##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from January 1, 2006 to March 31, 2006
 Commission file number: 1-31949
 INX Inc.
  Delaware
    
    76-0515249(State of incorporation)
    
    (I.R.S. Employer Identification Number)
 6401 Southwest Freeway
Houston, Texas 77074
 (713) 795-2000
 þ o
  o o þ
 o þ




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##### 



INX Inc. and Subsidiaries
 FORM 10-Q for the Quarter Ended March 31, 2006
 INDEX
 Part I. Financial InformationItem 1. Financial Statements (Unaudited):Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005Condensed Consolidated Balance Sheets at March 31, 2006 and December 31, 2005Condensed Consolidated Statement of Stockholders Equity for the three months ended March 31, 2006Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005Notes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 6. ExhibitsSignatureRule 13a-14a/15d-14a Certification of PEORule 13a-14a/15d-14a Certification of PFOSection 1350 Certification of PEOSection 1350 Certification of PFO




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements (Unaudited):
  
    Three months endedMarch 31,2006
    
    
    2005Revenue:Products
    
    $
    26,822
    
    
    $
    23,153Services
    
    
    3,965
    
    
    
    1,508Total revenue
    
    
    30,787
    
    
    
    24,661Cost of products and services:Products
    
    
    22,404
    
    
    
    19,816Services
    
    
    2,976
    
    
    
    1,184Total cost of products and services
    
    
    25,380
    
    
    
    21,000Gross profit
    
    
    5,407
    
    
    
    3,661Selling, general and administrative expenses
    
    
    5,845
    
    
    
    9,010Operating loss
    
    
    (438
    )
    
    
    (5,349
    )Interest and other income (expense), net
    
    
    (85
    )
    
    
    (68
    )Loss from continuing operations before income taxes
    
    
    (523
    )
    
    
    (5,417
    )Income tax expense
    
    
    1
    
    
    
    121Net loss from continuing operations
    
    
    (524
    )
    
    
    (5,538
    )Loss from discontinued operations, net of income taxes
    
    
    (4
    )
    
    
    (970
    )Net loss
    
    $
    (528
    )
    
    $
    (6,508
    )Net loss per share:Basic:Loss from continuing operations
    
    $
    (0.09
    )
    
    $
    (1.06
    )Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (0.19
    )Net loss per share
    
    $
    (0.09
    )
    
    $
    (1.25
    )Diluted:Loss from continuing operations
    
    $
    (0.09
    )
    
    $
    (1.06
    )Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (0.19
    )Net loss per share
    
    $
    (0.09
    )
    
    $
    (1.25
    )Shares used in computing net loss per share:Basic and diluted
    
    
    6,047,840
    
    
    
    5,210,794
  3




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##### Table of Contents



March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,915
    
    
    $
    2,597Accounts receivable, net of allowance of $383 and $161
    
    
    27,325
    
    
    
    24,903Inventory
    
    
    1,260
    
    
    
    79Other current assets
    
    
    837
    
    
    
    881Current assets of discontinued operations
    
    
    1,307
    
    
    
    2,564Total current assets
    
    
    33,644
    
    
    
    31,024Property and equipment, net of accumulated depreciation of $2,516 and $2,344
    
    
    2,258
    
    
    
    2,050Goodwill
    
    
    8,602
    
    
    
    7,121Intangible and other assets, net of accumulated amortization of $1,103 and $1,007
    
    
    298
    
    
    
    393Noncurrent assets of discontinued operations
    
    
    106
    
    
    
    1,057Total assets
    
    $
    44,908
    
    
    $
    41,645LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Notes payable and current portion of long-term debt
    
    $
    849
    
    
    $
    2,707Accounts payable
    
    
    19,670
    
    
    
    13,825Accrued expenses
    
    
    4,228
    
    
    
    3,696Other current liabilities
    
    
    309
    
    
    
    468Current liabilities of discontinued operations
    
    
    1,415
    
    
    
    2,936Total current liabilities
    
    
    26,471
    
    
    
    23,632Long-term liabilities of discontinued operations
    
    
    
    
    
    
    7Commitments and contingenciesStockholders Equity:Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued
    
    
    
    
    
    
    Common stock, $.01 par value, 15,000,000 shares authorized, 6,174,404 and
5,975,626 shares issued
    
    
    62
    
    
    
    60Additional paid-in capital
    
    
    28,503
    
    
    
    27,546Retained deficit
    
    
    (10,128
    )
    
    
    (9,600
    )Total stockholders equity
    
    
    18,437
    
    
    
    18,006Total liabilities and stockholders equity
    
    $
    44,908
    
    
    $
    41,645
  4




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##### Table of Contents



$.01 par value
    
    
    AdditionalCommon Stock
    
    
    Paid-In
    
    
    RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance at December 31, 2005
    
    
    5,975,626
    
    
    $
    60
    
    
    $
    27,546
    
    
    $
    (9,600
    )
    
    $
    18,006Exercise of common stock options
    
    
    125,670
    
    
    
    1
    
    
    
    255
    
    
    
    
    
    
    
    256Issuance of shares for Datatran acquisition
    
    
    73,108
    
    
    
    1
    
    
    
    514
    
    
    
    
    
    
    
    515Share-based compensation expense related
to employee stock options
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    60Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    128Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (528
    )
    
    
    (528
    )Balance at March 31, 2006
    
    
    6,174,404
    
    
    $
    62
    
    
    $
    28,503
    
    
    $
    (10,128
    )
    
    $
    18,437
  5




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##### Table of Contents



Three months endedMarch 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (528
    )
    
    $
    (6,508
    )Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:Net loss from discontinued operations
    
    
    4
    
    
    
    970Tax benefit from discontinued operations
    
    
    
    
    
    
    (121
    )Minority interest
    
    
    
    
    
    
    23Depreciation and amortization
    
    
    274
    
    
    
    178Share-based compensation expense related to employee stock options
    
    
    58
    
    
    
    Loss on retirement of assets
    
    
    2
    
    
    
    12Bad debt expense
    
    
    19
    
    
    
    (74
    )Exchange of options in merger of subsidiary
    
    
    
    
    
    
    5,729Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,441
    )
    
    
    3,284Inventory (net of effect of acquisition)
    
    
    (1,156
    )
    
    
    283Accounts payable
    
    
    5,845
    
    
    
    5,560Other assets and liabilities
    
    
    417
    
    
    
    728Net cash provided by continuing operations
    
    
    2,494
    
    
    
    10,064Net operating activities of discontinued operations
    
    
    (310
    )
    
    
    522Net cash provided by operating activities
    
    
    2,184
    
    
    
    10,586CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of Datatran Network Systems
    
    
    (1,000
    )
    
    
    Transaction costs paid for acquisitions
    
    
    (29
    )
    
    
    Capital expenditures (net of effect of acquisitions)
    
    
    (351
    )
    
    
    (92
    )Net cash used in investing activities of continuing operations
    
    
    (1,380
    )
    
    
    (92
    )Net investing activities of discontinued operations:Proceeds from sale of Stratasoft stock, net of transaction costs
    
    
    1,117
    
    
    
    Capital expenditures
    
    
    
    
    
    
    (41
    )Net cash used in investing activities
    
    
    (263
    )
    
    
    (133
    )CASH FLOWS FROM FINANCING ACTIVITIES:Exercise of stock options
    
    
    256
    
    
    
    12Net payments of short-term interest bearing credit facilities
    
    
    (1,742
    )
    
    
    (8,122
    )Payments on notes payable
    
    
    (116
    )
    
    
    (3
    )Net cash used in financing activities of continuing operations
    
    
    (1,602
    )
    
    
    (8,113
    )Net financing activities of discontinued operations
    
    
    (1
    )
    
    
    (22
    )Net cash used in financing activities
    
    
    (1,603
    )
    
    
    (8,135
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    318
    
    
    
    2,318CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    2,597
    
    
    
    4,975CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    2,915
    
    
    $
    7,293SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    74
    
    
    $
    219Cash paid for income taxes
    
    $
    1
    
    
    $
    25SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:Acquisition of INX minority interest:Issuance of common stock
    
    
    
    
    
    $
    1,530Transaction costs accrued
    
    
    
    
    
    
    180Minority interest acquired
    
    
    
    
    
    
    (302
    )Acquisition of Datatran Network Systems:Fair value of assets acquired
    
    $
    1,544
    
    
    
    Common stock issued
    
    
    (515
    )
    
    
    Sale of Stratasoft  warrants issued
    
    
    128
    
    
    
    
  6




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##### Table of Contents



INX INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
 1. Description of Business
  2. Basis of Presentation
   3. Share-Based Compensation
   7




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##### Table of Contents



Equity Compensation Plans
  1996 Incentive Stock Plan and the 1996 Non-Employee Director Stock Option Plan
 2000 Stock Incentive Plan
 Grant-Date Fair Value
  Three MonthsEnded March 31,2006
    
    2005Expected volatility
    
    
    65.1
    %
    
    
    78.6
    %Expected term (in years)
    
    
    6.5
    
    
    
    8.0Risk-free interest rate
    
    
    4.83
    %
    
    
    3.63
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
  Share-Based Compensation Expense
  8




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##### Table of Contents



Three Months EndedMarch 31,2006Cost of products and services  services
    
    $
    14Selling, general and administrative expenses
    
    
    44Share-based compensation from continuing operations before income taxes
    
    
    58Income tax benefit
    
    
    Share-based compensation from continuing operations
    
    
    58Share-based compensation from discontinued operations
    
    
    2Total share-based compensation
    
    $
    60
  Three Months EndedMarch 31, 2005Basic and diluted:Net loss as reported
    

    $
    (6,508
    )Deduct: share-based employee compensation, net of related income tax effect
    

    
    40Pro forma net loss
    

    $
    (6,548
    )Net loss per share:Basic  as reported
    

    $
    (1.25
    )Basic  pro forma
    

    $
    (1.26
    )Diluted  as reported
    

    $
    (1.25
    )Diluted  pro forma
    

    $
    (1.26
    )
 Option Activity
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term (Years)
    
    ValueOptions outstanding at December 31, 2005
    
    
    1,944,610
    
    
    $
    2.66Granted
    
    
    28,367
    
    
    
    6.10
    
    
    
    
    
    
    $
    3Exercised
    
    
    (125,670
    )
    
    
    2.04
    
    
    
    
    
    
    $
    612Canceled
    
    
    (1,800
    )
    
    
    5.26Options outstanding March 31, 2006
    
    
    1,845,507
    
    
    $
    2.75
    
    
    
    6.84
    
    
    $
    6,684Options exercisable at March 31, 2006
    
    
    1,541,724
    
    
    $
    2.12
    
    
    
    6.40
    
    
    $
    6,407Options vested and options expected to vest
at March 31, 2006
    
    
    1,802,714
    
    
    $
    2.70
    
    
    
    6.79
    
    
    $
    6,626
 9




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##### Table of Contents



4. Acquisitions
  Datatran Network Systems
    Network Architects, Corp.
  10




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##### Table of Contents



InfoGroup Northwest, Inc.
    Datatran
    
    
    Network
    
    
    InfoGroupNetwork
    
    
    Architects,
    
    
    Northwest,Systems
    
    
    Corp.
    
    
    Inc.Allocated acquisition cost:Intangibles  customer
relationships and noncompete
agreements amortized over 3
years
    
    $
    
    
    
    $
    241
    
    
    $
    134Inventory
    
    
    25
    
    
    
    
    
    
    
    Property and equipment
    
    
    38
    
    
    
    500
    
    
    
    297Security deposits
    
    
    
    
    
    
    4
    
    
    
    6Goodwill
    
    
    1,481
    
    
    
    3,620
    
    
    
    2,086Total acquisition cost
    
    $
    1,544
    
    
    $
    4,365
    
    
    $
    2,523
 11




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##### Table of Contents



Pro Forma Summary (Unaudited)
  Three Months EndedMarch 31,2006
    
    
    2005Revenues
    
    $
    30,832
    
    
    $
    38,806Net loss from continuing operations
    
    $
    (643
    )
    
    $
    (5,250
    )Net loss per share from continuing operations:Basic
    
    $
    (0.11
    )
    
    $
    (0.93
    )Diluted
    
    $
    (0.11
    )
    
    $
    (0.93
    )Weighted average shares used in calculation:Basic and diluted
    
    
    6,074,763
    
    
    
    5,655,584
 5. Discontinued Operations
  
    
    All outstanding Stratasoft common stock was sold for a purchase price of $3,000, which
has been or is subject to reduction as follows:
 
    
    $800 placed in escrow, which is available to satisfy indemnified losses, if
any, as defined in the Agreement. Funds placed in escrow are excluded from the estimated
gain stated above. Approximately $100 in indemnified losses have been incurred as of
March 31, 2006.
    
    $221 representing a preliminary net working capital adjustment, as defined.
The final working capital adjustment recorded during the three months ended March 31,
2006, resulted in the further reduction of the sale proceeds of $40.
    
    The Company indemnified the buyer for potential losses as defined in the
Agreement to a maximum of $1,400, inclusive of amounts placed in escrow. Excess funds
held in escrow will be released on January 26, 2008 unless retained in escrow for
potential indemnified losses as allowed in the Agreement under certain circumstances.
 
    
    The Company may receive additional consideration in the form of 10% of the outstanding
Stratasoft common stock if revenue exceeds $10,000 for any consecutive twelve month period
within two years of closing.
    
    The Company may receive additional cash consideration if Stratasoft is sold by the
buyer to another party for an amount in excess of $15,000.
  12




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##### Table of Contents



Three Months Ended March 31,2006
    
    
    2005Revenues:Stratasoft
    
    $
    268
    
    
    $
    1,441Valerent
    
    
    1,682
    
    
    
    1,666Total
    
    $
    1,950
    
    
    $
    3,107Income (loss) from operations of discontinued subsidiaries:Stratasoft
    
    $
    (260
    )
    
    $
    (527
    )Valerent
    
    
    (46
    )
    
    
    2Total
    
    
    (306
    )
    
    
    (525
    )Gain on disposal of discontinued operations:Stratasoft
    
    
    302
    
    
    
    Cumulative effect of change in accounting method at Stratasoft
    
    
    
    
    
    
    566Income tax benefit
    
    
    
    
    
    
    (121
    )Loss from discontinued operations, net of taxes
    
    $
    (4
    )
    
    $
    (970
    )
  March 31,
    
    
    December 31,2006
    
    
    2005(Audited)Current assets of discontinued operations:Accounts receivable, net
    
    $
    1,271
    
    
    $
    1,533Inventory
    
    
    36
    
    
    
    592Costs and earnings in excess of billings
    
    
    
    
    
    
    266Notes receivable and other current assets
    
    
    
    
    
    
    173Total
    
    $
    1,307
    
    
    $
    2,564Noncurrent assets of discontinued operations:Property and equipment, net
    
    $
    106
    
    
    $
    392Patents, net
    
    
    
    
    
    
    653Other noncurrent assets
    
    
    
    
    
    
    12Total
    
    $
    106
    
    
    $
    1,057Current liabilities of discontinued operations:Accounts payable
    
    $
    441
    
    
    $
    620Billings in excess of costs and earnings
    
    
    
    
    
    
    201Accrued expenses
    
    
    940
    
    
    
    1,376Deferred revenue
    
    
    34
    
    
    
    644Current portion of long-term debt
    
    
    
    
    
    
    95Total
    
    $
    1,415
    
    
    $
    2,936Long-term liabilities of discontinued operations:Long-term debt
    
    $
    
    
    
    $
    7
 6. Earnings Per Share
   13




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##### Table of Contents



Three months endedMarch 31,2006
    
    
    2005Numerator for basic earnings per share:Net loss from continuing operations
    
    $
    (524
    )
    
    $
    (5,538
    )Loss on disposal of discontinued operations, net of income taxes
    
    
    (4
    )
    
    
    (970
    )Net loss
    
    $
    (528
    )
    
    $
    (6,508
    )Numerator for diluted earnings per share:Net loss from continuing operations
    
    $
    (524
    )
    
    $
    (5,538
    )Loss on disposal of discontinued operations, net of income taxes
    
    
    (4
    )
    
    
    (970
    )Net loss
    
    $
    (528
    )
    
    $
    (6,508
    )Denominator
for basic earnings per share  weighted-average shares outstanding
    
    
    6,047,840
    
    
    
    5,210,794Effect of dilutive securities  shares issuable from assumed conversion of
common stock options and restricted stock
    
    
    
    
    
    
    Denominator
for diluted earnings per share  weighted-average shares
outstanding
    
    
    6,047,840
    
    
    
    5,210,794
 7. Stockholders Equity
  8. Elimination of Minority Interest in InterNetwork Experts, Inc.
  9. Commitments and Contingencies
 Litigation Inacom Corp v. I-Sector Corporation, f/k/a Allstar Systems, Inc.
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  14




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##### Table of Contents



Special notice regarding forward-looking statements
  General
    
    
    Transfer of listing from American Stock Exchange to The Nasdaq Capital Market
    
    Elimination of holding company structure and sale of two subsidiaries
    
    Acquisitions completed during the first quarter of 2006 and second quarter of 2005
    
    Adoption of Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, (SFAS 123R)
 Transfer of listing from American Stock Exchange to The Nasdaq Capital Market
  15




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##### Table of Contents



Elimination of Holding Company Structure and Sale of Two Subsidiaries
  
    
    All outstanding Stratasoft common stock was sold for a purchase price of $3,000, which
has been or is subject to reduction as follows:
 
    
    $800 placed in escrow, which is available to satisfy indemnified losses, if
any, as defined in the Agreement. Funds placed in escrow are excluded from the estimated
gain stated above. Approximately $100 in indemnified losses have been incurred as of
March 31, 2006.
    
    $221 representing a preliminary net working capital adjustment, as defined.
The final working capital adjustment recorded during the three months ended March 31,
2006, resulted in the further reduction of the sale proceeds of $40.
    
    We indemnified the buyer for potential losses as defined in the Agreement to
a maximum of $1,400, inclusive of amounts placed in escrow. Excess funds held in escrow
will be released on January 26, 2008 unless retained in escrow for potential indemnified
losses as allowed in the Agreement under certain circumstances.
 
    
    We may receive additional consideration in the form of 10% of the outstanding
Stratasoft common stock if revenue exceeds $10,000 for any consecutive twelve month period
within two years of closing.
    
    We may receive additional cash consideration if Stratasoft is sold by the buyer to
another party for an amount in excess of $15,000.
  Acquisitions
  Datatran Network Systems
   16




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##### Table of Contents



Network Architects, Corp.
   InfoGroup Northwest, Inc.
   Adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (SFAS 123R)
  17




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##### Table of Contents



Grant-Date Fair Value
  Three MonthsEnded March 31,2006
    
    2005Expected volatility
    
    
    65.1
    %
    
    
    78.6
    %Expected term (in years)
    
    
    6.5
    
    
    
    8.0Risk-free interest rate
    
    
    4.83
    %
    
    
    3.63
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
  Share-Based Compensation Expense
   Three
Months Ended
March 31, 2006Cost of
products and services  services
    

    $
    14Selling, general and administrative expenses
    

    
    44Share-based compensation from continuing operations before income taxes
    

    
    58Income tax benefit
    

    
    Share-based compensation from continuing operations
    

    $
    58Share-based compensation from discontinued operations
    

    
    2Total share-based compensation
    

    $
    60
 18




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##### Table of Contents



Three
Months Ended
March 31, 2005Basic and diluted:Net loss as reported
    

    $
    (6,508
    )Deduct: share-based employee compensation, net of related tax effect
    

    
    40Pro forma net loss
    

    $
    (6,548
    )Net loss per share:Basic  as reported
    

    $
    (1.25
    )Basic  pro forma
    

    $
    (1.26
    )Diluted  as reported
    

    $
    (1.25
    )Diluted  pro forma
    

    $
    (1.26
    )
 Option Activity
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term (Years)
    
    ValueOptions outstanding at December 31, 2005
    
    
    1,944,610
    
    
    $
    2.66Granted
    
    
    28,367
    
    
    
    6.10
    
    
    
    
    
    
    $
    3Exercised
    
    
    (125,670
    )
    
    
    2.04
    
    
    
    
    
    
    $
    612Canceled
    
    
    (1,800
    )
    
    
    5.26Options outstanding March 31, 2006
    
    
    1,845,507
    
    
    $
    2.75
    
    
    
    6.84
    
    
    $
    6,684Options exercisable at March 31, 2006
    
    
    1,541,724
    
    
    $
    2.12
    
    
    
    6.40
    
    
    $
    6,407Options vested and options expected to vest
at March 31, 2006
    
    
    1,802,714
    
    
    $
    2.70
    
    
    
    6.79
    
    
    $
    6,626
   19




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##### Table of Contents



Results Of Operations
 Period Comparisons.
 Three Months Ended March 31,2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %Revenue:Products
    
    $
    26,822
    
    
    
    87.1
    
    
    $
    23,153
    
    
    
    93.9Services
    
    
    3,965
    
    
    
    12.9
    
    
    
    1,508
    
    
    
    6.1Total revenue
    
    
    30,787
    
    
    
    100.0
    
    
    
    24,661
    
    
    
    100.0Gross profit:Products
    
    
    4,418
    
    
    
    16.5
    
    
    
    3,337
    
    
    
    14.4Services
    
    
    989
    
    
    
    24.9
    
    
    
    324
    
    
    
    21.5Total gross profit
    
    
    5,407
    
    
    
    17.6
    
    
    
    3,661
    
    
    
    14.8Selling, general and administrative expenses
    
    
    5,845
    
    
    
    19.0
    
    
    
    9,010
    
    
    
    36.5Operating loss
    
    
    (438
    )
    
    
    (1.4
    )
    
    
    (5,349
    )
    
    
    (21.7
    )Interest and other (income) expense, net
    
    
    85
    
    
    
    0.3
    
    
    
    68
    
    
    
    0.3Income tax expense
    
    
    1
    
    
    
    0.0
    
    
    
    121
    
    
    
    0.5Net loss from continuing operations
    
    
    (524
    )
    
    
    (1.7
    )
    
    
    (5,538
    )
    
    
    (22.5
    )Loss from discontinued operations, net of income taxes
    
    
    (4
    )
    
    
    (0.0
    )
    
    
    (970
    )
    
    
    (3.9
    )Net loss
    
    $
    (528
    )
    
    
    (1.7
    )
    
    $
    (6,508
    )
    
    
    (26.4
    )
 Three Months Ended March 31, 2006 Compared To the Three Months Ended March 31, 2005
 Revenue (R)
 Gross Profit (R)
 Selling, General and Administrative Expenses
 20




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##### Table of Contents



Operating Loss
 Interest and Other Income (Expense), Net
 Loss from discontinued operations, net of tax.
 Net loss
 Tax Loss Carryforward.
 Liquidity and Capital Resources
 Sources of Liquidity
  Accounts Receivable.
 Inventory.
 21




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##### Table of Contents



Contractual Obligations
  Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 Years(Dollars in thousands)Lease obligations
    
    $
    2,051
    
    
    $
    910
    
    
    $
    1,097
    
    
    $
    44
    
    
    $
    
  Datatran Network Systems (DNS).
 Network Architects, Corp (Netarch).
 InfoGroup Northwest, Inc. (InfoGroup).
    22




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##### Table of Contents



Credit Facility.
 
    
    The agreement provides a discretionary line of credit up to a maximum aggregate amount
of $40,000 to purchase inventory from CPC approved vendors.
    
    The agreement provides a working capital revolving line of credit under the above line
of credit with an aggregate outstanding sublimit of $10,000 within the overall $40,000
limit.
    
    The working capital revolving line of credit incurs interest payable monthly at the
rate of prime plus 0.5%.
    
    The agreement contains customary covenants regarding maintenance of insurance coverage,
maintenance of and reporting collateral, and submission of financial statements. The
agreement also contains restrictive financial covenants measured as of the end of each
calendar quarter as detailed further below.
    
    The line of credit is collateralized by substantially all of our assets.
  Total Credit Facility
    
    $
    40,000Borrowing base limitation
    
    
    (20,638
    )Total borrowing capacity
    
    
    19,362Less interest-bearing borrowings
    
    
    (722
    )Less non-interest bearing advances included in accounts payable
    
    
    (15,621
    )Total unused availability
    
    $
    3,019
     Cash Flows.
 Operating Activities.
 23




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##### Table of Contents



Investing Activities.
 Financing Activities.
 Related Party Transactions
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
  24




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Inacom Corp v. I-Sector Corporation, f/k/a Allstar Systems, Inc.
 
 Item 6. Exhibits
  
   INX Inc.Date: May 5, 2006
    
    By:
    
    /s/ BRIAN FONTANABrian Fontana, Vice Presidentand Chief Financial Officer
 25




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##### Table of Contents



Index to Exhibits
 ExhibitNo.
    
    Description
    
    Filed Herewith or Incorporated by Reference From:2.1
    
    Stock Purchase Agreement by and
among The Resource Group
International Limited and INX Inc.
dated January 26, 2006
    
    Exhibit 2.1 to Form 8-K filed January 31, 20063.1
    
    Certificate of Ownership and Merger
    
    Exhibit 3.1 to Form 8-K filed January 6, 200610.1
    
    Asset Purchase Agreement by and
among INX Inc., Datatran Network
Systems and Mel Sarowitz dated
February 3, 2006
    
    Exhibit 1.1 to Form 8-K filed February 6, 200610.2
    
    Amendment Seven, dated March 2,
2006, to Systems Integrator
Agreement by and between Cisco
Systems, Inc. and Internetwork
Experts, Inc., dated November 13,
2001
    
    Exhibit 10.25 to Form 10-K filed March 27, 200610.3
    
    Amendment Eight, dated March 20,
2006, to Systems Integrator
Agreement by and between Cisco
Systems, Inc. and INX Inc.
(formerly Internetwork Experts,
Inc.), dated November 13, 2001
    
    Exhibit 10.26 to Form 10-K filed March 27, 200631.1
    
    Rule 13a-14(a)/15d-14(a)
Certification of Principal
Executive Officer
    
    Filed herewith.31.2
    
    Rule 13a-14(a)/15d-14(a)
Certification of Principal
Financial Officer
    
    Filed herewith.32.1
    
    Section 1350 Certification of
Principal Executive Officer
    
    Filed herewith.32.2
    
    Section 1350 Certification of
Principal Financial Officer
    
    Filed herewith.
 26