under the Securities Act to register the resale of our common stock
beneficially owned by our former directors, officers and stockholders, Paul T.
Mannion Jr., Andrew Reckles and Robert B. Prag, as well as the individuals who
became directors, officers and significant stockholders following the
acquisition: B.K. Gogia, Jerzy W. Bala and Scott B. Parliament. In addition, if
we fail to meet certain deadlines in filing or having the registration
statements declared effective, some of these individuals will be entitled to
receive additional shares of common stock as a penalty.  As a penalty
268,404, shares of common stock were issued in 2007 to satisfy the
obligation.




29




Transactions
between Black Nickel and the Founding Stockholders




Immediately
prior to the consummation of our acquisition of InferX Virginia, we acquired an
aggregate of 300,000 shares of our common stock from Messrs. Mannion, Reckles
and Prag for an aggregate purchase price of $300.00.




Director
Independence




The Board
of Directors has determined that none of its directors is an “independent
director.”




Item
      14.
            Principal
      Accounting Fees and Services




Audit
Fees




The
aggregate fees billed for each of the fiscal years ended December 31, 2008 and
2007 for professional services rendered by the principal accountant for the
audit of our annual financial statements and reviews of the quarterly financial
statements was $38,000 and $38,000, respectively.




Audit
Related Fees




None.




Tax
Fees




None.




All
Other Fees




None.




PART
IV




Item
      15.
            Exhibits
      and Financial Statement Schedules




Our
consolidated financial statements for the fiscal years ended December 31, 2008
and 2007 are filed with this report.




Exhibit
      Index3(i)
              
              Certificate
      of Incorporation, as amended on October 27, 2006 (incorporated by
      reference to Exhibit 3(i) to the registrant’s Current Report on Form 8-K,
      filed on October 30, 2006).3(ii)
              
              By-laws
      (incorporated by reference to Exhibit 3(ii) to the registrant’s
      Registration Statement on Form 10-SB, filed on January 12,
      2006).4.1
              
              Form
      of common stock certificate (incorporated by reference to Exhibit 4.1 to
      the registrant’s Current Report on Form 8-K, filed on October 30,
      2006).4.2
              
              Form
      of Class A warrant to purchase common stock (incorporated by reference to
      Exhibit 4.2 to the registrant’s Current Report on Form 8-K, filed on
      October 30, 2006).4.3
              
              Form
      of Class B warrant to purchase common stock (incorporated by reference to
      Exhibit 4.3 to the registrant’s Current Report on Form 8-K, filed on
      October 30, 2006).
  30
  4.4
              
              Registration
      Rights Agreement (incorporated by reference to Exhibit 4.4 to the
      registrant’s Current Report on Form 8-K, filed on October 30,
      2006).10.1
              
              Lease
      of the registrant’s principal executive offices, as amended (incorporated
      by reference to Exhibit 10.1 to the registrant’s Current Report on Form
      8-K, filed on October 30, 2006).10.2
              
              Employment
      Agreement with B.K. Gogia (incorporated by reference to Exhibit 10.2 to
      the registrant’s Current Report on Form 8-K, filed on October 30,
      2006).10.3
              
              Employment
      Agreement with J. Bala (incorporated by reference to Exhibit 10.1 to
      Amendment No 1 to the registrant’s Current Report on Form 8-K, filed on
      November 1, 2006).10.4
              
              Employment
      Agreement with S. Parliament (incorporated by reference to Exhibit 10.1 to
      the registrant’s Current Report on Form 8-K, filed on November 16,
      2006).10.5
              
              Employment
      Agreement with J. Mena (incorporated by reference to Exhibit 10.5 to the
      registrant’s Current Report on Form 8-K, filed on October 30,
      2006).10.6
              
              Subscription
      Agreement (incorporated by reference to Exhibit 10.7 to the registrant’s
      Current Report on Form 8-K, filed on October 30, 2006).10.7
              
              Agreement
      and Plan of Merger by and among Black Nickel Acquisition Corp. I, InferX
      Acquisition Corp. and InferX Corporation, dated October 24, 2006
      (incorporated by reference to Exhibit 10.8 to the registrant’s Current
      Report on Form 8-K, filed on October 30, 2006).10.8
              
              Consulting
      Agreement with Michael D. Brown (incorporated by reference to Exhibit 99.1
      to the registrant’s Current Report on Form 8-K, filed on December 18,
      2006).10.9
              
              Executive
      Employment Agreement with Michael D. Brown (incorporated by reference to
      Exhibit 10.1 to the registrant’s Current Report on Form 8-K, filed on
      March 19, 2008).10.10
              
              InferX
      Corporation 2007 Stock Incentive Plan.10.11
              
              Form
      of Convertible Note (incorporated by reference to Exhibit 99.1 to the
      registrant’s Current Report on Form 8-K, filed on March 12,
      2008).10.12
              
              Form
      of Security Agreement (incorporated by reference to Exhibit 99.2 to the
      registrant’s Current Report on Form 8-K, filed on March 12,
      2008).10.13
              
              Task/Delivery
      Order for Supplies or Services issued by the U.S. Department of Veterans
      Affairs on October 24, 2007.10.14
              
              Agreement
      and Plan of Merger by and among InferX Corporation, The Irus Group, Inc.
      and Irus Acquisition Corp., dated March 16, 2009 (incorporated by
      reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K,
      filed on March 18, 2009).23.1
              
              Consent
      of KBL, LLP.24.1
              
              Power
      of attorney (included on signature page hereof).31.1
              
              Section
      302 Certification of the Chief Executive Officer required by Rule
      13a-14(a) or Rule 15d-14(a).
  31
  31.2
              
              Section
      302 Certification of the Chief Financial Officer required by Rule
      13a-14(a) or Rule 15d-14(a).32
              
              Section
      906 Certification of the Chief Executive Officer and the Chief Financial
      Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C.
      1350.





32




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.




InferX
      CorporationDate:  April
      15, 2009
                By:
                /s/ B.K. GogiaB.K.
      GogiaPresident
      and Chief Executive OfficerPOWER
      OF ATTORNEYPursuant
      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 and on the dates indicated.Date:  April
      15, 2009
                By:
                /s/ B.K. GogiaB.K.
      GogiaPresident
      and Chief Executive Officer(Principal
      Executive Officer and
                  Principal
      Financial and Accounting
                  Officer)Date:  April
      15, 2009
                By:
                /s/ B.K. GogiaB.K.
      GogiaDirectorDate:  April
      15, 2009
                By:
                /s/ Jerzy W. BalaJerzy
      W. BalaDirector





33




INFERX
CORPORATION


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




PAGEReport
      of Independent Registered Public Accounting Firm
                        
                        35Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                        
                        36Consolidated
      Statements of Operations for the Years Ended
                        
                        37December
      31, 2008 and 2007Consolidated
      Statement of Changes in Stockholders’ Equity (Deficit) for
    the
                        
                        38Years
      Ended December 31, 2008 and 2007Consolidated
      Statements of Cash Flows for the Years Ended
                        
                        39December
      31, 2008 and 2007Notes
      to Consolidated Financial Statements
                        
                        40





34





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors


InferX
Corporation


McLean,
Virginia





We have
audited the accompanying consolidated balance sheets of InferX Corporation (the
“Company”) as of December 31, 2008 and 2007 and the related consolidated
statements of operations, changes in stockholders’ equity (deficit), and cash
flows for the years ended December 31, 2008 and 2007. These consolidated
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.





We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  We were not engaged to perform an audit of the
Company’s internal control over financial reporting.  Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.  Accordingly, we
express no such opinion.  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 consolidated financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of InferX Corporation as of
December 31, 2008 and 2007, and the results of its consolidated statements of
operations, changes in stockholders’ equity (deficit), and cash flows for the
years ended December 31, 2008 and 2007 in conformity with U.S. generally
accepted accounting principles.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.   As discussed in
Note 1 to the consolidated financial statements, the Company has sustained
operating losses and capital deficits that raise substantial doubt about its
ability to continue as a going concern.  Management’s plans in regard
to these matters are also described in Note 1.  The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.





/s/
KBL, LLP


New York,
NY


March 23,
2009





35







INFERX
CORPORATION


CONSOLIDATED
BALANCE SHEETS


DECEMBER
31, 2008 AND 2007




2008
                            
                            
                            2007ASSETSCURRENT
      ASSETSCash
                            
                            $
                            -
                            
                            
                            $
                            1,670Prepaid
      expenses and other current assets
                            
                            
                            -
                            
                            
                            
                            7,505Total
      current assets
                            
                            
                            -
                            
                            
                            
                            9,175Fixed
      assets, net of depreciation
                            
                            
                            31,579
                            
                            
                            
                            31,047Other
      AssetComputer
      software development costs, net of amortization
                            
                            
                            140,249
                            
                            
                            
                            350,246Total
      other asset
                            
                            
                            140,249
                            
                            
                            
                            350,246TOTAL
      ASSETS
                            
                            $
                            171,828
                            
                            
                            $
                            390,468LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                            
                            $
                            1,462,684
                            
                            
                            $
                            803,731Cash
      overdraft
                            
                            
                            1,495
                            
                            
                            
                            -Liability
      for stock to be issued
                            
                            
                            -
                            
                            
                            
                            15,000Current
      portion of notes payable, net of debt discount of $9,658
                            
                            
                            395,278
                            
                            
                            
                            15,703Total
      current liabilities
                            
                            
                            1,859,458
                            
                            
                            
                            834,434Long-term
      LiabilitiesNotes
      payable, net of current portion, net of debt discount of
      $164,460
                            
                            
                            163,540
                            
                            
                            
                            350,307TOTAL
      LIABILITIES
                            
                            
                            2,022,997
                            
                            
                            
                            1,184,741STOCKHOLDERS'
      EQUITY (DEFICIT)Preferred
      stock, par value $0.0001 per share, 10,000,000 shares authorized
      andno
      shares issued and outstanding
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, par value $0.0001 per share, 75,000,000 shares authorized
      and17,738,510
      and 11,472,188 issued and outstanding
                            
                            
                            1,774
                            
                            
                            
                            1,147Additional
      paid-in capital
                            
                            
                            4,948,692
                            
                            
                            
                            3,278,517Retained
      earnings (deficit)
                            
                            
                            (6,801,635
                            )
                            
                            
                            (4,073,937
                            )Total
      stockholders' equity (deficit)
                            
                            
                            (1,851,169
                            )
                            
                            
                            (794,273
                            )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                            
                            $
                            171,828
                            
                            
                            $
                            390,468





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





36





INFERX
CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





2008
                
                
                2007REVENUE
                
                $
                80,934
                
                
                $
                371,093COST
      OF REVENUESDirect
      labor and other fringes
                
                
                43,261
                
                
                
                79,354Subcontractor
                
                
                19,710
                
                
                
                104,191Other
      direct costs
                
                
                416
                
                
                
                12,132Amortization
      of computer software development costs
                
                
                209,996
                
                
                
                177,003Total
      costs of revenues
                
                
                273,383
                
                
                
                372,680GROSS
      (LOSS)
                
                
                (192,450
                )
                
                
                (1,587
                )OPERATING
      EXPENSESIndirect
      and overhead labor and fringes
                
                
                633,884
                
                
                
                716,416Professional
      fees
                
                
                172,480
                
                
                
                537,665Travel
      related costs
                
                
                22,729
                
                
                
                44,288Rent
                
                
                128,626
                
                
                
                106,789General
      and administrative
                
                
                221,874
                
                
                
                94,070Registration
      penalty
                
                
                -
                
                
                
                134,202Stock
      issued for services
                
                
                116,625
                
                
                
                -Stock
      based compensation
                
                
                48,345
                
                
                
                27,613Depreciation
      and impairment
                
                
                14,446
                
                
                
                29,707Total
      operating expenses
                
                
                1,359,010
                
                
                
                1,690,750NET
      LOSS FROM OPERATIONS BEFORE OTHER EXPENSE AND PROVISION FOR INCOME
      TAXES
                
                
                (1,551,460
                )
                
                
                (1,692,337
                )OTHER
      EXPENSEInterest
      expense, net of interest income
                
                
                1,176,238
                
                
                
                12,400NET
      LOSS FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES
                
                
                (2,727,698
                )
                
                
                (1,704,737
                )Provision
      for income taxes
                
                
                -
                
                
                
                -NET (LOSS) APPLICABLE TO SHARES
                
                $
                (2,727,698
                )
                
                $
                (1,704,737
                )NET
      (LOSS) PER BASIC AND DILUTED SHARES
                
                $
                (0.20
                )
                
                $
                (0.17
                )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING
                
                
                13,623,617
                
                
                
                10,324,653





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





37





INFERX
CORPORATION


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





Additional
                  
                  
                  RetainedPreferred
      Stock
                  
                  
                  Common
      Stock
                  
                  
                  Paid-In
                  
                  
                  EarningsShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  (Deficit)
                  
                  
                  TotalBalance
      - December 31, 2006
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  9,129,392
                  
                  
                  $
                  913
                  
                  
                  $
                  1,846,575
                  
                  
                  $
                  (2,853,817
                  )
                  
                  $
                  (1,006,329
                  )Exercising
      of warrants to common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,074,392
                  
                  
                  
                  207
                  
                  
                  
                  628,611
                  
                  
                  
                  -
                  
                  
                  
                  628,818Issuance
      of shares for penalty under registration rights agreement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  268,404
                  
                  
                  
                  27
                  
                  
                  
                  134,175
                  
                  
                  
                  -
                  
                  
                  
                  134,202Change
      in classification of derivatives based on EITF 00-19-2
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  547,086
                  
                  
                  
                  484,617
                  
                  
                  
                  1,031,703Warrants
      issued to consultant
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  94,457
                  
                  
                  
                  -
                  
                  
                  
                  94,457Vested
      stock options issued
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  27,613
                  
                  
                  
                  -
                  
                  
                  
                  27,613Net
      loss for the year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,704,737
                  )
                  
                  
                  (1,704,737
                  )Balance
      - December 31, 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  11,472,188
                  
                  
                  
                  1,147
                  
                  
                  
                  3,278,517
                  
                  
                  
                  (4,073,937
                  )
                  
                  
                  (794,273
                  )Issuance
      of common stock in conversion of notes payable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,411,322
                  
                  
                  
                  541
                  
                  
                  
                  168,959
                  
                  
                  
                  -
                  
                  
                  
                  169,500Issuance
      of common stock for services rendered
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  350,000
                  
                  
                  
                  35
                  
                  
                  
                  52,465
                  
                  
                  
                  -
                  
                  
                  
                  52,500Issuance
      of common stock for liability for stock to be issued
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,000
                  
                  
                  
                  3
                  
                  
                  
                  14,997
                  
                  
                  
                  -
                  
                  
                  
                  15,000Issuance
      of common stock for incentive to enter into note payable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  475,000
                  
                  
                  
                  48
                  
                  
                  
                  64,077
                  
                  
                  
                  -
                  
                  
                  
                  64,125Vested
      stock options issued
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  48,345
                  
                  
                  
                  -
                  
                  
                  
                  48,345Recognition
      of beneficial conversion feature on notes payable
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,091,253
                  
                  
                  
                  -
                  
                  
                  
                  1,091,253Warrants
      issued
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  230,079
                  
                  
                  
                  -
                  
                  
                  
                  230,079Net
      loss for the year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,727,698
                  )
                  
                  
                  (2,727,698
                  )Balance
      - December 31, 2008
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  17,738,510
                  
                  
                  $
                  1,774
                  
                  
                  $
                  4,948,692
                  
                  
                  $
                  (6,801,635
                  )
                  
                  $
                  (1,851,169
                  )





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





38





INFERX
CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOW


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007





2008
                      
                      
                      2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss)
                      
                      $
                      (2,727,698
                      )
                      
                      $
                      (1,704,737
                      )Adjustments
      to reconcile net (loss) to net cash (used in) operating
      activities:Stock
      issued for services
                      
                      
                      116,625
                      
                      
                      
                      -Services
      rendered for liability for stock to be issued
                      
                      
                      -
                      
                      
                      
                      15,000Stock
      issued for penalty under registration rights agreeement
                      
                      
                      -
                      
                      
                      
                      134,202Value
      of warrants issued
                      
                      
                      -
                      
                      
                      
                      94,457Beneficial
      conversion feature
                      
                      
                      1,091,253
                      
                      
                      
                      -Stock
      based compensation
                      
                      
                      48,345
                      
                      
                      
                      27,613Amortization
      of debt discount
                      
                      
                      55,961
                      
                      
                      
                      -Impairment
      loss
                      
                      
                      -
                      
                      
                      
                      10,473Amortization
      of computer software development costs
                      
                      
                      209,996
                      
                      
                      
                      177,003Depreciation
                      
                      
                      14,446
                      
                      
                      
                      19,234Change
      in assets and liabilitiesDecrease
      in accounts receivable
                      
                      
                      -
                      
                      
                      
                      50,000Decrease
      in prepaid expenses and other current assets
                      
                      
                      7,505
                      
                      
                      
                      -Increase
      in accounts payable and accrued expenses
                      
                      
                      672,953
                      
                      
                      
                      674,337Total
      adjustments
                      
                      
                      2,217,084
                      
                      
                      
                      1,202,319Net
      cash (used in) operating activities
                      
                      
                      (510,614
                      )
                      
                      
                      (502,418
                      )CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                      
                      
                      (14,978
                      )
                      
                      
                      (21,083
                      )Computer
      software development costs
                      
                      
                      -
                      
                      
                      
                      (166,283
                      )Net
      cash (used in) investing activities
                      
                      
                      (14,978
                      )
                      
                      
                      (187,366
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Increase
      (decrease) in cash overdraft
                      
                      
                      1,495
                      
                      
                      
                      -Exercise
      of warrants to common stock
                      
                      
                      -
                      
                      
                      
                      628,818Borrowings
      of promissory notes
                      
                      
                      547,500
                      
                      
                      
                      -(Repayment)
      of notes payable
                      
                      
                      (25,073
                      )
                      
                      
                      (16,918
                      )Net
      cash provided by financing activities
                      
                      
                      523,922
                      
                      
                      
                      611,900NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                      
                      
                      (1,670
                      )
                      
                      
                      (77,884
                      )CASH
      AND CASH EQUIVALENTS - BEGINNING OF PERIOD
                      
                      
                      1,670
                      
                      
                      
                      79,554CASH
      AND CASH EQUIVALENTS - END OF PERIOD
                      
                      $
                      -
                      
                      
                      $
                      1,670SUPPLEMENTAL
      INFORMATION OF CASH FLOW ACTIVITYCash
      paid during the period for interest
                      
                      $
                      10,284
                      
                      
                      $
                      9,028SUPPLEMENTAL
      INFORMATION ON NONCASH ACTIVITYIssuance
      of warrants with convertible notes
                      
                      $
                      230,079
                      
                      
                      $
                      -Conversion
      of notes payable to stock
                      
                      $
                      162,500
                      
                      
                      $
                      -Stock
      issued for compensation
                      
                      $
                      15,000
                      
                      
                      $
                      -Stock
      issued for services
                      
                      $
                      116,625
                      
                      
                      $
                      -Stock
      based compensation
                      
                      $
                      48,345
                      
                      
                      $
                      27,613Warrants
      issued to consultant
                      
                      $
                      -
                      
                      
                      $
                      94,457Services
      rendered for liability for stock to be issued
                      
                      $
                      -
                      
                      
                      $
                      15,000Stock
      issued for penalty shares under registration rights
    agreement
                      
                      $
                      -
                      
                      
                      $
                      134,202





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


39
  INFERX
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007





NOTE
      1-
            ORGANIZATION AND BASIS
      OF PRESENTATION




Black
Nickel Acquisition Corp. I was incorporated in Delaware on May 26, 2005, and was
formed as a vehicle to pursue a business combination. From inception through
October 24, 2006, Black Nickel Acquisition Corp. I, was engaged in
organizational efforts and obtaining initial financing.




On May
17, 2006, Black Nickel Acquisition Corp. I entered into a letter of intent with
InferX Corporation, a privately-held Virginia corporation (“InferX Virginia”),
with respect to entering into a merger transaction relating to bridge financing
for InferX Virginia and the acquisition of and merger with InferX Virginia. The
transaction closed on October 24, 2006. Following the merger, Black Nickel
Acquisition Corp. I effected a short-form merger of InferX Virginia with and
into Black Nickel Acquisition Corp. I, pursuant to which the separate existence
of InferX Virginia terminated and Black Nickel Acquisition Corp. I changed its
name to InferX Corporation (“InferX” or the “Company”).




The
transaction was recorded as a recapitalization under the purchase method of
accounting, as InferX became the accounting acquirer. The reported amounts and
disclosures contained in the consolidated financial statements are those of
InferX Corporation, the operating company.




InferX
was incorporated under the laws of Delaware in 1999. On December 31, 2005,
InferX and Datamat Systems Research, Inc. (“Datamat”), a company incorporated in
1992 under the corporate laws of the Commonwealth of Virginia executed an
Agreement and Plan of Merger (the “Merger”). InferX and Datamat had common
majority directors. The financial statements herein reflect the combined entity,
and all intercompany transactions and accounts have been eliminated. As a result
of the Merger, InferX merged with and into Datamat, the surviving entity. Upon
completion, Datamat changed its name to InferX Corporation.




InferX
was formed to develop and commercially market computer applications software
systems that were initially developed by Datamat with grants from the Missile
Defense Agency.  Datamat was formed as a professional services
research and development firm, specializing in the Department of Defense. The
Company currently provides services and software to the United States
government, and is in process of formalizing business plans that will enable
them to provide software and services to commercial entities as
well.




Going
Concern




As shown
in the accompanying consolidated financial statements the Company has incurred a
loss of $2,727,698 and $1,704,737 for the years ended December 31, 2008 and
2007, respectively, and has a working capital deficiency of $1,859,458 as of
December 31, 2008.  The principal reasons for the recurring losses and
working capital deficiency relates to the Company’s continued focus on refining
its products and search for profitable government contracts. The Company expects
the negative cash flow from operations to continue its trend through the next
twelve months, however continues to expand their pipeline of contracts. These
factors raise significant doubt about the ability of the Company to continue as
a going concern.




Management’s
plans to address these conditions include continued efforts to obtain government
contracts as well as commercial contracts through expanding sources and new
technology, and the raising of additional capital through the sale of the
Company’s stock. Additionally, the Company has commenced plan’s to reduce their
liabilities by conversion of the notes payable and underlying warrants into
shares of common stock. The Company has only had discussions up to this point
other than the $169,500 they have converted in 2008.




The
Company’s long-term success is dependent upon the obtaining of sufficient
capital to fund its operations; development of its products; and launching its
products to the worldwide market. These factors will contribute to the Company’s
obtaining sufficient sales volume to be profitable. To achieve these objectives,
the Company may be required to raise additional capital through public or
private financings or other arrangements.




It cannot
be assured that such financings will be available on terms attractive to the
Company, if at all. Such financings may be dilutive to existing stockholders and
may contain restrictive covenants.


40
  INFERX
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 DECEMBER
31, 2008 AND 2007


NOTE
      1-
            ORGANIZATION AND BASIS
      OF PRESENTATION (CONTINUED)




Going Concern
(Continued)




The
Company is subject to certain risks common to technology-based companies in
similar stages of development. Principal risks to the Company include
uncertainty of growth in market acceptance for its products; history of losses
in recent years; ability to remain competitive in response to new technologies;
costs to defend, as well as risks of losing patent and intellectual property
rights; reliance on limited number of suppliers; reliance on outsourced
manufacture of its products for quality control and product availability;
uncertainty of demand for its products in certain markets; ability to manage
growth effectively; dependence on key members of its management; and its ability
to obtain adequate capital to fund future operations.




The
consolidated financial statements do not include any adjustments relating to the
carrying amounts of recorded assets or the carrying amounts and classification
of recorded liabilities that may be required should the Company be unable to
continue as a going concern.




NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES




Principles of
Consolidation




The
consolidated financial statements include those of the Company and its
wholly-owned subsidiary. All intercompany accounts and transactions have been
eliminated in consolidation.




Use of
Estimates




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.




Cash and Cash
Equivalents




The
Company considers all highly liquid debt instruments and other short-term
investments with a maturity of three months or less, when purchased, to be cash
equivalents.




The
Company maintains cash and cash equivalent balances at one financial institution
that is insured by the Federal Deposit Insurance Corporation.




Allowance for Doubtful
Accounts




The
Company provides an allowance for doubtful accounts, which is based upon a
review of outstanding receivables as well as historical collection information.
Credit is granted to substantially all customers on an unsecured basis. In
determining the amount of the allowance, management is required to make certain
estimates and assumptions. Management has determined that as of December 31,
2008, an allowance of $2,364 is required.




Fixed
Assets




Fixed
assets are stated at cost, less accumulated depreciation. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets (primarily three to five years). Costs of maintenance and repairs
are charged to expense as incurred.




41




INFERX
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 DECEMBER
31, 2008 AND 2007




NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




Computer Software
Development Costs




During
2008 and 2007, the Company capitalized certain software development costs. The
Company capitalizes the cost of software in accordance with SFAS 86 once
technological feasibility has been demonstrated, as the Company has in the past
sold, leased or otherwise marketed their software, and plans on doing so in the
future. The Company capitalizes costs incurred to develop and market their
privacy preserving software during the development process, including payroll
costs for employees who are directly associated with the development process and
services performed by consultants. Amortization of such costs is based on the
greater of (1) the ratio of current gross revenues to the sum of current and
anticipated gross revenues, or (2) the straight-line method over the remaining
economic life of the software, typically five years. It is possible that those
anticipated gross revenues, the remaining economic life of the products, or
both, may be reduced as a result of future events. The Company has not developed
any software for internal use. The Company commencing January 1, 2008, placed an
additional $226,084 of software development from prior years into service, which
is being amortized over a three year period.




For the
years ended December 31, 2008 and 2007, the Company recognized $209,996 and
$177,003 of amortization expense on its capitalized software costs,
respectively.




Recoverability of Long-Lived
Assets




The
Company reviews the recoverability of its long-lived assets on a periodic basis
whenever events and changes in circumstances have occurred which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company’s ability to recover the carrying value of its long-lived assets
from expected future cash flows from its operations on an undiscounted basis. If
such assets are determined to be impaired, the impairment recognized is the
amount by which the carrying value of the assets exceeds the fair value of the
assets. Fixed assets to be disposed of by sale are carried at the lower of the
then current carrying value or fair value less estimated costs to
sell.




Revenue
Recognition




The
Company generates revenue from professional services rendered to customers as
well as from application management support contracts with governmental units.
The Company’s revenue is generated under time-and-material contracts and
fixed-price contracts.




Time-and-Material
Contracts




Time-and-material
contracts revenue is generated whereby costs are generally incurred in
proportion with contracted billing schedules and revenue is recognized as
services are performed, with the corresponding cost of providing those services
reflected as direct costs. The customers are billed in accordance with the
contracts entered into. Such method is expected to result in reasonably
consistent profit margins over the contract term.




Fixed-Price
Contracts




Revenue
from firm-fixed-price contracts is recognized upon achievement of the milestones
contained in the contracts in accordance with the provisions of Staff Accounting
Bulletin 104. Revenue is not recognized until collectibility is assured, which
does not take place until completion of the particular milestone. Costs are
recognized as services are performed.




The
Company does not derive revenue from projects involving multiple
revenue-generating activities. If a contract would involve the provision of
multiple service elements, total estimated contract revenue would be allocated
to each element based on the fair value of each element.




The
amount of revenue allocated to each element would then be limited to the amount
that is not contingent upon the delivery of another element in the future.
Revenue for each element would then be recognized depending upon whether the
contract is a time-and-materials contract or a fixed-price, fixed-time
contract.




42


INFERX
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 DECEMBER
31, 2008 AND 2007


NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




Stock-Based
Compensation




On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) published
Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
123R”).  SFAS 123R requires that compensation cost related to
share-based payment transactions be recognized in the financial statements.
Share-based payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee share purchase plans.  The provisions of SFAS
123R, as amended, are effective for small business issuers beginning as of the
next interim period after December 15, 2005.  The Company has adopted
these provisions as of January 1, 2006 and this adoption did not have a material
effect on the Company’s operations.




On
January 1, 2006, the Company adopted the provisions of FAS No. 123R “Share-Based
Payment” (“FAS 123R”) which requires recognition of stock-based compensation
expense for all share-based payments based on fair value. Prior to January 1,
2006, the Company measured compensation expense for all of its share-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) and related interpretations. The Company has provided pro
forma disclosure amounts in accordance with FAS No. 148, “Accounting for
Stock-Based Compensation – Transition and Disclosure – an amendment of FASB
Statement No. 123” (“FAS 148”), as if the fair value method defined by FAS No.
123, “Accounting for Stock Based Compensation” (“FAS 123”) had been applied to
its stock-based compensation.





The
Company has elected to use the modified–prospective approach method. Under that
transition method, the calculated expense in 2006 is equivalent to compensation
expense for all awards granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair values estimated in accordance with the
original provisions of FAS 123. Stock-based compensation expense for all awards
granted after January 1, 2006 is based on the grant-date fair values estimated
in accordance with the provisions of FAS 123R. The Company recognizes these
compensation costs, net of an estimated forfeiture rate, on a pro rata basis
over the requisite service period of each vesting tranche of each award. The
Company considers voluntary termination behavior as well as trends of actual
option forfeitures when estimating the forfeiture rate.




The
Company’s options issued in January and December 2008 were considered stock
based compensation (see Note 7).




Concentrations




The
Company has derived all of its revenue for the years ended December 31, 2008 and
2007 from one customer.




Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable. To date, accounts
receivable have been derived from contracts with agencies of the federal
government. Accounts receivable are generally due within 30 days and no
collateral is required.




Segment
Reporting




The
Company follows the provisions of SFAS 131, “Disclosures about Segments of an
Enterprise and Related Information.” This standard requires that companies
disclose operating segments based on the manner in which management
disaggregates the Company in making internal operating decisions. The Company
believes that there is only one operating segment.




43


INFERX
CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 DECEMBER
31, 2008 AND 2007




NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




Fair Value of Financial
Instruments (other than Derivative Financial Instruments)





The
carrying amounts reported in the consolidated balance sheet for cash and cash
equivalents, and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments.  For
the notes payable, the carrying amount reported is based upon the incremental
borrowing rates otherwise available to the Company for similar
borrowings.




Convertible
Instruments




The
Company reviews the terms of convertible debt and equity securities for
indications requiring bifurcation, and separate accounting, for the embedded
conversion feature. Generally, embedded conversion features, where the ability
to physical or net-share settle the conversion option is not within the control
of the Company, are bifurcated and accounted for as a derivative financial
instrument. Bifurcation of the embedded derivative instrument requires
allocation of the proceeds first to the fair value of the embedded derivative
instrument with the residual allocated to the debt instrument. The resulting
discount to the face value of the debt instrument is amortized through periodic
charges to interest expense using the Effective Interest Method.




Income
Taxes




Under
Financial Accounting Standards Board Statement No. 109, “Accounting for Income
Taxes,” the liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.




Uncertainty in Income
Taxes




In July
2006, the FASB issued Interpretation No. 48 (FIN No. 48), “Accounting for
Uncertainty in Income Taxes.” This interpretation requires recognition and
measurement of uncertain income tax positions using a “more-likely-than-not”
approach. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. Management has adopted FIN 48 for 2007, and they evaluate their tax
positions on an annual basis, and have determined that as of December 31, 2008,
no additional accrual for income taxes is necessary.




(Loss) Per Share of Common
Stock




Basic net
(loss) per common share (“EPS”) is computed using the weighted average number of
common shares outstanding for the period. Diluted earnings per share includes
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants. Common stock equivalents
are not included in the computation of diluted earnings per share when the
Company reports a loss because to do so would be anti-dilutive for the periods
presented.





44


INFERX
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


DECEMBER
31, 2008 AND 2007





NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




(Loss) Per Share of Common
Stock (Continued)




The
following is a reconciliation of the computation for basic and diluted
EPS:




Years
      EndedDecember
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007Net
      (loss)
                  
                  $
                  (2,727,698
                  )
                  
                  $
                  (1,704,737
                  )Weighted-average
      common shares   outstanding :Basic
                  
                  
                  13,623,617
                  
                  
                  
                  10,324,653Convertible
      Notes
                  
                  
                  20,165,151
                  
                  
                  
                  -Warrants
                  
                  
                  20,408,784
                  
                  
                  
                  4,908,784Options
                  
                  
                  2,015,000
                  
                  
                  
                  140,834Diluted
                  
                  
                  56,212,552
                  
                  
                  
                  15,374,271Basic
      net (loss) per share
                  
                  $
                  (0.20
                  )
                  
                  $
                  (0.17
                  )Diluted
      net (loss) per share
                  
                  $
                  (0.20
                  )
                  
                  $
                  (0.17
                  )




Research and
Development




Research
and development costs are expensed as incurred. In addition, research and
development costs of $68,509 and $32,127 have been included in indirect labor
and $0 and $183,548 have been included in direct labor and subcontractor costs
for the years ended December 31, 2008 and 2007, respectively.




Recent Issued Accounting
Standards




In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.”
This standard defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosure about
fair value measurements. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Early adoption is
encouraged. The adoption of SFAS 157 has not had a material impact on the
consolidated financial statements.




In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No.
115”, (“FAS 159”) which permits entities to choose to measure many financial
instruments and certain other items at fair value at specified election dates. A
business entity is required to report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. This statement is expected to expand the use of fair value
measurement. FAS 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.




In
December 2006, the FASB Staff issued FSP EITF - 00-19-2, “Accounting for Registration Payment
Arrangements” (“EITF
00-19-2”). EITF 00-19-2 addresses an issuer’s accounting for registration
payment arrangements. EITF 00-19-2 specifies that the contingent obligation to
make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately
recognized and measured in accordance with SFAS No. 5, Accounting for
Contingencies. EITF 00-19-2 is effective for financial statements issued for
fiscal years beginning after December 15, 2006, and interim periods within those
fiscal years. Application of EITF 00-19-02 resulted in an adjustment in January
2007 reclassifying the derivative liability to additional paid-in capital and
retained earnings. The adjustment reduced the derivative liability by $1,031,703
and increased additional paid-in capital by $547,086 and increased retained
earnings by $484,617 which was the cumulative-effect adjustment resulting from
the adoption of this standard.


45




NOTE
2                
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(CONTINUED)




Recent Issued Accounting
Standards (Continued)




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (SFAS 160). SFAS 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, changes in a parent’s ownership of a noncontrolling interest,
calculation and disclosure of the consolidated net income attributable to the
parent and the noncontrolling interest, changes in a parent’s ownership interest
while the parent retains its controlling financial interest and fair value
measurement of any retained noncontrolling equity investment. SFAS 160 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. Management does not believe that the adoption of SFAS No. 160 has
had an impact on the Company’s consolidated financial position, results of
operations or cash flows.





In
December 2007, the FASB issued SFAS 141R,Business Combinations (“SFAS 141R”), which replaces
FASB SFAS 141,Business
Combinations. This Statement retains the fundamental requirements in SFAS
141 that the acquisition method of accounting be used for all business
combinations and for an acquirer to be identified for each business combination.
SFAS 141R defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date that the acquirer achieves control.  SFAS 141R will require
an entity to record separately from the business combination the direct costs,
where previously these costs were included in the total allocated cost of the
acquisition.  SFAS 141R will require an entity to recognize the assets
acquired, liabilities assumed, and any non-controlling interest in the acquired
at the acquisition date, at their fair values as of that date.  This
compares to the cost allocation method previously required by SFAS No.
141.





SFAS 141R
will require an entity to recognize as an asset or liability at fair value for
certain contingencies, either contractual or non-contractual, if certain
criteria are met.  Finally, SFAS 141R will require an entity to
recognize contingent consideration at the date of acquisition, based on the fair
value at that date.  This Statement will be effective for business
combinations completed on or after the first annual reporting period beginning
on or after December 15, 2008.  Early adoption of this standard is not
permitted and the standards are to be applied prospectively
only.  Upon adoption of this standard, there would be no impact to the
Company’s results of operations and financial condition for acquisitions
previously completed.  The adoption of SFAS No. 141R has not had a
material effect on the Company’s consolidated financial position, results of
operations or cash flows.





In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expenses
the current view of the staff that it will accept a company’s election to use
the simplified method discussed in Staff Accounting Bulletin No. 107, “Share Based Payment”, (“SAB 107”), for estimating
the expected term of “plain
vanilla” share options regardless of whether the company has sufficient
information to make more refined estimates. SAB 110 became effective for the
Company on January 1, 2008. The adoption of SAB 110 has not had a material
impact on the Company’s financial position.





In April
2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets”. This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets”. The Company was required to adopt FSP 142-3 on October 1, 2008. The
guidance in FSP 142-3 for determining the useful life of a recognized intangible
asset shall be applied prospectively to intangible assets acquired after
adoption, and the disclosure requirements shall be applied prospectively to all
intangible assets recognized as of, and subsequent to, adoption. The Company
does not believe FSP 142-3 will materially impact their financial position,
results of operations or cash flows.


46


INFERX
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


DECEMBER
31, 2008 AND 2007





NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




Recent Issued Accounting
Standards (Continued)




In May
2008, the FASB issued FSP Accounting Principles Board 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company does not believe that the adoption of FSP APB 14-1 will have
a material effect on its financial position, results of operations or cash
flows.





In June
2008, the Emerging Issues Task Force issued EITF No. 07-05, “Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF
07-05”), which supersedes the definition in EITF 06-01 for periods beginning
after December 15, 2008. The objective of EITF 07-05 is to provide guidance for
determining whether an equity-linked financial instrument (or embedded feature)
is indexed to an entity’s own stock and it applies to any freestanding financial
instrument or embedded feature that has all the characteristics of a derivative
in FSAB 133, for purposes of determining whether that instrument or embedded
feature qualifies for the first part of the scope exception in paragraph 11(a)
of SFAS 133 (“the Paragraph 11(a) Exception”). EITF 07-05 also applies to any
freestanding financial instrument that is potentially settled in an entity’s own
stock, regardless of whether the instrument s within the scope of EITF 00-19.
The Company is determining what impact, if any, EITF 07-05 will have on its
financial position, results of operations and cash flows.





In June
2008, the Emerging Issues Task Force issued EITF 08-04, “Transition Guidance for
Conforming Changes to EITF 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”
(“EITF 08-04”). EITF 08-04 is effective for years ending after December 15,
2008. The overall objective of EITF 08-04 is to conform the requirements of EITF
00-27 and FASB 150 with EITF 98-5 to provide for consistency in application of
the standard. The Company has computed and recorded a beneficial conversion
feature in connection with certain of their prior financing arrangements and
does not believe that EITF 08-04 will have a material effect on that
accounting.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date and
are not expected to have a material impact on the condensed consolidated
financial statements upon adoption.




NOTE
      3-
            FIXED
      ASSETS




Fixed
assets consist of the following as of December 31, 2008 and 2007,
respectively:




Estimated Useful
                    
                    
                    December 31,
                    
                    
                    December 31,Lives (Years)
                    
                    
                    2008
                    
                    
                    2007Computer
      equipment
                    
                    
                    5
                    
                    
                    $
                    107,065
                    
                    
                    $
                    92,087Office
      machinery and equipment
                    
                    
                    3
                    
                    
                    
                    15,638
                    
                    
                    
                    15,638Furniture  and
      fixtures
                    
                    
                    5
                    
                    
                    
                    538
                    
                    
                    
                    538Automobile
                    
                    
                    5
                    
                    
                    
                    58,476
                    
                    
                    
                    58,476181,717
                    
                    
                    
                    166,739Less:
      Accumulated depreciation
                    
                    
                    
                    
                    
                    
                    (150,138
                    )
                    
                    
                    (135,692
                    )Total,
      net
                    
                    
                    
                    
                    
                    $
                    31,579
                    
                    
                    $
                    31,047




Depreciation
expense was $14,446 and $19,234 for the years ended December 31, 2008 and 2007,
respectively.


47




INFERX
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


DECEMBER
31, 2008 AND 2007




NOTE
      4-
            COMPUTER SOFTWARE
      DEVELOPMENT COSTS




Computer
software development costs consist of the following as of December 31, 2008 and
2007, respectively:




Estimated Useful
                  
                  
                  December 31,
                  
                  
                  December 31,Lives (Years)
                  
                  
                  2008
                  
                  
                  2007Computer
      software development costs
                  
                  
                  5
                  
                  
                  $
                  986,724
                  
                  
                  $
                  986,724Less:
      Accumulated amortization
                  
                  
                  
                  
                  
                  
                  (846,475
                  )
                  
                  
                  (636,478
                  )Total,
      net
                  
                  
                  
                  
                  
                  $
                  140,249
                  
                  
                  $
                  350,246




Amortization
expense was $209,996 and $177,003 for the years ended December 31, 2008 and
2007, respectively.  At March 31, 2007, the Company wrote off net
software development costs of $10,473 relating to their Inferview
product.




Amortization
expense anticipated through December 31, 2010 is as follows:




Period
      ended December 31:2009
                      
                      $
                      70,1252010
                      
                      
                      70,124$
                      140,249




NOTE
      5-
            NOTES
      PAYABLE




SBA
Loan




On July
22, 2003, the Company and the U.S. Small Business Administration (“SBA”) entered
into a Note (the “Note”) under the SBA’s Secured Disaster Loan program in the
amount of $377,100.




Under the
Note, the Company agreed to pay principal and interest at an annual rate of 4%
per annum, of $1,868 every month commencing twenty-five (25) months from the
date of the Note (commencing August 2005). The Note matures July
2033.




The
Company must comply with the default provisions contained in the Note. The
Company is in default under the Note if it does not make a payment under the
Note, or if it: a) fails to comply with any provision of the Note, the Loan
Authorization and Agreement, or other Loan documents; b) defaults on any other
SBA loan; c) sells or otherwise transfers, or does not preserve or account to
SBA’s satisfaction for, any of the collateral (as defined therein) or its
proceeds; d) does not disclose, or anyone acting on their behalf does not
disclose, any material fact to the SBA; e) makes, or anyone acting on their
behalf makes, a materially false or misleading representation to the SBA; f)
defaults on any loan or agreement with another creditor, if the SBA believes the
default may materially affect the Company’s ability to pay this Note; g) fails
to pay any taxes when due; h) becomes the subject of a proceeding under any
bankruptcy or insolvency law; i) has a receiver or liquidator appointed for any
part of their business or property; j) makes an assignment for the benefit of
creditors; k) has any adverse change in financial condition or business
operation that the SBA believes may materially affect the Company’s ability to
pay this Note; l) dies; m) reorganizes, merges, consolidates, or otherwise
changes ownership or business structure without the SBA’s prior written consent;
or n) becomes the subject of a civil or criminal action that the SBA believes
may materially affect the Company’s ability to pay this Note. The Company is
currently in default of this note as they have not made a payment since October
29, 2008. As a result, the Company has classified all of the principal remaining
on this note as a current liability, and has not received a waiver from the SBA
until the first quarter of 2009 for the default.


48


INFERX
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


DECEMBER
31, 2008 AND 2007




NOTE
      5-
            NOTES PAYABLE
      (CONTINUED)




SBA
Loan (Continued)




As of
December 31, 2008, the Company has an outstanding principal balance of $354,936.
Interest expense on the SBA loan for the years ended December 31, 2008 and 2007
were $8,035 and $12,628, respectively.




Automobile
Loan




The
Company has a note payable with an automotive finance company in the original
amount of $44,990 (the “Auto Note”). The Auto Note commenced in November 2003,
and requires payments of $750 per month for a period of 60 months. The Auto Note
is secured by the automobile.




As of
December 31, 2008, the note has matured.




Convertible
Notes





The
Company has entered into the following convertible notes:





·
            Convertible
      note dated March 6, 2008 in the amount of $75,000, with a term of 2 years,
      with interest calculated at 9.9% per annum. The note is convertible at 50%
      of the closing bid price of the common stock on the date of conversion.
      The Company has accrued interest for the period ended December 31, 2008 in
      the amount of $5,974. In accordance with EITF 98-5 and EITF 00-27, the
      Company recorded a beneficial conversion feature of $75,000 based on the
      difference in the intrinsic value of the conversion option. As of December
      31, 2008, $7,000 was converted for 4,207,618 shares of common stock. An
      additional $5,000 was converted in January 2009 into 1,515,151 shares of
      common stock;





·
            Convertible
      note dated March 7, 2008 in the amount of $62,500, with a term of 2 years,
      with interest calculated at 9.9% per annum. The note was convertible at
      50% of the closing bid price of the common stock on the date of
      conversion, and was converted the same day the note was executed for a
      conversion price of $.135 or 462,963 shares. This note was converted
      immediately and the shares were issued in April 2008, and there was no
      beneficial conversion feature associated with this
  note;




·
            Convertible
      note dated March 10, 2008 in the amount of $100,000, with a term of 2
      years, with interest calculated at 9.9% per annum. The note was
      convertible at 50% of the closing bid price of the common stock on the
      date of conversion, and was converted the same day the note was executed
      for a conversion price of $.135 or 740,741 shares. This note was converted
      immediately and shares were issued in April 2008 and there was no
      beneficial conversion feature associated to this
  note.





·
            Convertible
      note dated June 1, 2008 in the amount of $25,000, with a term of 1 year,
      with interest calculated at 9.9% per annum. The note is convertible into a
      fixed price of $0.02 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $0.02 per share for 1,250,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest for the period ended December 31, 2008 in the
      amount of $1,451;





·
            Convertible
      note dated June 21, 2008 in the amount of $10,000, with a term of 1 year,
      with interest calculated at 9.9% per annum. The note is convertible into a
      fixed price of $0.02 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $0.02 per share for 500,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted..
      The Company has accrued interest for the period ended December 31, 2008 in
      the amount of $526;


49


INFERX
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


DECEMBER
31, 2008 AND 2007




NOTE
      5-
            NOTE PAYABLE
      (CONTINUED)




Convertible Notes(continued)





·
            Convertible
      note dated June 21, 2008 in the amount of $10,000, with a term of 1 year,
      with interest calculated at 9.9% per annum. The note is convertible into a
      fixed price of $0.02 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $0.02 per share for 500,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest for the period ended December 31, 2008 in the
      amount of $526;




·
            Convertible
      note dated July 2, 2008 in the amount of $5,000, with a term of 1 year,
      with interest calculated at 9.9% per annum. The note is convertible into a
      fixed price of $.020 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $.02 per share for 250,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest for the period ended December 31, 2008 in the
      amount of $248;





·
            Convertible
      notes dated between July 23, 2008 and August 6, 2008 in the amount of
      $250,000, with a term of 2 years, with interest calculated at 10% per
      annum. The notes are convertible into a fixed price of $.02 per share of
      common stock on the outstanding principal and accrued interest on the date
      of conversion. The note holder also received a warrant agreement
      exercisable over five years to purchase common stock at $.02 per share for
      12,500,000 warrants. There will also be warrants issued for accrued
      interest should the interest be converted. The Company has accrued
      interest for the period ended December 30, 2008 in the amount of $10,736.;
      and





·
            Convertible
      note dated November 16, 2008 in the amount of $10,000, with a term of 2
      years, with interest calculated at 10% per annum. The note is convertible
      into a fixed price of $.02 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $.02 per share for 500,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest for the period ended December 31, 2008 in the
      amount of $121;




The
convertible notes issued in June, July, August and November 2008, were issued
with warrants and each instrument was valued according to the provisions of APB
14. The value of the warrants are reflected as additional paid in capital with a
value of $230,079, with a corresponding debt discount in the same amount. The
discount is being amortized over the life of the convertible notes of 1 to 2
years. Amortization of the discount for the year ended December 31, 2008 is
$55,961, with a remaining debt discount as of December 31, 2008 of $174,118. In
addition, the Company calculated a beneficial conversion feature of $1,091,253
on the $385,000 in convertible notes in accordance with the provisions of EITF
98-5 and EITF 00-27.




As of
December 31, 2008, the repayment schedule of the Notes Payable for the next two
years and in the aggregate is:




2009
      (net of discount of $9,658)
                  
                  $
                  395,2782010
      (net of discount of $164,460)
                  
                  
                  163,540558,818Less:
      current portion
                  
                  
                  (395,278
                  )Long-term
      portion
                  
                  $
                  163,540


50




NOTE
      6-
            STOCKHOLDERS’ EQUITY
      (DEFICIT)




Preferred
Stock




The
Company was incorporated on May 26, 2005, and the Board of Directors authorized
10,000,000 shares of preferred stock with a par value of $0.0001. The Company
has not issued any shares of preferred stock since inception.




Common
Stock




The
Company was incorporated on May 26, 2005, and the Board of Directors authorized
75,000,000 shares of common stock with a par value of $0.0001.




The
Company as of December 31, 2008 has 17,738,510 shares of common stock issued and
outstanding.





During
the year ended December 31, 2008 the Company issued 462,963 and 740,741 shares
of common stock in convertible note transactions of $62,500 and $100,000,
respectively (see Note 5).  These shares of stock were issued in April
2008. Additionally, 4,207,618 shares of common stock were issued to convert
$7,000 of a convertible note payable.





The
Company issued 475,000 shares of common stock to three convertible note holders
valued at $64,125 for entering into the March 6, 7 and 10 convertible note
agreements.  The Company also issued 350,000 shares of common stock
for services rendered valued at $52,500. The combined $116,625 is reflected as
stock issued for services in the consolidated statements of operations for the
year ended December 31, 2008.  These shares of stock were issued in
April 2008.




The
Company has also recorded a $15,000 consulting fee in 2007 for the issuance of
30,000 shares of stock. The fees were earned in 2007 and the shares of stock
were issued in April 2008.





Warrants




The
Company in the private placement granted 2,329,392 Class A and 2,329,392 Class B
warrants. In April 2007, 1,629,513 of the Class A warrants were exercised into
common shares. In November 2007, an additional 444,879 of the Class A warrants
were exercised into common shares. The Company granted additional Class A
warrants to the warrant holders that exercised during April and November 2007.
The additional Class A warrants of 2,074,392 were issued in November 2007 and
are reflected herein. The Company also issued 250,000 warrants in September 2007
for investor relation services and 2,250,000 warrants in connection with the
convertible notes issued in June 2008, 250,000 warrants in connection with the
notes issued in July 2008, 12,500,000 warrants in connection with the notes
issued in July and August 2008, and 500,000 warrants in connection with the note
issued in November 2008. The following is a breakdown of the
warrants:





Exercise
                
                DateWarrants
                
                Price
                
                Issued
                
                Term255,000
                
                $
                0.50
                
                4/1/2007
                
                5
      years2,329,392
                
                $
                0.50
                
                4/1/2007
                
                5
      years250,000
                
                $
                0.50
                
                9/1/2007
                
                5
      years2,074,392
                
                $
                0.50
                
                11/30/2007
                
                3.9
      years2,250,000
                
                $
                0.02
                
                6/1/2008
                
                5
      years250,000
                
                $
                0.02
                
                7/2/2008
                
                5
      years12,500,000
                
                $
                0.02
                
                7/31/08-8/6/08
                
                5
      years500,000
                
                $
                0.02
                
                11/16/2008
                
                5
      years20,408,784


The
warrants have a weighted average price of $.12.


51


INFERX
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


DECEMBER
31, 2008 AND 2007





NOTE
      6-
            STOCKHOLDERS’ EQUITY
      (DEFICIT) (CONTINUED)




The Class
A Warrants and Class B Warrants in the private placement as well as the
consultant warrants were valued utilizing the Black – Scholes method as
follows:





Class A
                    
                    
                    Class B
                    
                    
                    Consultant
                    
                    
                    Conv
    NotesStock
      Price
                    
                    $
                    .50
                    
                    
                    $
                    .50
                    
                    
                    $
                    .50
                    
                    
                    $
                    .10Strike
      Price
                    
                    $
                    .50
                    
                    
                    $
                    .62
                    
                    
                    $
                    .50
                    
                    
                    $
                    .02Expected
      Life of Warrant
                    
                    5
      yrs.
                    
                    
                    5
      yrs.
                    
                    
                    5
      yrs.
                    
                    
                    5
      yrs.Annualized
      Volatility
                    
                    
                    50
                    %
                    
                    
                    50
                    %
                    
                    
                    50
                    %
                    
                    
                    100
                    %Discount
      Rate
                    
                    
                    3.50
                    %
                    
                    
                    3.50
                    %
                    
                    
                    3.50
                    %
                    
                    
                    3.00
                    %Annual Rate of Quarterly Dividends
                    
                    None
                    
                    
                    None
                    
                    
                    None
                    
                    
                    NoneCall
      Option Value
                    
                    $
                    .237
                    
                    
                    $
                    .206
                    
                    
                    $
                    .378
                    
                    
                    $
                    .0834/$.0908




Options




Prior to
October 2007, there were no options outstanding, or granted. In October 2007,
the Company’s Board of Directors and Shareholders approved the adoption of an
option plan for a total of 2,200,000 shares and issued 440,000 options in
October 2007 and 2,000,000 in December 2008 that vest over a three-year period
of time with a strike price of $0.50 per share (October 2007/January 2008) and
$.01 (December 2008). 425,000 of these options were forfeited during 2008. The
Company has 2,015,000 options remaining at December 31, 2008, all of which are
fully vested.




These
options were valued as follows:




January
      2008Stock Price
                                  
                                  $
                                  0.03/$0.55Strike
      Price
                                  
                                  $
                                  .50Expected
      Life of Option
                                  
                                  1
      yr.Annualized
      Volatility
                                  
                                  
                                  100
                                  %Discount
      Rate
                                  
                                  
                                  3.00
                                  %Annual
      Rate of Quarterly Dividends
                                  
                                  NoneCall
      Option Value
                                  
                                  $
                                  .124/$.217




December 2008Stock Price
                    
                    $
                    0.01Strike
      Price
                    
                    $
                    0.01Expected
      Life of Option
                    
                    5
      yr.Annualized
      Volatility
                    
                    
                    100
                    %Discount
      Rate
                    
                    
                    3.00
                    %Annual
      Rate of Quarterly Dividends
                    
                    NoneCall
      Option Value
                    
                    $
                    .0076





The value
attributable to these options for the year ended December 31, 2008 and 2007 is
$48,345 and $27,613 respectively and is reflected in the consolidated statements
of operations as stock based compensation.


52


INFERX
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


DECEMBER
31, 2008 AND 2007




NOTE
      7-
            COMMITMENTS




Rental




The
Company leased office space under an operating lease that expired in November
2008. The Company currently leases space on a month-to-month basis.




Rent
expense for the years ended December 31, 2008 and 2007 was $128,626 and
$106,789, respectively.




Consulting
Agreements




During
the year ended December 31, 2008, the Company did not enter into any consulting
agreements. In 2007, the Company entered into consulting agreements with
marketing and strategic consulting groups with terms that do not exceed one
year. These companies are to be paid fees for the services they perform. The
Company has included these fees in their consolidated statements of operations
for the years ended December 31, 2008 and 2007.





Registration Rights
Agreement




The
Registration Rights Agreement dated October 23, 2006 between the Company and
certain investors provided that the Company would accrue a penalty of 1% of the
total shares of the Company’s common stock registered on Form SB-2 (the “Total
Shares”), per month for each month beyond April 23, 2007 that Company’s
registration statement on Form SB-2 failed to be effective up to a maximum of
10% of the Total Shares or 447,340 shares of common stock. The Company has
incurred a penalty of 268,404 shares of its common stock through September 10,
2007, the effective date of the Company’s registration statement. This liability
had been accrued at a value of $.50 per share or $134,202 at September 30,
2007.  The penalty shares noted above were issued in October
2007.




NOTE
      8-
            PROVISION FOR INCOME
      TAXES




Deferred
income taxes will be determined using the liability method for the temporary
differences between the financial reporting basis and income tax basis of the
Company’s assets and liabilities.  Deferred income taxes are measured
based on the tax rates expected to be in effect when the temporary differences
are included in the Company’s tax return.  Deferred tax assets and
liabilities are recognized based on anticipated future tax consequences
attributable to differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases.


53


INFERX
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


DECEMBER
31, 2008 AND 2007




NOTE
      8-
            PROVISION FOR INCOME
      TAXES (CONTINUED)




At
December 31, 2008, deferred tax assets consist of the following:





Net
      operating losses
                  
                  $
                  1,904,911Valuation
      allowance
                  
                  
                  (1,904,911
                  )$
                  -





At
December 31, 2008, the Company had net operating loss carryforward in the
approximate amount of $5,602,679, available to offset future taxable income
through 2028.  The Company established valuation allowances equal to
the full amount of the deferred tax assets due to the uncertainty of the
utilization of the operating losses in future periods.




A
reconciliation of the Company’s effective tax rate as a percentage of income
before taxes and federal statutory rate for the years ended December 31, 2008
and 2007 is summarized below.




2008
                  
                  
                  2007Federal
      statutory rate
                  
                  
                  (34.0
                  )%
                  
                  
                  (34.0
                  )%State
      income taxes, net of federal benefits
                  
                  
                  6.0
                  
                  
                  
                  6.0Valuation
      allowance
                  
                  
                  28.0
                  
                  
                  
                  28.00
                  %
                  
                  
                  0
                  %




NOTE
9-                DEFINED CONTRIBUTION
PLAN




The
Company has a retirement plan which satisfies the requirements of Section 401(k)
of the Internal Revenue Code. This defined contribution retirement plan covers
substantially all employees. Participants can elect to have up to the maximum
percentage allowable of their salaries reduced and contributed to the plan. The
Company may make matching contributions equal to a discretionary percentage of
the participants’ elective deferrals. The Company made no such contributions for
the years ended December 31, 2008 and 2007, respectively.




NOTE
10-             MAJOR
CUSTOMER




The
Company’s contracts with agencies of the federal government accounted for 100%
of its revenue and accounts receivable as of and for the years ended December
31, 2008 and 2007, respectively.


54


NOTE
11-            
FAIR VALUE
MEASUREMENTS




On
January 1, 2008, the Company adopted SFAS 157. SFAS 157 defines fair value,
provides a consistent framework for measuring fair value under generally
accepted accounting principles and expands fair value financial statement
disclosure requirements. SFAS 157’s valuation techniques are based on observable
and unobservable inputs. Observable inputs reflect readily obtainable data from
independent sources, while unobservable inputs reflect our market assumptions.
SFAS 157 classifies these inputs into the following hierarchy:




Level 1
inputs: Quoted prices for identical instruments in active markets.




Level 2
inputs: Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.




Level 3
inputs: Instruments with primarily unobservable value drivers.




The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring basis as of December 31,
2008:




Level
      1
                      
                      
                      Level
      2
                      
                      
                      Level
      3
                      
                      
                      TotalCash
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      assets
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Notes
      payable, net of discount
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      558,818
                      
                      
                      
                      558,818Total
      liabilities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      558,818
                      
                      
                      
                      558,818





NOTE
12-            
SUBSEQUENT
EVENT




On March
16, 2009, the Company entered into an agreement and plan of reorganization (the
“Merger Agreement”) with the Irus Group, Inc. under which it intends to effect a
reverse triangular merger between The Irus Group, Inc. and the Company’s
wholly-owned subsidiary, Irus Acquisition Corp. (formed for the purse of
completing this transaction).




Under the
terns of the Merger Agreement, the issued and outstanding shares of The Irus
Group common stock will be automatically converted into the right to receive 70%
of the issued and outstanding shares of the Company’s common stock.




The
Merger Agreement also provides that, at the effective time of the Merger, the
Company’s Board of Directors agrees to appoint Vijay Suri, President and CEO of
the Company and have Vijay Suri fill a vacancy on its Board of Directors. In
addition, effectiveness of the Merger Agreement is conditional upon (i) the
Company restructuring existing debt by converting the existing debt and warrants
to common stock with the intention of having no more than 57-60 million shares
of its common stock outstanding prior to a reverse split of not less than 1:10;
(ii) the Company using its best efforts to reduce its accounts payable by 70%,
(iii) Vijay Suri, President and CEO of The Irus Group, Inc. executing an
employment agreement with the Company, and (iv) additional customary closing
conditions relating to delivery of financial statements, closing certificates as
to representations and warranties, and the delivery of any required consents or
government approvals. The Merger is expected to be completed by June 30,
2009.




55