UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 (Mark
One)
 R
                QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended June 30, 2009OR£
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from January 1, 2009 to June 30,
  2009
 
 Commission
file number: 1-31949
 
 INX
Inc.
 (Exact
name of Registrant as specified in its charter)
 
 Delaware
              76-0515249(State
      of incorporation)
              (I.R.S.
      Employer Identification Number)
 
 6401
Southwest Freeway
 Houston,
Texas 77074
 (Address
of principal executive offices)
 (Zip
code)
 
 (713)
795-2000
 (Registrant’s
telephone number including area code)
 
 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 R   No
£
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  R
Yes  £
No
 
 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. (Check one):
 
 Large
      accelerated filer £
              Accelerated
      filer £
              Non-accelerated
      filer £
              Smaller
      reporting company R(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 Exchange Act). Yes £    No
R
 
 The
Registrant has 8,924,127 shares of common stock outstanding as of August 6,
2009.
 
 
 INX
Inc. and Subsidiaries
 FORM
10-Q for the Quarter Ended June 30, 2009
 
 INDEX
 
 Part
      I. Financial InformationItem
      1. Financial Statements (Unaudited):Condensed
      Consolidated Statements of Operations for the three months ended June 30,
      2009 and 2008Condensed
      Consolidated Statements of Operations for the six months ended June 30,
      2009 and 2008Condensed
      Consolidated Balance Sheets at June 30, 2009 and December 31,
      2008Condensed
      Consolidated Statement of Stockholders’ Equity for the six months ended
      June 30, 2009Condensed
      Consolidated Statements of Cash Flows for the six months ended June 30,
      2009 and 2008Notes
      to Condensed Consolidated Financial StatementsItem
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of OperationsItem
      4T. Controls and ProceduresPart
      II. Other InformationItem
      1. Legal ProceedingsItem
      2. Unregistered Sales of Equity Securities and Use of
    ProceedsItem
      4. Submission of Matters to a Vote of Security HoldersItem
      6. ExhibitsSignature
 
 2
 PART
1. FINANCIAL INFORMATION
 
 Item
1. Financial Statements (Unaudited):
 
 INX INC.
AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (In
thousands, except share and per share amounts)
 (Unaudited)
 
 Three
      Months
                        Ended June 30,2009
                      
                      
                      2008Revenue:Products
                      
                      $
                      46,455
                      
                      
                      $
                      51,430Services
                      
                      
                      11,893
                      
                      
                      
                      12,561Total
      revenue
                      
                      
                      58,348
                      
                      
                      
                      63,991Cost
      of products and services:Products
                      
                      
                      36,877
                      
                      
                      
                      41,664Services
                      
                      
                      8,746
                      
                      
                      
                      8,575Total
      cost of products and services
                      
                      
                      45,623
                      
                      
                      
                      50,239Gross
      profit
                      
                      
                      12,725
                      
                      
                      
                      13,752Selling,
      general and administrative expenses
                      
                      
                      12,325
                      
                      
                      
                      11,871Operating
      income
                      
                      
                      400
                      
                      
                      
                      1,881Interest
      and other income (expense), net
                      
                      
                      5
                      
                      
                      
                      (98
                      )Income
      from continuing operations before income taxes
                      
                      
                      405
                      
                      
                      
                      1,783Income
      tax expense
                      
                      
                      69
                      
                      
                      
                      680Net
      income from continuing operations
                      
                      
                      336
                      
                      
                      
                      1,103(Loss)
      income from discontinued operations, net of income taxes
                      
                      
                      (17
                      )
                      
                      
                      10Net
      income
                      
                      $
                      319
                      
                      
                      $
                      1,113Net
      income per share:Basic:Income
      from continuing operations
                      
                      $
                      0.04
                      
                      
                      $
                      0.15Income
      from discontinued operations, net of income taxes
                      
                      
                      —
                      
                      
                      
                      —Net
      income per share
                      
                      $
                      0.04
                      
                      
                      $
                      0.15Diluted:Income
      from continuing operations
                      
                      $
                      0.04
                      
                      
                      $
                      0.13Loss
      from discontinued operations, net of income taxes
                      
                      
                      (0.01
                      )
                      
                      
                      —Net
      income per share
                      
                      $
                      0.03
                      
                      
                      $
                      0.13Shares
      used in computing net income per share:Basic
                      
                      
                      8,822,621
                      
                      
                      
                      7,579,303Diluted
                      
                      
                      9,319,280
                      
                      
                      
                      8,281,715
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
 
 3
  INX INC.
AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (In
thousands, except share and per share amounts)
 (Unaudited)
 
 Six
      Months
                        Ended June 30,2009
                      
                      
                      2008Revenue:Products
                      
                      $
                      91,021
                      
                      
                      $
                      101,921Services
                      
                      
                      24,660
                      
                      
                      
                      21,713Total
      revenue
                      
                      
                      115,681
                      
                      
                      
                      123,634Cost
      of products and services:Products
                      
                      
                      72,999
                      
                      
                      
                      82,948Services
                      
                      
                      17,654
                      
                      
                      
                      14,787Total
      cost of products and services
                      
                      
                      90,653
                      
                      
                      
                      97,735Gross
      profit
                      
                      
                      25,028
                      
                      
                      
                      25,899Selling,
      general and administrative expenses
                      
                      
                      25,053
                      
                      
                      
                      22,255Operating
      (loss) income
                      
                      
                      (25
                      )
                      
                      
                      3,644Interest
      and other income (expense), net
                      
                      
                      17
                      
                      
                      
                      (171
                      )(Loss)
      income from continuing operations before income taxes
                      
                      
                      (8
                      )
                      
                      
                      3,473Income
      tax expense
                      
                      
                      119
                      
                      
                      
                      1,363Net
      (loss) income from continuing operations
                      
                      
                      (127
                      )
                      
                      
                      2,110(Loss)
      income from discontinued operations, net of income taxes
                      
                      
                      (56
                      )
                      
                      
                      14Net
      (loss) income
                      
                      $
                      (183
                      )
                      
                      $
                      2,124Net
      (loss) income per share:Basic:(Loss)
      income from continuing operations
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.28(Loss)
      income from discontinued operations, net of income taxes
                      
                      
                      (0.01
                      )
                      
                      
                      —Net
      (loss) income per share
                      
                      $
                      (0.02
                      )
                      
                      $
                      0.28Diluted:(Loss)
      income from continuing operations
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.26(Loss)
      income from discontinued operations, net of income taxes
                      
                      
                      (0.01
                      )
                      
                      
                      —Net
      (loss) income per share
                      
                      $
                      (0.02
                      )
                      
                      $
                      0.26Shares
      used in computing net (loss) income per share:Basic
                      
                      
                      8,764,416
                      
                      
                      
                      7,565,104Diluted
                      
                      
                      8,764,416
                      
                      
                      
                      8,199,449
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
 
 4
  INX INC.
AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
thousands, except share and par value amounts)
 (Unaudited)
 
 June
      30,
                      2009
                    
                    
                    December
      31,
                      2008ASSETS
                    
                    
                    
                    
                    (As
      Restated, Note 10)Current
      Assets:Cash
      and cash equivalents
                    
                    $
                    13,181
                    
                    
                    $
                    10,937Accounts
      receivable, net of allowance of $678 and $735
                    
                    
                    50,791
                    
                    
                    
                    52,866Inventory,
      net
                    
                    
                    1,172
                    
                    
                    
                    2,406Other
      current assets
                    
                    
                    1,605
                    
                    
                    
                    1,275Total
      current assets
                    
                    
                    66,749
                    
                    
                    
                    67,484Property
      and equipment, net of accumulated depreciation of $6,417 and
      $5,429
                    
                    
                    4,569
                    
                    
                    
                    5,207Goodwill
                    
                    
                    13,125
                    
                    
                    
                    12,751Intangible
      assets, net of accumulated amortization of $2,718 and
    $2,346
                    
                    
                    1,480
                    
                    
                    
                    1,852Other
      assets
                    
                    
                    53
                    
                    
                    
                    —Total
      assets
                    
                    $
                    85,976
                    
                    
                    $
                    87,294LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
                    
                    $
                    6,097
                    
                    
                    $
                    5,170Floor
      plan financing
                    
                    
                    35,936
                    
                    
                    
                    40,002Accrued
      expenses
                    
                    
                    7,773
                    
                    
                    
                    6,899Current
      portion of capital lease obligations
                    
                    
                    189
                    
                    
                    
                    77Notes
      payable
                    
                    
                    30
                    
                    
                    
                    91Other
      current liabilities
                    
                    
                    747
                    
                    
                    
                    1,072Total
      current liabilities
                    
                    
                    50,772
                    
                    
                    
                    53,311Long-term
      Liabilities:Long-term
      portion of capital lease obligations
                    
                    
                    290
                    
                    
                    
                    163Other
      long-term liabilities
                    
                    
                    285
                    
                    
                    
                    250Total
      long-term liabilities
                    
                    
                    575
                    
                    
                    
                    413Commitments
      and contingencies (Note 9)Stockholders’
      Equity:Preferred
      stock, $.01 par value, 5,000,000 shares authorized, no shares
      issued
                    
                    
                    —
                    
                    
                    
                    —Common
      stock, $.01 par value, 15,000,000 shares authorized, 8,834,363 and
      8,709,304 shares issued
                    
                    
                    88
                    
                    
                    
                    87Additional
      paid-in capital
                    
                    
                    51,983
                    
                    
                    
                    50,742Accumulated
      deficit
                    
                    
                    (17,442
                    )
                    
                    
                    (17,259
                    )Total
      stockholders’ equity
                    
                    
                    34,629
                    
                    
                    
                    33,570Total
      liabilities and stockholders’ equity
                    
                    $
                    85,976
                    
                    
                    $
                    87,294
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
 
 5
 
 INX INC.
AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 (In
thousands, except share amounts)
 (Unaudited)
 
 $.01
      par value
                    Common Stock
                  
                  
                  Additional
                    Paid-In
                  
                  
                  AccumulatedShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  Total(As
      Restated, Note 10)
                  
                  
                  (As
      Restated, Note 10)Balance
      at December 31, 2008
                  
                  
                  8,709,304
                  
                  
                  $
                  87
                  
                  
                  $
                  50,742
                  
                  
                  $
                  (17,259
                  )
                  
                  $
                  33,570Issuance
      of common stock under restricted stock grants
                  
                  
                  50,367
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Issuance
      of common stock grants to directors
                  
                  
                  19,149
                  
                  
                  
                  —
                  
                  
                  
                  90
                  
                  
                  
                  —
                  
                  
                  
                  90Issuance
      of common stock under employee stock purchase plan
                  
                  
                  83,558
                  
                  
                  
                  1
                  
                  
                  
                  166
                  
                  
                  
                  —
                  
                  
                  
                  167Share-based
      compensation expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,053
                  
                  
                  
                  —
                  
                  
                  
                  1,053Tax
      withholdings related to net share settlements of restricted stock
      awards
                  
                  
                  (10,049
                  )
                  
                  
                  —
                  
                  
                  
                  (26
                  )
                  
                  
                  —
                  
                  
                  
                  (26
                  )Purchase
      and retirement of common stock
                  
                  
                  (19,466
                  )
                  
                  
                  —
                  
                  
                  
                  (66
                  )
                  
                  
                  —
                  
                  
                  
                  (66
                  )Exercise
      of stock options
                  
                  
                  1,500
                  
                  
                  
                  —
                  
                  
                  
                  4
                  
                  
                  
                  —
                  
                  
                  
                  4Excess
      tax benefit from stock option exercises
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  20
                  
                  
                  
                  —
                  
                  
                  
                  20Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (183
                  )
                  
                  
                  (183
                  )Balance
      at June 30, 2009
                  
                  
                  8,834,363
                  
                  
                  $
                  88
                  
                  
                  $
                  51,983
                  
                  
                  $
                  (17,442
                  )
                  
                  $
                  34,629
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statement.
 
 6
 
 INX INC.
AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In
thousands)
 (Unaudited)
 
 Six
      Months
                        Ended June 30,2009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIES:
                      
                      
                      
                      
                      (As
      Restated, Note 10)Net
      (loss) income
                      
                      $
                      (183
                      )
                      
                      $
                      2,124Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Net
      loss (income) from discontinued operations
                      
                      
                      56
                      
                      
                      
                      (14
                      )Tax
      expense from discontinued operations
                      
                      
                      —
                      
                      
                      
                      6Depreciation
      and amortization
                      
                      
                      1,475
                      
                      
                      
                      1,102Share-based
      compensation expense
                      
                      
                      1,143
                      
                      
                      
                      726Excess
      tax benefits from stock option exercises
                      
                      
                      (20
                      )
                      
                      
                      (1,195
                      )Loss
      on retirement of assets
                      
                      
                      52
                      
                      
                      
                      22Bad
      debt expense (recovery)
                      
                      
                      25
                      
                      
                      
                      (71
                      )Changes
      in operating assets and liabilities, net of effect of
      acquisitions:Accounts
      receivable
                      
                      
                      2,050
                      
                      
                      
                      (6,588
                      )Inventory
                      
                      
                      1,234
                      
                      
                      
                      297Accounts
      payable
                      
                      
                      927
                      
                      
                      
                      1,354Other
      assets and liabilities
                      
                      
                      (122
                      )
                      
                      
                      2,934Net
      cash provided by operating activities
                      
                      
                      6,637
                      
                      
                      
                      697CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of Access Flow, Inc.
                      
                      
                      —
                      
                      
                      
                      (2,278
                      )Acquisition
      of Select, Inc. purchase price adjustments
                      
                      
                      —
                      
                      
                      
                      (10
                      )Transaction
      costs paid for acquisitions
                      
                      
                      —
                      
                      
                      
                      (320
                      )Increase
      in restricted cash for lease deposit
                      
                      
                      (53
                      )
                      
                      
                      —Capital
      expenditures
                      
                      
                      (254
                      )
                      
                      
                      (1,001
                      )Net
      cash used in investing activities
                      
                      
                      (307
                      )
                      
                      
                      (3,609
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:(Payments)
      borrowings under floor plan financing, net
                      
                      
                      (4,066
                      )
                      
                      
                      3,017Proceeds
      from issuance of common stock under registered direct
    offering
                      
                      
                      —
                      
                      
                      
                      8,809Proceeds
      from issuance of common stock under employee stock purchase
      plan
                      
                      
                      167
                      
                      
                      
                      —Payment
      of short-term credit facility
                      
                      
                      —
                      
                      
                      
                      (6,000
                      )Exercise
      of stock options
                      
                      
                      4
                      
                      
                      
                      827Excess
      tax benefits from stock option exercises
                      
                      
                      20
                      
                      
                      
                      1,195Purchase
      of common stock
                      
                      
                      (66
                      )
                      
                      
                      (1,536
                      )Tax
      withholdings related to net share settlements of restricted stock
      awards
                      
                      
                      (26
                      )
                      
                      
                      (3
                      )Proceeds
      from other short-term borrowings
                      
                      
                      —
                      
                      
                      
                      251Payments
      on notes payable and capital lease obligations
                      
                      
                      (119
                      )
                      
                      
                      (384
                      )Net
      cash (used in) provided by financing activities
                      
                      
                      (4,086
                      )
                      
                      
                      6,176NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                      
                      
                      2,244
                      
                      
                      
                      3,264CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                      
                      
                      10,937
                      
                      
                      
                      9,340CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                      
                      $
                      13,181
                      
                      
                      $
                      12,604
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
 
 7
  INX INC.
AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In
thousands)
 (Unaudited)
 
 Six
      Months
                                  Ended June 30,2009
                                
                                
                                2008SUPPLEMENTAL
      NONCASH INVESTING AND FINANCING ACTIVITIES:Capital
      lease obligation:Cost
      of assets acquired
                                
                                $
                                297
                                
                                
                                $
                                —Capital
      lease obligation incurred
                                
                                
                                (297
                                )
                                
                                
                                —Acquisition
      of Access Flow, Inc.:Fair
      value of assets acquired
                                
                                
                                374
                                
                                
                                
                                5,987Common
      stock issuable
                                
                                
                                —
                                
                                
                                
                                (3,273
                                )Additional
      purchase price payable
                                
                                
                                (374
                                )
                                
                                
                                —Transaction
      costs and noncompete agreements accrued
                                
                                
                                —
                                
                                
                                
                                (116
                                )Acquisition
      of Network Architects, Corp.:Fair
      value of assets acquired
                                
                                
                                —
                                
                                
                                
                                740Common
      stock issuable
                                
                                
                                —
                                
                                
                                
                                (740
                                )
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
 
 8
 
 INX
INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (In
thousands, except share and per share amounts)
 
 1.
Description of Business
 
 INX Inc.
(“INX” or the “Company”) is a provider of technology infrastructure solutions
for enterprise-class organizations such as corporations, schools and federal,
state and local governmental agencies. The solutions INX provides consist of
three broad categories of technology infrastructure: network infrastructure,
unified communications and data center. Network infrastructure solutions consist
of network routing and switching, wireless networking and network security
solutions. Unified communications solutions consist of Internet Protocol (“IP”)
network-based voice or telephone solutions as well as IP network-based video
communications solutions. Data center solutions consist of network storage
solutions and data center server virtualization solutions. The accompanying
condensed consolidated financial statements include the accounts of INX Inc. and
its wholly-owned subsidiaries, Select, Inc. and Valerent, Inc. All intercompany
transactions and accounts are eliminated in consolidation. Select, Inc. and
Valerent, Inc. were merged into INX Inc. as of the close of business on
December 31, 2008.
 
 2.
Basis of Presentation
 
 The
accompanying unaudited financial data as of June 30, 2009 and for the
three-month and six-month periods ended June 30, 2009 and 2008 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. The December 31, 2008 Condensed
Consolidated Balance Sheet was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally
accepted in the United States. However, the Company believes the disclosures are
adequate to make the information presented not misleading. These Condensed
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto, included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and
amendments thereto.  As more fully described in Note 10, the Company
intends to restate the consolidated financial statements for the years ended
December 31, 2008, 2007, and 2006 and will be amending the Annual Report on Form
10-K for the fiscal year ended December 31, 2008.
 
 In the
opinion of management, all adjustments (which include normal recurring
adjustments, except as disclosed herein) necessary for a fair presentation of
financial position as of June 30, 2009, results of operations for the
three-month and six-month periods ended June 30, 2009 and 2008, cash flows for
the six months ended June 30, 2009 and 2008, and stockholders’ equity for the
six months ended June 30, 2009, have been included. The results of the interim
periods are not necessarily indicative of results for the full year or any
future period.
 
 During
the period ended June 30, 2009, the Company adopted Statement of Financial
Accounting Standards No. 165, “Subsequent Events” (“SFAS
165”).  SFAS 165 requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for selecting that date.
For the period ended June 30, 2009, the Company evaluated subsequent events
from June 30, 2009 to August 14, 2009, the filing date with the Securities and
Exchange Commission of this report on Form 10-Q.
 
 3.
Recent Accounting Pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”
(“SFAS 141R”). The purpose of issuing the statement is to replace current
guidance in SFAS 141 to better represent the economic value of a business
combination transaction. The changes to be effected with SFAS 141R from the
current guidance include, but are not limited to: (1) acquisition costs
will be recognized separately from the acquisition; (2) known contractual
contingencies at the time of the acquisition will be considered part of the
liabilities acquired and measured at their fair value; all other contingencies
will be part of the liabilities acquired measured at their fair value only if it
is more likely than not that they meet the definition of a liability;
(3) contingent consideration based on the outcome of future events will be
recognized and measured at the time of the acquisition; (4) business
combinations achieved in stages (step acquisitions) will need to recognize the
identifiable assets and liabilities, as well as noncontrolling interests, in the
acquiree, at the full amounts of their fair values; and (5) a bargain
purchase (defined as a business combination in which the total acquisition-date
fair value of the identifiable net assets acquired exceeds the fair value of the
consideration transferred plus any noncontrolling interest in the acquiree) will
require that excess to be recognized as a gain attributable to the acquirer. The
Company adopted SFAS 141R on January 1, 2009. The adoption of
SFAS 141R will impact the accounting for all business combinations entered
into after January 1, 2009 as compared to prior practice.
 
 9
 On
January 1, 2009 the Company adopted FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities”(“FSP
EITF 03-6-1”). FSP EITF 03-6-1 clarified that all outstanding unvested
share-based payment awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders. Awards of this
nature are considered participating securities and the two-class method of
computing basic and diluted EPS must be applied.  The adoption of EITF
03-6-1 did not have a material effect on the Company’s basic earnings per
share.
  In April
2009, the FASB issued  FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments.  This FSP amends FASB Statement No.
107 (“SFAS 107”), Disclosures
about Fair Value of Financial Instruments,to require disclosures about
fair value of financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. This FSP also amends
APB Opinion No. 28, Interim
Financial Reporting,to require those disclosures in summarized financial
information at interim reporting periods and is effective for interim periods
ending after June 15, 2009.  The Company does not have material
financial instruments as defined under SFAS 107 except for those specifically
excluded from the required additional disclosures in FSP FAS 107-1 and APB
28-1.  The adoption of FSP FAS 107-1 and APB 28-1 did not have a
material impact on the Company’s consolidated financial statements.
 
 4.
Acquisitions
 
 The
following acquisitions were consummated to improve the Company’s geographical
presence and enhance its technical capabilities.
 
 Access
Flow, Inc.
 
 Under an
Asset Purchase Agreement dated June 6, 2008 (the “APA”), the Company
purchased the operations and certain assets, and assumed specified liabilities
of Access Flow, Inc. (“AccessFlow”). AccessFlow is a Sacramento,
California-based consulting organization focused on delivering VMware-based data
center virtualization solutions, with revenues for the twelve months ended
March 31, 2008 of approximately $10,500. The Company completed the
acquisition simultaneously with the execution of the APA. Neither AccessFlow nor
any shareholder of AccessFlow has any prior affiliation with the Company. The
APA contains customary representations and warranties and requires AccessFlow
and its Shareholders to indemnify the Company for certain liabilities arising
under the APA, subject to certain limitations and conditions.
 
 The
consideration paid at closing pursuant to the APA was (a) $2,450 in cash
and (b) 262,692 shares of the Company’s common stock, of which 24,000
shares were placed in escrow under holdback provisions defined in the agreement.
During the quarter ended September 30, 2009, shares held in escrow will be
released to AccessFlow after a reduction of 2,327 shares representing $33 for
costs reimbursable under the APA escrow provisions.  The 2,327 shares
returned from escrow will be retired.  Upon release of the remaining
shares in escrow to AccessFlow, 1,032 shares in Company common stock
representing $10 is issuable to the broker of the transaction.
 
 Additional
purchase price consideration of $364 was earned and is payable to AccessFlow as
of June 30, 2009 for the achievement of certain customer billing milestones
during the twelve-month period ending June 30, 2009.  The additional
purchase consideration was recorded as goodwill. At the Company’s option, 50% of
such additional consideration may be paid in the form of common
stock.
 Additional
purchase consideration is payable to AccessFlow based on certain financial
performance during the one-year period ending June 30, 2010. The financial
performance upon which such additional purchase consideration is based includes
the following business components: (i) the acquired AccessFlow Sacramento,
California branch office revenue excluding its hosting business, (ii) the
acquired AccessFlow hosting business, and (iii) customer billings for
certain virtualization products and services specified in the APA generated by
the Company’s pre-existing fourteen branch office locations. The APA specifies
the computation of additional purchase consideration earned under each business
component, including a minimum and maximum amount payable. For each business
component the minimum annual additional consideration payable is zero and the
maximum annual additional consideration payable is (i) $405,
(ii) $405, and (iii) $540, respectively. At the Company’s option, 50%
of such additional consideration may be paid in the form of common stock.
Additional purchase consideration, if any, will be recorded as
goodwill.
 
 10
 NetTeks
Technology Consultants, Inc.
 
 Under an
Asset Purchase Agreement dated November 14, 2008 (the “NetTeks APA”), the
Company purchased the operations and certain assets, and assumed specified
liabilities of NetTeks Technology Consultants, Inc. (“NetTeks”). NetTeks is a
Boston, Massachusetts-based network consulting organization with offices in
downtown Boston and Glastonbury, Connecticut, with revenues for the twelve
months ended September 30, 2008 of approximately $12,700. The Company
completed the acquisition simultaneously with the execution of the NetTeks APA.
Neither NetTeks nor any shareholder of NetTeks has any prior affiliation with
the Company. The NetTeks APA contains customary representations and warranties
and requires NetTeks and its shareholders to indemnify the Company for certain
liabilities arising under the NetTeks APA, subject to certain limitations and
conditions.
 
 The
consideration paid at closing pursuant to the NetTeks APA was (a) $1,350 in
cash and (b) 30,770 shares of the Company’s common stock, of which
15,385 common stock shares were held in escrow under holdback provisions defined
in the NetTeks APA.  Additional purchase consideration is payable
based on NetTeks’ branch office operating income contribution during each of the
two-year periods ending November 30, 2009 and November 30, 2010. The
NetTeks APA specifies the computation of additional purchase consideration
earned including a minimum of zero for each of the two-year periods and a
maximum of $1,313 for the period ending November 30, 2009 and $1,488 for
the period ending November 30, 2010. At the Company’s option, 50% of such
additional purchase price may be paid in the form of Common Stock. Additional
purchase consideration, if any, will be recorded as goodwill.
 
 VocalMash
 
 Under an
Asset Purchase Agreement dated December 4, 2008 (“VocalMash APA”), the
Company purchased the operations of VocalMash, a business owned and operated by
INX’s Vice President of Sales. VocalMash is an application integration company
that utilizes Web 2.0 technologies to integrate unified communications systems
with other enterprise applications. The Company completed the acquisition
simultaneously with the execution of the VocalMash APA. The VocalMash APA
contains customary representations and warranties and requires VocalMash and its
owner to indemnify the Company for certain liabilities arising under the
VocalMash APA, subject to certain limitations and conditions.
 
 The
consideration paid at closing pursuant to the VocalMash APA was
60,000 shares of the Company’s common stock. The common stock was valued at
$4.89 per share or $293. Additional purchase consideration of up to a
maximum of $380 may be payable under the VocalMash APA based on the achievement
of operating income contribution targets for 2009. Additional purchase
consideration, if any, will be recorded as goodwill.
 
 Pro
Forma Summary
 
 The
following pro forma consolidated amounts give effect to the Company’s
acquisition of AccessFlow, NetTeks, and VocalMash as if they had occurred
January 1, 2008. The pro forma consolidated amounts presented below are based on
continuing operations. The pro forma consolidated amounts are not necessarily
indicative of the operating results that would have been achieved had the
transaction been in effect and should not be construed as being representative
of future operating results.
 
 Three
      Months Ended
                      June
      30,
                    
                    
                    Six
      Months Ended
                      June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenues
                    
                    $
                    58,348
                    
                    
                    $
                    68,634
                    
                    
                    $
                    115,681
                    
                    
                    $
                    134,723Net
      income (loss) from continuing operations
                    
                    $
                    336
                    
                    
                    $
                    1,055
                    
                    
                    $
                    (127)
                    
                    
                    $
                    2,314Net
      income (loss)
                    
                    $
                    319
                    
                    
                    $
                    1,065
                    
                    
                    $
                    (183)
                    
                    
                    $
                    2,328Net
      income (loss) per share from continuing operations:Basic
                    
                    $
                    0.04
                    
                    
                    $
                    0.13
                    
                    
                    $
                    (0.01)
                    
                    
                    $
                    0.29Diluted
                    
                    $
                    0.04
                    
                    
                    $
                    0.12
                    
                    
                    $
                    (0.01)
                    
                    
                    $
                    0.27Net
      income (loss) per share:Basic
                    
                    $
                    0.04
                    
                    
                    $
                    0.13
                    
                    
                    $
                    (0.02)
                    
                    
                    $
                    0.29Diluted
                    
                    $
                    0.03
                    
                    
                    $
                    0.12
                    
                    
                    $
                    (0.02)
                    
                    
                    $
                    0.27Weighted
      average shares used in calculation:Basic
                    
                    
                    8,822,621
                    
                    
                    
                    7,871,752
                    
                    
                    
                    8,764,416
                    
                    
                    
                    7,894,027Diluted
                    
                    
                    9,319,280
                    
                    
                    
                    8,574,164
                    
                    
                    
                    8,764,416
                    
                    
                    
                    8,528,372
 
 11
 AdvancedNetworX
 
 Under an
Asset Purchase Agreement dated July 17, 2009 (the “Agreement”), the Company
purchased the
operations andcertain assets, and assumed specified
liabilities of AdvancedNetworX, Inc.
(“AdvancedNetworX”).  AdvancedNetworX, a Raleigh, North
Carolina-based network consulting organization founded in September 2007,
generated revenue of approximately $1,600 for the 12 months ended June 30, 2009.
The acquisition will create a presence for INX in the Mid Atlantic
region.  The Company completed the acquisition simultaneously with the
execution of the Agreement. The Agreement contains customary representations and
warranties and requires AdvancedNetworX and
its shareholders to indemnify the Company for certain liabilities arising under
the Agreement, subject to certain limitations and conditions.
 
 The
consideration paid at closing pursuant to the Agreement totaled $562, consisting
of (a) $385 in cash, (b) $167 in liabilities under customer contracts, and (c)
2,000 shares of the Company’s common stock, $0.001 par value (the “Common
Stock”), which were held by the Company under holdback provisions defined in the
Agreement.  The Common Stock will be valued at the share price on July
17, 2009, which was $5.08 per share totaling $10.  The values
assigned to property and equipment, intangible assets, and contingent purchase
price consideration will be determined by an appraisal which has not yet been
completed.  Transaction costs will be expensed as
incurred.
 
 Additional
purchase consideration is payable based on AdvancedNetworX’s
branch office operating income contribution during each of the one-year periods
ending July 31, 2010, July 31, 2011, and July 31, 2012.  The Agreement
specifies the computation of additional purchase consideration earned including
a minimum of zero and a maximum of $700 for each of the aforementioned
periods.  At the Company’s option, up to 60% of such additional
purchase price may be paid in the form of Common Stock. Additional purchase
consideration, if any, will be recorded in accordance with SFAS
141R.
 
 5.
Earnings Per Share
 
 The
following table presents the calculation of basic and diluted earnings per
share:
  Three
      Months Ended June 30,
                  
                  
                  Six
      Months Ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Numerator:Net
      income (loss) from continuing operations-basic and diluted
                  
                  $
                  336
                  
                  
                  $
                  1,103
                  
                  
                  $
                  (127
                  )
                  
                  $
                  2,110(Loss)
      income on disposal of discontinued operations, net of  income
      taxes
                  
                  
                  (17
                  )
                  
                  
                  10
                  
                  
                  
                  (56
                  )
                  
                  
                  14Net
      income (loss)-basic and diluted
                  
                  $
                  319
                  
                  
                  $
                  1,113
                  
                  
                  $
                  (183
                  )
                  
                  $
                  2,124Denominator:Weighted-average
      shares outstanding-basic
                  
                  
                  8,822,621
                  
                  
                  
                  7,579,303
                  
                  
                  
                  8,764,416
                  
                  
                  
                  7,565,104Effect
      of dilutive securities — shares issuable from assumed conversion of common
      stock options, restricted stock, and warrants
                  
                  
                  496,659
                  
                  
                  
                  702,412
                  
                  
                  
                  —
                  
                  
                  
                  634,345Weighted-average
      shares outstanding-diluted
                  
                  
                  9,319,280
                  
                  
                  
                  8,281,715
                  
                  
                  
                  8,764,416
                  
                  
                  
                  8,199,449
 
 For the
three-month period ended June 30, 2009 and 2008, warrants to purchase common
stock of 40,000 and 575,000 shares, respectively, were excluded from the
determination of the dilutive shares since they are antidilutive.  For
the six-month period ended June 30, 2009 and 2008, warrants to purchase common
stock of 40,000 and 619,955 shares, respectively, were excluded from the
determination of the dilutive shares since they are antidilutive.  For
the three-month period ended June 30, 2009 and 2008, options to purchase 592,788
and 123,500 shares, respectively, were excluded in the calculation of diluted
earnings since they are antidilutive. For the six-month period ended June 30,
2009 and 2008, options to purchase 592,788 and 191,500 shares, respectively,
were excluded in the calculation of diluted earnings since they are
antidilutive. For the three-month period ended June 30, 2009 and 2008, no
restricted shares were excluded in the calculation of diluted earnings. For the
six-month period ended June 30, 2009 and 2008, restricted shares of 502,978 and
0, respectively, were excluded in the calculation of diluted earnings since they
are antidilutive.  For the six-month period ended June 30, 2009,
35,593 shares from Access Flow’s acquisition earn out were excluded in the
calculation of diluted earnings since they are antidilutive.
 
 12
 6.
Share-Based Compensation
 
 The
Company recognized employee share-based compensation expense for stock option,
restricted stock grants, and the employee stock purchase plan of $460 and $324
during the three months ended June 30, 2009 and 2008, respectively, and $1,053
and $636 during the six months ended June 30, 2009 and 2008,
respectively.  In addition, during the three months ended June 30,
2009 and 2008, the Company issued 19,149 shares and 7,443 shares, respectively,
to its non-employee directors.  The issued shares vest immediately and
were valued at $90, determined by multiplying the number of shares issued by the
closing price per share for the common stock as reported by NASDAQ on May 12,
2009 and May 13, 2008.  The unrecognized compensation cost related to
the Company's unvested stock options as of June 30, 2009 and 2008 was $1,124 and
$1,881, respectively and is expected to be recognized over a weighted-average
period of 1.5 years and 1.9 years, respectively.  The unrecognized
compensation cost related to the Company's unvested restricted shares as of June
30, 2009 and 2008 was $3,763 and $2,038, respectively and is expected to be
recognized over a weighted-average period of 2.3 years and 3.8 years,
respectively.
 
 7.
Senior Credit Facility
 
 The
Company has a $60,000 maximum aggregate line of credit with Castle Pines
Capital LLC (“CPC”) under a senior credit facility. The CPC senior credit
facility is used primarily for inventory financing and working capital
requirements.  At June 30, 2009, $35,936 was outstanding under the
Facility and is presented as Floor Plan Financing in the condensed consolidated
balance sheet, and the unused availability was $3,746.  The carrying
value of the balance outstanding approximates its fair value given the
short-term maturity of the instruments.  Substantially all of our
assets are pledged as collateral under the senior credit facility. At June 30,
2009, the Company was in compliance with the loan covenants of the senior credit
facility.
 
 8.
Stockholders’ Equity
 
 On
September 10, 2008, the Board of Directors authorized a common stock
repurchase plan of up to $2,000 of the Company’s common stock on or before
December 31, 2008. The purchases were required to be made in open market or
privately negotiated transactions in compliance with Rule 10b-18 under the
Securities Exchange Act of 1934, as amended, subject to market and business
conditions, applicable legal requirements and other factors. The plan also
required the purchased shares to be retired as soon as practicable following the
purchase. The plan did not obligate the Company to purchase any particular
amount of common stock and could be suspended at any time at the Company’s
discretion.  On December 3, 2008, the Board of Directors modified
the September 10, 2008 common stock repurchase plan, authorizing the
repurchase of $2,000 during the period January 1, 2009 to March 31,
2009.  During the three-month period ended March 31, 2009, 19,466
shares were purchased for $66. From inception of the repurchase plan to
March 31, 2009, 300,339 shares were purchased for $1,762, an average
purchase price of $5.87 per share. The repurchase plan expired on March 31,
2009.
 
 On May
12, 2009, the Board of Directors authorized a new common stock repurchase plan
of up to $2,000 of the Company’s common stock on or before October 31, 2009. The
purchases are required to be made in open market or privately negotiated
transactions in compliance with Rule 10b-18 under the Securities Exchange
Act of 1934, as amended, subject to market and business conditions, applicable
legal requirements and other factors. The plan also requires the purchased
shares to be retired as soon as practicable following the purchase. The plan
does not obligate the Company to purchase any particular amount of common stock
and could be suspended at any time at the Company’s discretion.  No
shares of common stock were repurchased under the plan during the period May 12,
2009 to June 30, 2009.
 
 9.
Commitments and Contingencies
 
 Self-Insured
Medical Plan
 
 Effective
January 1, 2009, the Company changed its employee medical insurance coverage to
self-insure for losses up to $100 per claim.  The Company maintains
stop loss coverage with a third party insurer to limit its total exposure with
an annual aggregate loss limit of $2,357 based on the current enrollment in the
plan. During the six-month period ended June 30, 2009, medical claims and
administrative fees totaling $1,087 were incurred and a liability recorded of
$235 at June 30, 2009 as an estimate of the ultimate cost of claims incurred as
of the balance sheet date.  The Company’s liability is based on an
analysis of historical data and actuarial estimates and includes known claims
and an estimate of claims incurred but not yet reported.  Management
believes that it has adequately reserved for the self-insurance liability;
however, any significant variation in claims incurred but not paid from
historical trends could cause actual expense to differ materially from the
accrued liability.
 
 13
 Litigation
 
 On
February 6, 2009, INX filed a lawsuit in the United States District Court
Eastern District of Texas styled InternetworkExperts, Inc.
(INX) v. International Business Machines Corporationclaiming damages totaling $1,791 plus interest, attorney fees, and costs
of suit for breach of purchase orders in 2004 and 2006 under which payments were
due upon early termination of services. The amount that may ultimately be
recovered, if any, cannot be determined at this time, and such amount will be
recorded only upon settlement and payment by the defendant.
 
 INX is
also party to other litigation and claims which management believes are normal
in the course of its operations. While the results of such litigation and claims
cannot be predicted with certainty, INX believes the final outcome of such
matters will not have a materially adverse effect on its results of operations,
financial position, or cash flows.
 
 Contingencies
 
 The
Company served as a subcontractor to Complete Communications Services, Inc.
(“CoCom”), a subcontractor on certain school district contracts during 2007. On
August 24, 2007, CoCom filed a Chapter 11 Petition in
U.S. Bankruptcy Court. As of December 31, 2008, the Company had no
outstanding accounts receivable from CoCom. The Company received payments of
$102 during the ninety day period preceding the bankruptcy filing which could
potentially be deemed preferential. While the result of the potential preference
claims cannot be predicted with certainty, INX believes the final outcome of
such matters will not have a materially adverse effect on its results of
operations, financial position, or cash flows.
 
 On
January 6, 2009, Lyondell Chemical Company (“Lyondell”) filed a
Chapter 11 Petition in U.S. Bankruptcy Court. As of December 31,
2008, the Company had an accounts receivable from Lyondell of $99, less an
allowance for doubtful accounts of $99. The Company received payments of $539
during the ninety day period preceding the bankruptcy filing which could
potentially be deemed preferential. INX cannot predict the final outcome of this
matter, including whether it could have a materially adverse effect on its
results of operations, financial position, or cash flows.
 
 INX has
contracts with the federal government and its agencies and subcontracts with
various federal government contractors. INX is  subject to audit from
time to time for compliance with government regulations and contract provisions
including costs incurred.  An adverse finding under an audit could
result in the disallowance of our costs under a government contract, termination
of a government contract, forfeiture of profits, suspension of payments, fines
and suspension and prohibition from doing business with the federal government.
In the event that an audit results in disallowance of our costs under a
contract, INX has the right to appeal the findings of the audit under applicable
dispute resolution provisions.  Under a subcontract with Northrop
Grumman, the Federal Government has made written claims totaling $128 to which
the Company believes it has valid defenses.  INX is currently unable
to predict the ultimate resolution of the matter, but believes the final outcome
will not have a materially adverse effect on its results of operations,
financial position, or cash flows.
 
 10.
Restatement of Previously Issued Financial Statements
 
 On August
12, 2009, management of the Company in consultation with the Audit Committee of
the Board of Directors, determined that the Company's financial statements
included in the Annual Report on Form 10-K for the fiscal year ended December
31, 2008 and Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2009 required restatement.  This determination was made following
a review by the Company of the following:
 
 ·
              During
      the performance of a routine internal audit, a computational error was
      discovered in the calculation of services revenue and related commission
      expense affecting the fiscal quarter ended March 31, 2009.  The
      Company has determined that correction of the error will result in an
      increase in its previously reported net loss of approximately $186 ($0.02
      per share). The correction has no effect on the previously reported
      Statement of Cash Flows.
 
 ·
              The
      Company previously presented its floor plan financing balances as trade
      accounts payable because it believed that its principal vendor had a
      substantial investment in the floor plan financing
      company.  During the preparation of this Quarterly Report on
      Form 10-Q for the quarter ended June 30, 2009, the Company became aware
      that the principal vendor had no ownership interest in its floor plan
      financing company.  Consequently, the Company is correcting its
      presentation of the floor plan balances in its Balance Sheets from trade
      accounts payable to floor plan financing and the related amounts in its
      Statements of Cash Flows from operating activities to financing
      activities.  The error affects the Company’s Annual Report on
      Form 10-K for the three years ended December 31, 2008 and Quarterly Report
      on Form 10-Q for the fiscal quarter ended March 31, 2009.  The
      correction of the error has no effect on the previously reported
      Statements of Operations.  There is no impact to the Company's
      current liabilities or total liabilities as a result of this
      reclassification for each of the three years ended December 31, 2008 or as
      of March 31, 2009 and 2008.
 
 14
 ·
              In
      addition to the aforementioned corrections, the Company is recording
      certain immaterial adjustments that increase pre-tax expense of $76, of
      which $26 was previously recorded in the three months ended March 31,
      2009, and $13 affecting the consolidated financial statements as of and
      for the year ended December 31, 2008 and as of and for the three-month
      period ended March 31, 2009, respectively.  These adjustments
      primarily relate to stock option
modifications.
  The
Company is in the process of amending its previously filed Annual Report on Form
10-K for the three years ended December 31, 2008 and Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2009 to reflect the aforementioned
restatement adjustments.  Until the amended Form 10-K and Form 10-Q
are filed, the current Annual Report on Form 10-K for the three years ended
December 31, 2008 and Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 2009 should not be relied upon.  The effect of the
aforementioned corrections on the condensed consolidated financial statements as
of and for the three months ended March 31, 2009 and 2008 previously filed on
the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2009
and on the consolidated financial statements as of and for the three years ended
December 31, 2008 as previously filed on the Annual Report on Form 10-K for the
year ended December 31, 2008 are disclosed below.
 
 Condensed
Consolidated Statement of Cash Flows for the six months ended June 30,
2008:
 
 As
      Previously
                      Reported
                    
                    
                    Restatement
                      Adjustment
                    
                    
                    As RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                    
                    $
                    2,124
                    
                    
                    
                    
                    
                    $
                    2,124Adjustments
      to reconcile net income to net cash provided by operating
      activities:Net
      income from discontinued operations
                    
                    
                    (14
                    )
                    
                    
                    
                    
                    
                    (14
                    )Tax
      expense from discontinued operations
                    
                    
                    6
                    
                    
                    
                    
                    
                    
                    6Depreciation
      and amortization
                    
                    
                    1,102
                    
                    
                    
                    
                    
                    
                    1,102Share-based
      compensation expense
                    
                    
                    726
                    
                    
                    
                    
                    
                    
                    726Excess
      tax benefits from stock option exercises
                    
                    
                    (1,195
                    )
                    
                    
                    
                    
                    
                    (1,195
                    )Loss
      on retirement of assets
                    
                    
                    22
                    
                    
                    
                    
                    
                    
                    22Bad
      debt expense (recovery)
                    
                    
                    (71
                    )
                    
                    
                    
                    
                    
                    (71
                    )Changes
      in operating assets and liabilities, net of effect of
      acquisitions:Accounts
      receivable
                    
                    
                    (6,588
                    )
                    
                    
                    
                    
                    
                    (6,588
                    )Inventory
                    
                    
                    297
                    
                    
                    
                    
                    
                    
                    297Accounts
      payable
                    
                    
                    4,371
                    
                    
                    $
                    (3,017
                    )
                    
                    
                    1,354Other
      assets and liabilities
                    
                    
                    2,934
                    
                    
                    
                    
                    
                    
                    
                    2,934Net
      cash provided by operating activities
                    
                    
                    3,714
                    
                    
                    
                    (3,017
                    )
                    
                    
                    697CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of Access Flow, Inc.
                    
                    
                    (2,278
                    )
                    
                    
                    
                    
                    
                    
                    (2,278
                    )Acquisition
      of Select, Inc. purchase price adjustments
                    
                    
                    (10
                    )
                    
                    
                    
                    
                    
                    
                    (10
                    )Transaction
      costs paid for acquisitions
                    
                    
                    (320
                    )
                    
                    
                    
                    
                    
                    
                    (320
                    )Increase
      in restricted cash for lease deposit
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    —Capital
      expenditures
                    
                    
                    (1,001
                    )
                    
                    
                    
                    
                    
                    
                    (1,001
                    )Net
      cash used in investing activities
                    
                    
                    (3,609
                    )
                    
                    
                    
                    
                    
                    
                    (3,609
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Borrowings
      under floor plan financing, net
                    
                    
                    —
                    
                    
                    
                    3,017
                    
                    
                    
                    3,017Proceeds
      from issuance of common stock under registered direct
    offering
                    
                    
                    8,809
                    
                    
                    
                    
                    
                    
                    
                    8,809Net
      payments of short-term interest bearing credit facilities
                    
                    
                    (6,000
                    )
                    
                    
                    
                    
                    
                    
                    (6,000
                    )Exercise
      of stock options
                    
                    
                    827
                    
                    
                    
                    
                    
                    
                    
                    827Excess
      tax benefits from stock option exercises
                    
                    
                    1,195
                    
                    
                    
                    
                    
                    
                    
                    1,195Purchase
      of common stock
                    
                    
                    (1,536
                    )
                    
                    
                    
                    
                    
                    
                    (1,536
                    )Tax
      withholdings related to net share settlements of restricted stock
      awards
                    
                    
                    (3
                    )
                    
                    
                    
                    
                    
                    
                    (3
                    )Proceeds
      from other short-term borrowings
                    
                    
                    251
                    
                    
                    
                    
                    
                    
                    
                    251Payments
      on notes payable and capital lease obligations
                    
                    
                    (384
                    )
                    
                    
                    
                    
                    
                    
                    (384
                    )Net
      cash provided by financing activities
                    
                    
                    3,159
                    
                    
                    
                    3,017
                    
                    
                    
                    6,176NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                    
                    
                    3,264
                    
                    
                    
                    
                    
                    
                    
                    3,264CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                    
                    
                    9,340
                    
                    
                    
                    
                    
                    
                    
                    9,340CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                    
                    $
                    12,604
                    
                    
                    $
                    —
                    
                    
                    $
                    12,604
 
 15
 The
following is a summary of the impact of the restatement as of and for the
three-month period ended March 31, 2009 on the unaudited condensed consolidated
financial statements.
 
 Condensed
Consolidated Statement of Operations for the three months ended March 31,
2009:
 
 As
      Previously
                        Reported
                      
                      
                      Restatement
                        Adjustment
                      
                      
                      As RestatedRevenue:Products
                      
                      $
                      44,566
                      
                      
                      
                      
                      
                      $
                      44,566Services
                      
                      
                      12,975
                      
                      
                      $
                      (208
                      )
                      
                      
                      12,767Total
      revenue
                      
                      
                      57,541
                      
                      
                      
                      (208
                      )
                      
                      
                      57,333Cost
      of products and services:Products
                      
                      
                      36,122
                      
                      
                      
                      
                      
                      
                      
                      36,122Services
                      
                      
                      8,934
                      
                      
                      
                      (26
                      )
                      
                      
                      8,908Total
      cost of products and services
                      
                      
                      45,056
                      
                      
                      
                      (26
                      )
                      
                      
                      45,030Gross
      profit
                      
                      
                      12,485
                      
                      
                      
                      (182
                      )
                      
                      
                      12,303Selling,
      general and administrative expenses
                      
                      
                      12,736
                      
                      
                      
                      (8
                      )
                      
                      
                      12,728Operating
      loss
                      
                      
                      (251
                      )
                      
                      
                      (174
                      )
                      
                      
                      (425
                      )Interest
      and other income, net
                      
                      
                      12
                      
                      
                      
                      
                      
                      
                      
                      12Loss
      from continuing operations before income taxes
                      
                      
                      (239
                      )
                      
                      
                      (174
                      )
                      
                      
                      (413
                      )Income
      tax expense
                      
                      
                      51
                      
                      
                      
                      (1
                      )
                      
                      
                      50Net
      loss from continuing operations
                      
                      
                      (290
                      )
                      
                      
                      (173
                      )
                      
                      
                      (463
                      )Loss
      from discontinued operations, net of income taxes
                      
                      
                      (39
                      )
                      
                      
                      
                      
                      
                      
                      (39
                      )Net
      loss
                      
                      $
                      (329
                      )
                      
                      $
                      (173
                      )
                      
                      $
                      (502
                      )Net
      loss per share:Basic:Loss
      from continuing operations
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.05
                      )Loss
      from discontinued operations, net of income taxes
                      
                      
                      (0.01
                      )
                      
                      
                      
                      
                      
                      
                      (0.01
                      )Net
      loss per share
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.06
                      )Diluted:Loss
      from continuing operations
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.05
                      )Loss
      from discontinued operations, net of income taxes
                      
                      
                      (0.01
                      )
                      
                      
                      
                      
                      
                      
                      (0.01
                      )Net
      loss per share
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.06
                      )Shares
      used in computing net loss per share:Basic
                      
                      
                      8,706,210
                      
                      
                      
                      
                      
                      
                      
                      8,706,210Diluted
                      
                      
                      8,706,210
                      
                      
                      
                      
                      
                      
                      
                      8,706,210
 
 16
 Condensed
Consolidated Balance Sheet at March 31, 2009:
 
 As
      Previously
                      Reported
                    
                    
                    Restatement
                      Adjustment
                    
                    
                    As RestatedCurrent
      Assets:Cash
      and cash equivalents
                    
                    $
                    8,681
                    
                    
                    
                    
                    
                    $
                    8,681Accounts
      receivable, net
                    
                    
                    46,710
                    
                    
                    $
                    (208
                    )
                    
                    
                    46,502Inventory,
      net
                    
                    
                    2,745
                    
                    
                    
                    
                    
                    
                    
                    2,745Other
      current assets
                    
                    
                    1,562
                    
                    
                    
                    
                    
                    
                    
                    1,562Total
      current assets
                    
                    
                    59,698
                    
                    
                    
                    (208
                    )
                    
                    
                    59,490Property
      and equipment, net
                    
                    
                    4,998
                    
                    
                    
                    
                    
                    
                    
                    4,998Goodwill
                    
                    
                    12,751
                    
                    
                    
                    
                    
                    
                    
                    12,751Intangible
      and other assets, net
                    
                    
                    1,667
                    
                    
                    
                    
                    
                    
                    
                    1,667Total
      assets
                    
                    $
                    79,114
                    
                    
                    $
                    (208
                    )
                    
                    $
                    78,906Current
      Liabilities:Notes
      payable
                    
                    $
                    84
                    
                    
                    
                    
                    
                    
                    $
                    84Current
      portion of capital lease obligations
                    
                    
                    191
                    
                    
                    
                    
                    
                    
                    
                    191Accounts
      payable
                    
                    
                    36,620
                    
                    
                    $
                    (31,512
                    )
                    
                    
                    5,108Floor
      plan financing
                    
                    
                    —
                    
                    
                    
                    31,512
                    
                    
                    
                    31,512Accrued
      expenses
                    
                    
                    6,885
                    
                    
                    
                    (21
                    )
                    
                    
                    6,864Other
      current liabilities
                    
                    
                    783
                    
                    
                    
                    (1
                    )
                    
                    
                    782Total
      current liabilities
                    
                    
                    44,563
                    
                    
                    
                    (22
                    )
                    
                    
                    44,541Long-term
      Liabilities:Long-term
      portion of capital lease obligations
                    
                    
                    308
                    
                    
                    
                    
                    
                    
                    
                    308Other
      long-term liabilities
                    
                    
                    317
                    
                    
                    
                    
                    
                    
                    
                    317Total
      long-term liabilities
                    
                    
                    625
                    
                    
                    
                    
                    
                    
                    
                    625Stockholders’
      Equity:Common
      stock
                    
                    
                    88
                    
                    
                    
                    
                    
                    
                    
                    88Additional
      paid-in capital
                    
                    
                    51,350
                    
                    
                    
                    63
                    
                    
                    
                    51,413Accumulated
      deficit
                    
                    
                    (17,512
                    )
                    
                    
                    (249
                    )
                    
                    
                    (17,761
                    )Total
      stockholders’ equity
                    
                    
                    33,926
                    
                    
                    
                    (186
                    )
                    
                    
                    33,740Total
      liabilities and stockholders’ equity
                    
                    $
                    79,114
                    
                    
                    $
                    (208
                    )
                    
                    $
                    78,906
 
 17
 Condensed
Consolidated Statement of Cash Flows for the three months ended March 31,
2009:
 
 As
      Previously
                      Reported
                    
                    
                    Restatement
                      Adjustment
                    
                    
                    As RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                    
                    $
                    (329
                    )
                    
                    $
                    (173
                    )
                    
                    $
                    (502
                    )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Net
      income from discontinued operations
                    
                    
                    39
                    
                    
                    
                    
                    
                    
                    
                    39Depreciation
      and amortization
                    
                    
                    727
                    
                    
                    
                    
                    
                    
                    
                    727Share-based
      compensation expense
                    
                    
                    580
                    
                    
                    
                    13
                    
                    
                    
                    593Loss
      on retirement of assets
                    
                    
                    22
                    
                    
                    
                    
                    
                    
                    
                    22Bad
      debt expense
                    
                    
                    (5
                    )
                    
                    
                    
                    
                    
                    
                    (5
                    )Changes
      in operating assets and liabilities, net of effect of
      acquisitions:Accounts
      receivable
                    
                    
                    6,161
                    
                    
                    
                    208
                    
                    
                    
                    6,369Inventory
                    
                    
                    (339
                    )
                    
                    
                    
                    
                    
                    
                    (339
                    )Accounts
      payable
                    
                    
                    (8,552
                    )
                    
                    
                    8,490
                    
                    
                    
                    (62
                    )Other
      assets and liabilities
                    
                    
                    (487
                    )
                    
                    
                    (48
                    )
                    
                    
                    (535
                    )Net
      cash used in operating activities
                    
                    
                    (2,183
                    )
                    
                    
                    8,490
                    
                    
                    
                    6,307CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of Select, Inc. purchase price adjustments
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    —Capital
      expenditures
                    
                    
                    (125
                    )
                    
                    
                    
                    
                    
                    
                    (125
                    )Net
      cash used in investing activities
                    
                    
                    (125
                    )
                    
                    
                    
                    
                    
                    
                    (125
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      under floor plan financing, net
                    
                    
                    —
                    
                    
                    
                    (8,490
                    )
                    
                    
                    (8,490
                    )Proceeds
      from issuance of common stock under employee stock purchase
      plan
                    
                    
                    167
                    
                    
                    
                    
                    
                    
                    
                    167Proceeds
      from other short-term borrowings
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    —Exercise
      of stock options
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    —Excess
      tax benefits from stock option exercises
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    —Purchase
      of common stock
                    
                    
                    (66
                    )
                    
                    
                    
                    
                    
                    
                    (66
                    )Purchase
      of treasury stock resulting from grantee election
                    
                    
                    (22
                    )
                    
                    
                    
                    
                    
                    
                    (22
                    )Payments
      on notes payable and capital lease obligations
                    
                    
                    (27
                    )
                    
                    
                    
                    
                    
                    
                    (27
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    52
                    
                    
                    
                    (8,490
                    )
                    
                    
                    (8,438
                    )NET
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                    
                    
                    (2,256
                    )
                    
                    
                    
                    
                    
                    
                    (2,256
                    )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                    
                    
                    10,937
                    
                    
                    
                    
                    
                    
                    
                    10,937CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                    
                    $
                    8,681
                    
                    
                    $
                    —
                    
                    
                    $
                    8,681
 
 18
 The
following is a summary of the impact of the restatement on the unaudited
Consolidated Balance Sheets as of  December 31, 2008, 2007, and
2006.
 
 December 31, 2008As
      Previously
                          Reported
                        
                        
                        Restatement
                          Adjustment
                        
                        
                        As RestatedCurrent
      Assets:Cash
      and cash equivalents
                        
                        $
                        10,937
                        
                        
                        
                        
                        
                        $
                        10,937Accounts
      receivable, net
                        
                        
                        52,866
                        
                        
                        
                        
                        
                        
                        52,866Inventory,
      net
                        
                        
                        2,406
                        
                        
                        
                        
                        
                        
                        2,406Other
      current assets
                        
                        
                        1,275
                        
                        
                        
                        
                        
                        
                        1,275Total
      current assets
                        
                        
                        67,484
                        
                        
                        
                        
                        
                        
                        67,484Property
      and equipment, net
                        
                        
                        5,207
                        
                        
                        
                        
                        
                        
                        5,207Goodwill
                        
                        
                        12,751
                        
                        
                        
                        
                        
                        
                        12,751Intangible
      and other assets, net
                        
                        
                        1,852
                        
                        
                        
                        
                        
                        
                        1,852Total
      assets
                        
                        $
                        87,294
                        
                        
                        $
                        —
                        
                        
                        $
                        87,294Current
      Liabilities:Accounts
      payable
                        
                        $
                        45,172
                        
                        
                        $
                        (40,002
                        )
                        
                        $
                        5,170Floor
      plan financing
                        
                        
                        —
                        
                        
                        
                        40,002
                        
                        
                        
                        40,002Accrued
      expenses
                        
                        
                        6,873
                        
                        
                        
                        26
                        
                        
                        
                        6,899Current
      portion of capital lease obligations
                        
                        
                        77
                        
                        
                        
                        
                        
                        
                        
                        77Notes
      payable
                        
                        
                        91
                        
                        
                        
                        
                        
                        
                        
                        91Other
      current liabilities
                        
                        
                        1,072
                        
                        
                        
                        
                        
                        
                        
                        1,072Total
      current liabilities
                        
                        
                        53,285
                        
                        
                        
                        26
                        
                        
                        
                        53,311Long-term
      Liabilities:Long-term
      portion of capital lease obligations
                        
                        
                        163
                        
                        
                        
                        
                        
                        
                        
                        163Other
      long-term liabilities
                        
                        
                        250
                        
                        
                        
                        
                        
                        
                        
                        250Total
      long-term liabilities
                        
                        
                        413
                        
                        
                        
                        
                        
                        
                        
                        413Stockholders’
      Equity:Common
      stock
                        
                        
                        87
                        
                        
                        
                        
                        
                        
                        
                        87Additional
      paid-in capital
                        
                        
                        50,692
                        
                        
                        
                        50
                        
                        
                        
                        50,742Accumulated
      deficit
                        
                        
                        (17,183
                        )
                        
                        
                        (76
                        )
                        
                        
                        (17,259
                        )Total
      stockholders’ equity
                        
                        
                        33,596
                        
                        
                        
                        (26
                        )
                        
                        
                        33,570Total
      liabilities and stockholders’ equity
                        
                        $
                        87,294
                        
                        
                        $
                        —
                        
                        
                        $
                        87,294
 
 19
  December 31, 2007As
      Previously
                    Reported
                  
                  
                  Restatement
                    Adjustment
                  
                  
                  As RestatedAccounts
      payable
                  
                  $
                  37,233
                  
                  
                  $
                  (32,519
                  )
                  
                  $
                  4,714Floor
      plan financing
                  
                  
                  —
                  
                  
                  
                  32,519
                  
                  
                  
                  32,519
 
 
 December 31, 2006As
      Previously
                    Reported
                  
                  
                  Restatement
                    Adjustment
                  
                  
                  As RestatedAccounts
      payable
                  
                  $
                  28,798
                  
                  
                  $
                  (25,991
                  )
                  
                  $
                  2,807Floor
      plan financing
                  
                  
                  —
                  
                  
                  
                  25,991
                  
                  
                  
                  25,991
 
 The
following is a summary of the impact of the restatement on the unaudited
statements of operations for the years ended  December 31,
2008.
 
 December 31, 2008As
      Previously
                        Reported
                      
                      
                      Restatement
                        Adjustment
                      
                      
                      As RestatedRevenue:Products
                      
                      $
                      213,125
                      
                      
                      
                      
                      
                      $
                      213,125Services
                      
                      
                      46,032
                      
                      
                      
                      
                      
                      
                      46,032Total
      revenue
                      
                      
                      259,157
                      
                      
                      
                      
                      
                      
                      259,157Cost
      of goods and services:Products
                      
                      
                      175,244
                      
                      
                      
                      
                      
                      
                      175,244Services
                      
                      
                      32,756
                      
                      
                      $
                      26
                      
                      
                      
                      32,782Total
      cost of goods and services
                      
                      
                      208,000
                      
                      
                      
                      26
                      
                      
                      
                      208,026Gross
      profit
                      
                      
                      51,157
                      
                      
                      
                      (26
                      )
                      
                      
                      51,131Selling,
      general and administrative expenses
                      
                      
                      48,734
                      
                      
                      
                      50
                      
                      
                      
                      48,784Impairment
      charge
                      
                      
                      13,071
                      
                      
                      
                      
                      
                      
                      
                      13,071Operating
      loss
                      
                      
                      (10,648
                      )
                      
                      
                      (76
                      )
                      
                      
                      (10,724
                      )Interest
      expense
                      
                      
                      (330
                      )
                      
                      
                      
                      
                      
                      
                      (330
                      )Interest
      income
                      
                      
                      357
                      
                      
                      
                      
                      
                      
                      
                      357Other
      expense, net
                      
                      
                      (43
                      )
                      
                      
                      
                      
                      
                      
                      (43
                      )Loss
      from continuing operations before income taxes
                      
                      
                      (10,664
                      )
                      
                      
                      (76
                      )
                      
                      
                      (10,740
                      )Income
      tax expense (benefit)
                      
                      
                      2,011
                      
                      
                      
                      
                      
                      
                      
                      2,011Net
      loss from continuing operations
                      
                      
                      (12,675
                      )
                      
                      
                      (76
                      )
                      
                      
                      (12,751
                      )Income
      from discontinued operations, net of taxes
                      
                      
                      37
                      
                      
                      
                      
                      
                      
                      
                      37Net
      loss
                      
                      $
                      (12,638
                      )
                      
                      $
                      (76
                      )
                      
                      $
                      (12,714
                      )Net
      loss per share:Basic:Net
      loss from continuing operations before minority interest
                      
                      $
                      (1.55
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (1.56
                      )Loss
      from discontinued operations, net of taxes
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Net
      loss per share
                      
                      $
                      (1.55
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (1.56
                      )Diluted:Net
      loss from continuing operations before minority interest
                      
                      $
                      (1.55
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (1.56
                      )Loss
      from discontinued operations, net of taxes
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Net
      loss per share
                      
                      $
                      (1.55
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (1.56
                      )Shares
      used in computing net income (loss) per share:Basic
                      
                      
                      8,133,165
                      
                      
                      
                      7,026,623
                      
                      
                      
                      8,133,165Diluted
                      
                      
                      8,133,165
                      
                      
                      
                      8,027,286
                      
                      
                      
                      8,133,165
 
 20
 The
following is a summary of the impact of the restatement on the unaudited
statements of cash flows for the years ended  December 31, 2008, 2007,
and 2006.
 
 Year Ended December 31,
      2008As
      Previously
                      Reported
                    
                    
                    Restatement
                      Adjustment
                    
                    
                    As RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                    
                    $
                    (12,638
                    )
                    
                    $
                    (76
                    )
                    
                    $
                    (12,714
                    )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Income
      from discontinued operations
                    
                    
                    (37
                    )
                    
                    
                    
                    
                    
                    
                    (37
                    )Depreciation
      and amortization
                    
                    
                    2,667
                    
                    
                    
                    
                    
                    
                    
                    2,667Impairment
      charge
                    
                    
                    13,071
                    
                    
                    
                    
                    
                    
                    
                    13,071Deferred
      income tax expense
                    
                    
                    535
                    
                    
                    
                    
                    
                    
                    
                    535Share-based
      compensation expense
                    
                    
                    1,565
                    
                    
                    
                    50
                    
                    
                    
                    1,615Bad
      debt expense
                    
                    
                    541
                    
                    
                    
                    
                    
                    
                    
                    541Issuance
      of stock grant
                    
                    
                    116
                    
                    
                    
                    
                    
                    
                    
                    116Loss
      on retirement of assets
                    
                    
                    43
                    
                    
                    
                    
                    
                    
                    
                    43Tax
      expense from discontinued operations
                    
                    
                    19
                    
                    
                    
                    
                    
                    
                    
                    19Changes
      in assets and liabilities that provided (used) cash:Accounts
      receivable, net
                    
                    
                    (8,279
                    )
                    
                    
                    
                    
                    
                    
                    (8,279
                    )Inventory
                    
                    
                    (953
                    )
                    
                    
                    
                    
                    
                    
                    (953
                    )Other
      current assets
                    
                    
                    758
                    
                    
                    
                    
                    
                    
                    
                    758Accounts
      payable
                    
                    
                    7,939
                    
                    
                    
                    (7,483
                    )
                    
                    
                    456Accrued
      expenses
                    
                    
                    1,458
                    
                    
                    
                    26
                    
                    
                    
                    1,484Other
      current and long-term liabilities
                    
                    
                    (502
                    )
                    
                    
                    
                    
                    
                    
                    (502
                    )Net
      cash provided by (used in) continuing operations
                    
                    
                    6,303
                    
                    
                    
                    (7,483
                    )
                    
                    
                    (1,180
                    )Net
      operating activities from discontinued operations
                    
                    
                    18
                    
                    
                    
                    
                    
                    
                    
                    18Net
      cash provided by (used in) operating activities
                    
                    
                    6,321
                    
                    
                    
                    (7,483
                    )
                    
                    
                    (1,162
                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures, net of acquisitions
                    
                    
                    (2,260
                    )
                    
                    
                    
                    
                    
                    
                    (2,260
                    )Acquisition
      of Access Flow, Inc.
                    
                    
                    (2,550
                    )
                    
                    
                    
                    
                    
                    
                    (2,550
                    )Acquisition
      of NetTeks Technology Consultants, Inc.
                    
                    
                    (1,440
                    )
                    
                    
                    
                    
                    
                    
                    (1,440
                    )Acquisition
      of Select, Inc., net of $2,864 cash acquired
                    
                    
                    153
                    
                    
                    
                    
                    
                    
                    
                    153Proceeds
      of sale of fixed assets
                    
                    
                    1
                    
                    
                    
                    
                    
                    
                    
                    1Transaction
      costs paid for acquisitions
                    
                    
                    (225
                    )
                    
                    
                    
                    
                    
                    
                    (225
                    )Net
      cash used in investing activities
                    
                    
                    (6,321
                    )
                    
                    
                    
                    
                    
                    
                    (6,321
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of common stock
                    
                    
                    8,751
                    
                    
                    
                    
                    
                    
                    
                    8,751Proceeds
      from issuance of common stock under Employee Stock Purchase
      Plan
                    
                    
                    344
                    
                    
                    
                    
                    
                    
                    
                    344Payments
      under acquisition credit facility
                    
                    
                    (6,000
                    )
                    
                    
                    
                    
                    
                    
                    (6,000
                    )Borrowings
      under floor plan financing, net
                    
                    
                    —
                    
                    
                    
                    7,483
                    
                    
                    
                    7,483Proceeds
      from exercise of stock options
                    
                    
                    831
                    
                    
                    
                    
                    
                    
                    
                    831Excess
      tax benefits from stock option exercises
                    
                    
                    1,107
                    
                    
                    
                    
                    
                    
                    
                    1,107Proceeds
      from other short-term borrowings
                    
                    
                    460
                    
                    
                    
                    
                    
                    
                    
                    460Payments
      of other short-term borrowings
                    
                    
                    (601
                    )
                    
                    
                    
                    
                    
                    
                    (601
                    )Purchase
      of treasury stock resulting from grantee election
                    
                    
                    (61
                    )
                    
                    
                    
                    
                    
                    
                    (61
                    )Purchase
      of common stock
                    
                    
                    (3,234
                    )
                    
                    
                    
                    
                    
                    
                    (3,234
                    )Net
      cash provided by financing activities
                    
                    
                    1,597
                    
                    
                    
                    7,483
                    
                    
                    
                    9,080NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                    
                    
                    1,597
                    
                    
                    
                    
                    
                    
                    
                    1,597CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                    
                    
                    9,340
                    
                    
                    
                    
                    
                    
                    
                    9,340CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                    
                    $
                    10,937
                    
                    
                    $
                    —
                    
                    
                    $
                    10,937
 
 21
 Consolidated
Statement of Cash Flows for the year ended December 31, 2007:
 
 December 31, 2007As
      Previously
                    Reported
                  
                  
                  Restatement
                    Adjustment
                  
                  
                  As RestatedAccounts
      payable
                  
                  $
                  1,653
                  
                  
                  $
                  (6,528
                  )
                  
                  $
                  (4,875
                  )Net
      cash provided by continuing operations
                  
                  
                  9,997
                  
                  
                  
                  (6,528
                  )
                  
                  
                  3,469Net
      cash provided by operating activities
                  
                  
                  10,025
                  
                  
                  
                  (6,528
                  )
                  
                  
                  3,497Borrowings
      under non-interest bearing floor plan financing, net
                  
                  
                  —
                  
                  
                  
                  6,528
                  
                  
                  
                  6,528Net
      cash provided by financing activities of continuing
    operations
                  
                  
                  3,104
                  
                  
                  
                  6,528
                  
                  
                  
                  9,632Net
      cash provided by financing activities
                  
                  
                  3,104
                  
                  
                  
                  6,528
                  
                  
                  
                  9,632
 
 Consolidated
Statement of Cash Flows for the year ended December 31, 2006:
 
 December 31, 2006As
      Previously
                    Reported
                  
                  
                  Restatement
                    Adjustment
                  
                  
                  As RestatedAccounts
      payable
                  
                  $
                  14,981
                  
                  
                  $
                  (15,978
                  )
                  
                  $
                  (997
                  )Net
      cash used in continuing operations
                  
                  
                  (26
                  )
                  
                  
                  (15,978
                  )
                  
                  
                  (16,004
                  )Net
      cash used in operating activities
                  
                  
                  (710
                  )
                  
                  
                  (15,978
                  )
                  
                  
                  (16,688
                  )Borrowings
      under non-interest bearing floor plan financing, net
                  
                  
                  —
                  
                  
                  
                  15,978
                  
                  
                  
                  15,978Net
      cash provided by financing activities of continuing
    operations
                  
                  
                  2,515
                  
                  
                  
                  15,978
                  
                  
                  
                  18,493Net
      cash provided by financing activities
                  
                  
                  2,514
                  
                  
                  
                  15,978
                  
                  
                  
                  18,492
 
 
 22
 Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
 
 The
following discussion is qualified in its entirety by, and should be read in
conjunction with, our condensed consolidated financial statements, including the
notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our
Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as
previously filed with the Securities and Exchange Commission. Amounts are
presented in thousands except for share, per share data, percentages, and
ratios.
 
 Special
notice regarding forward-looking statements
 
 This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 relating to
future events or our future financial performance. Readers are cautioned that
any statement that is not a statement of historical fact including, but not
limited to, statements which may be identified by words including, but not
limited to, “anticipate,” “appear,” “believe,” “could,” “estimate,” “expect,”
“hope,” “indicate,” “intend,” “likely,” “may,” “might,” “plan,” “potential,”
“seek,” “should,” “will,” “would,” and other variations or negative expressions
thereof, are predictions or estimations and are subject to known and unknown
risks and uncertainties. Numerous factors, including factors that we have little
or no control over, may affect INX’s actual results and may cause actual results
to differ materially from those expressed in the forward-looking statements
contained herein. In evaluating such statements, readers should consider the
various factors identified in our Annual Report on Form 10-K for our fiscal year
ended December 31, 2008, as filed with the Securities and Exchange Commission
including the matters set forth in Item 1A. — “Risk Factors,” which could cause
actual events, performance or results to differ materially from those indicated
by such statements.  As more fully described in Note 10 of the Notes
to Condensed Consolidated Financial Statements, the condensed consolidated
financial statements as of and for the three months ended March 31, 2009 and
2008 filed on the Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 2009 and the consolidated financial statements as of and for the three
years ended December 31, 2008 as previously filed on the Annual Report on Form
10-K for the fiscal year ended December 31, 2008 are being
restated.
 
 Restatement
 
 On August
12, 2009, management of the Company in consultation with the Audit Committee of
the Board of Directors, determined that the our financial statements included in
the Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2009
required restatement.  This determination was made following a review
of the following:
 
 ·
              During
      the performance of a routine internal audit, a computational error was
      discovered in the calculation of services revenue and related commission
      expense affecting the fiscal quarter ended March 31, 2009.  We
      determined that correction of the error will result in an increase in its
      previously reported net loss of approximately $186 ($0.02 per share). The
      correction has no effect on the previously reported Statement of Cash
      Flows.
 
 ·
              We
      previously presented our floor plan financing balances as trade accounts
      payable because we believed that our principal vendor had a substantial
      investment in the floor plan financing company.  During the
      preparation of this Quarterly Report on Form 10-Q for the period June 30,
      2009, we became aware that the principal vendor had no ownership interest
      in its floor plan financing company.  Consequently, we are
      correcting our presentation of the floor plan balances in our Balance
      Sheets from trade accounts payable to floor plan financing and the related
      amounts in our Statements of Cash Flows from operating activities to
      financing activities.  The error affects the our Annual Report
      on Form 10-K for the fiscal year ended December 31, 2008 and Quarterly
      Report on Form 10-Q for the fiscal quarter ended March 31,
      2009.  The correction of the error has no effect on the
      previously reported statements of operations.  There is no
      impact to our current liabilities or total liabilities as a result of this
      reclassification for each of the three years ended December 31, 2008 or as
      of March 31, 2009 and 2008.
 
 ·
              In
      addition to the aforementioned corrections, we are recording certain
      immaterial adjustments that increase pre-tax expense of $76, of which $26
      was previously recorded in the three months ended March 31, 2009, and $13
      affecting the consolidated financial statements as of and for the year
      ended December 31, 2008 and as of and for the three-month period ended
      March 31, 2009, respectively.  These adjustments primarily
      relate to stock option
modifications.
 
 We are in
the process of amending our previously filed Annual Report on Form 10-K for the
fiscal year ended December 31, 2008 and Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2009.  The effect of the aforementioned
corrections on the condensed consolidated financial statements as of and for the
three months ended March 31, 2009 and 2008 previously filed on the Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2009 and on the
consolidated financial statements as of and for the years ended December 31,
2008 and 2007 as previously filed on the Annual Report on Form 10-K for the
fiscal year ended December 31, 2008 are more fully described in Note 10 of the
Notes to Condensed Consolidated Financial Statements.  The “Liquidity
and Capital Resources” sections of this Item 2 has been restated to reflect the
impact of the aforementioned errors.
 
 23
 Results
of Operations
 
 Period Comparisons.The
following tables set forth, for the periods indicated, certain financial data
derived from our condensed consolidated statements of operations. Percentages
shown in the table below are percentages of total revenue, except for the
products and services components of gross profit, which are percentages of the
respective product and service revenue.
 
 Three Months Ended June 30, 2009
Compared To the Three Months Ended June 30, 2008
 
 Three Months Ended June 30,2009
                        
                        
                        2008Amount
                        
                        
                        %
                        
                        
                        Amount
                        
                        
                        %Revenue:Products
                        
                        $
                        46,455
                        
                        
                        
                        79.6
                        
                        
                        $
                        51,430
                        
                        
                        
                        80.4Services
                        
                        
                        11,893
                        
                        
                        
                        20.4
                        
                        
                        
                        12,561
                        
                        
                        
                        19.6Total
      revenue
                        
                        
                        58,348
                        
                        
                        
                        100.0
                        
                        
                        
                        63,991
                        
                        
                        
                        100.0Gross
      profit:Products
                        
                        
                        9,578
                        
                        
                        
                        20.6
                        
                        
                        
                        9,766
                        
                        
                        
                        19.0Services
                        
                        
                        3,147
                        
                        
                        
                        26.5
                        
                        
                        
                        3,986
                        
                        
                        
                        31.7Total
      gross profit
                        
                        
                        12,725
                        
                        
                        
                        21.8
                        
                        
                        
                        13,752
                        
                        
                        
                        21.5Selling,
      general and administrative expenses
                        
                        
                        12,325
                        
                        
                        
                        21.1
                        
                        
                        
                        11,871
                        
                        
                        
                        18.6Operating
      income
                        
                        
                        400
                        
                        
                        
                        0.7
                        
                        
                        
                        1,881
                        
                        
                        
                        2.9Interest
      and other income (expense), net
                        
                        
                        5
                        
                        
                        
                        —
                        
                        
                        
                        (98
                        )
                        
                        
                        (0.1
                        )Income
      tax expense
                        
                        
                        69
                        
                        
                        
                        0.1
                        
                        
                        
                        680
                        
                        
                        
                        1.1Net
      income from continuing operations
                        
                        
                        336
                        
                        
                        
                        0.6
                        
                        
                        
                        1,103
                        
                        
                        
                        1.7(Loss
      ) income from discontinued operations, net of income taxes
                        
                        
                        (17
                        )
                        
                        
                        (0.1
                        )
                        
                        
                        10
                        
                        
                        
                        —Net
      income
                        
                        $
                        319
                        
                        
                        
                        0.5
                        
                        
                        $
                        1,113
                        
                        
                        
                        1.7
 
 Revenue. Total revenue
decreased by $5,643, or 8.8%, to $58,348 from $63,991. Products revenue
decreased $4,975, or 9.7% to $46,455 from $51,430. The decrease in products
revenue was primarily due to markets affected by the macroeconomic downturn in
the United States.  The most significant revenue declines were
experienced in the New England Region, Northwest Region, National Division,
Central Texas Region, and Federal Division, partially offset by revenue from
newly acquired locations in the New England Region and Northern California
Region and increased products revenue from large projects in the North Texas and
Southwest Regions. Services revenue decreased $668 or 5.3% to $11,893 from
$12,561. Services revenue decreased in the Federal Division, National Division,
and Northwest Region, partially offset by increases in the Central Texas Region
and newly acquired locations in the New England Region and Northern California
Region.
 
 Gross Profit. Total gross
profit decreased by $1,027, or 7.5%, to $12,725 from $13,752. Gross profit as a
percentage of revenue increased to 21.8% from 21.5%, due to higher products
revenue margin partially offset by lower services revenue margin. Gross profit
on the products sales component decreased $188 or 1.9%, to $9,578 from $9,766
and, as a percentage of sales, increased to 20.6% from 19.0%, due to
proportionately higher vendor rebates and increased revenues for third party
support contracts recorded on a net basis.  Gross profit on services
revenue decreased $839 or 21.0% to $3,147 from $3,986 and gross profit as a
percent of services revenue decreased to 26.5% from 31.7%. The services gross
margin decreased in 2009 due to reduced professional services revenues on a cost
base which is primarily fixed in nature and lower managed services gross margin
due to the higher cost base of an acquired location.
 
 24
 Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by $454,
or 3.8% to $12,325 from $11,871. As a percentage of total revenue, these
expenses increased to 21.1% in 2009 versus 18.6% in 2008. Increased 2009
expenses reflect selling, general and administrative expenses of the operations
acquired in the NetTeks, AccessFlow, and VocalMash  acquisitions and
additional sales and administrative personnel costs from severance costs and
corporate headcount increases, partially offset by reduced commission expense
due to lower gross profit and proportionately higher sales to non-commissioned
accounts.
 
 Operating Income. Operating
income decreased $1,481 to income of $400 from income of $1,881, primarily due
to lower sales, lower gross margins, and proportionately higher selling, general
and administrative expenses.
 
 Interest and Other Income (Expense),
Net. Interest and other income (expense), net, changed by $103 to income
of $5 from expense of $98, primarily due to the elimination of borrowings under
our senior credit facility in June 2008.
 
 Income Tax Expense. Income
tax expense decreased by $611 to $69 from $680, primarily due to lower 2009
pretax income.  An income tax benefit was not recognized for the 2009
loss due to the corresponding valuation allowance recorded as discussed further
under “Deferred Tax
Assets” below.
 
 Net Income. Net income
decreased $794 to income of $319 from income of $1,113, primarily due to lower
sales, lower gross margins, and proportionately higher selling, general and
administrative expenses partially offset by lower income tax
expense.
 
 Six Months Ended June 30, 2009
Compared To the Six Months Ended June 30, 2008
 
 Six Months Ended June 30,2009
                        
                        
                        2008Amount
                        
                        
                        %
                        
                        
                        Amount
                        
                        
                        %Revenue:Products
                        
                        $
                        91,021
                        
                        
                        
                        78.7
                        
                        
                        $
                        101,921
                        
                        
                        
                        82.4Services
                        
                        
                        24,660
                        
                        
                        
                        21.3
                        
                        
                        
                        21,713
                        
                        
                        
                        17.6Total
      revenue
                        
                        
                        115,681
                        
                        
                        
                        100.0
                        
                        
                        
                        123,634
                        
                        
                        
                        100.0Gross
      profit:Products
                        
                        
                        18,022
                        
                        
                        
                        19.8
                        
                        
                        
                        18,973
                        
                        
                        
                        18.6Services
                        
                        
                        7,006
                        
                        
                        
                        28.4
                        
                        
                        
                        6,926
                        
                        
                        
                        31.9Total
      gross profit
                        
                        
                        25,028
                        
                        
                        
                        21.6
                        
                        
                        
                        25,899
                        
                        
                        
                        20.9Selling,
      general and administrative expenses
                        
                        
                        25,053
                        
                        
                        
                        21.6
                        
                        
                        
                        22,255
                        
                        
                        
                        18.0Operating
      (loss) income
                        
                        
                        (25
                        )
                        
                        
                        —
                        
                        
                        
                        3,644
                        
                        
                        
                        2.9Interest
      and other income (expense), net
                        
                        
                        17
                        
                        
                        
                        —
                        
                        
                        
                        (171
                        )
                        
                        
                        (0.1
                        )Income
      tax expense
                        
                        
                        119
                        
                        
                        
                        0.1
                        
                        
                        
                        1,363
                        
                        
                        
                        1.1Net
      (loss) income from continuing operations
                        
                        
                        (127
                        )
                        
                        
                        (0.1
                        )
                        
                        
                        2,110
                        
                        
                        
                        1.7(Loss
      ) income from discontinued operations, net of income taxes
                        
                        
                        (56
                        )
                        
                        
                        (0.1
                        )
                        
                        
                        14
                        
                        
                        
                        —Net
      (loss) income
                        
                        $
                        (183
                        )
                        
                        
                        (0.2
                        )
                        
                        $
                        2,124
                        
                        
                        
                        1.7
 
 Revenue. Total revenue
decreased by $7,953, or 6.4%, to $115,681 from $123,634. Products revenue
decreased $10,900, or 10.7% to $91,021 from $101,921. The decrease in products
revenue was primarily due to the effect of the  macroeconomic downturn
in the United States.  We experienced lower revenue in the Northwest
Region, National Division, Central Texas Region, New England Region, Southwest
Region, and Gulf Coast Region, partially offset by revenue from newly acquired
locations in the New England Region and Northern California Region and increased
products revenue in the North Texas and Southern California Regions. Services
revenue increased $2,947 or 13.6% to $24,660 from $21,713. Services revenue
increased in the majority of our Regions, led by increases in the Federal
Division, Central Texas Region, Southwest Region, and Southern California
Region, and the newly acquired locations in the New England Region and Northern
California Region.
 
 25
 Gross Profit. Total gross
profit decreased by $871, or 3.4%, to $25,028 from $25,899. Gross profit as a
percentage of revenue increased to 21.6% from 20.9%, due to higher products
revenue margins partially offset by lower services margins. Gross profit on the
products sales component decreased $951 or 5.0%, to $18,022 from $18,973 and, as
a percentage of sales, increased to 19.8% from 18.6% due to proportionately
higher vendor rebates in 2009.  Gross profit on services revenue
increased $80 or 1.2% to $7,006 from $6,926 and gross profit as a percent of
services revenue decreased to 28.4% from 31.9%. The services gross margin
decreased in 2009 due to an increased projects with significant outside
contractor costs reducing professional services gross margin and lower managed
services gross margin due to the higher cost base of an acquired
location.
 
 Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by
$2,798, or 12.6% to $25,053 from $22,255. As a percentage of total revenue,
these expenses increased to 21.6% in 2009 versus 18.0% in
2008.  Increased 2009 expenses reflect selling, general and
administrative expenses of the operations acquired in the NetTeks, AccessFlow,
and VocalMash  acquisitions and additional sales and administrative
personnel costs from headcount increases, partially offset by reduced commission
expense due to lower gross profit and proportionately higher sales to
non-commissioned accounts.
 
 Operating (Loss) Income.
Operating income decreased $3,669 to a loss of $25 from income of $3,644,
primarily due to lower sales and proportionately higher selling, general and
administrative expenses partially offset by higher gross margins.
 
 Interest and Other Income (Expense),
Net. Interest and other income (expense), net, changed by $188 to income
of $17 from expense of $171, primarily due to the elimination of borrowings
under our senior credit facility in June 2008.
 
 Income Tax Expense. Income
tax expense decreased by $1,244 to $119 from $1,363, primarily due to lower 2009
pretax income.  An income tax benefit was not recognized for the 2009
loss due to the corresponding valuation allowance recorded as discussed further
under “Deferred Tax
Assets” below.
 
 Net (Loss) Income. Net income
decreased $2,307 to a loss of $183 from income of $2,124, primarily due to lower
sales and proportionately higher selling, general and administrative expenses
partially offset by higher gross margins and lower income tax
expense.
 
 Tax Loss Carryforward.Because of our operating losses in 2003, 2005, 2006 and 2008, and
exercises of stock options, we have accumulated a net operating loss
carryforward for federal income tax purposes that, at June 30, 2009, was
approximately $2,480. Since United States tax laws limit the time during which
an NOL may be applied against future taxable income and tax liabilities, we may
not be able to take full advantage of our NOL carryforward for federal income
tax purposes. The carryforward will expire during the period 2023 through 2026
if not otherwise used. A change in ownership, as defined by federal income tax
regulations, could significantly limit the company’s ability to utilize its
carryforward.
 
 As a
result of the adoption of SFAS 123(R), we recognize tax benefits associated with
the exercise of stock options directly to stockholders’ equity only when
realized. Accordingly, deferred tax assets are not recognized for net operating
loss carryforwards resulting from windfall tax benefits. A windfall tax benefit
occurs when the actual tax benefit realized upon an employee’s disposition of a
share-based award exceeds the cumulative book compensation charge associated
with the award. At June 30, 2009, we have windfall tax benefits of $2,480
included in NOL carryforward but not reflected in deferred tax
assets.
 
 Deferred Tax Assets.In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which temporary
differences, as determined pursuant to SFAS No. 109, “Accounting for Income
Taxes,” become deductible. Management considers the reversal of deferred tax
liabilities, projected future income, and tax planning strategies in making this
assessment. Management’s evaluation of the realizability of deferred tax assets
must consider both positive and negative evidence. The weight given to the
potential effects of positive and negative evidence is based on the extent to
which it can be objectively verified. During the fourth quarter of 2008 and in
the first and second quarters of 2009, we recorded a valuation allowance related
to the net operating loss carryforwards and other temporary items as we
determined it is more likely than not that we will not be able to use the assets
to reduce future tax liabilities.  As of June 30, 2009, the net
deferred tax asset was $4,022 and was fully reserved with a valuation allowance
of the same amount.
 
 26
 Liquidity
and Capital Resources
 
 Sources
of Liquidity
 
 Our
principal sources of liquidity are collections from our accounts receivable and
our credit facility (the “Credit Facility”) with Castle Pines Capital LLC
(“CPC”), which we believe are sufficient to meet our short-term and long-term
liquidity requirements. We use the Credit Facility to finance the majority of
our purchases of inventory and to provide working capital when our cash flow
from operations is insufficient. Our working capital increased to $15,977 at
June 30, 2009 from $14,199 at December 31, 2008, primarily due to lower floor
plan financing resulting from reduced sales levels.
 
 The total
Credit Facility is $60,000 with an additional $10 million credit facility
specifically for acquisitions (“Acquisition Facility”). Substantially all of our
assets are pledged as collateral under the Credit Facility. Advances under the
Acquisition Facility are specific to each acquisition and subject to approval by
CPC based on pre-established criteria. There were no borrowings under the
Acquisition Facility outstanding at June 30, 2009.
 
 As of
June 30, 2009, borrowing capacity and availability were as follows:
 
 Total
      Credit Facility
                  
                  $
                  60,000Borrowing
      base limitation
                  
                  
                  (20,318
                  )Total
      borrowing capacity
                  
                  
                  39,682Less
      interest-bearing borrowings
                  
                  
                  —Less
      non-interest bearing advances
                  
                  
                  (35,936
                  )Total
      unused availability
                  
                  $
                  3,746
 
 In
addition to unused borrowing availability, liquidity at June 30, 2009 included
our cash balance of $13,181. The “unused availability” is the amount not
borrowed, but eligible to be borrowed. The borrowing base restrictions generally
restrict our borrowings under the Credit Facility to 85% of the eligible
receivables, 100% of our floorplanned inventory and 75% of Cisco vendor rebates
receivable.
 
 We use
the Credit Facility to finance purchases of Cisco products from Cisco and from
certain wholesale distributors. Cisco provides 60-day terms, and other wholesale
distributors typically provide 30-day terms. Balances under the Credit Facility
that are within those respective 60-day and 30-day periods (the “Free Finance
Period”) do not accrue interest and are presented as “Floor Plan Financing” in
our balance sheet. To the extent that we have credit availability under the
Credit Facility, we have the ability to extend the payment terms past the Free
Finance Period for up to 120 days after original invoice date. Amounts extended
past the Free Finance Period accrue interest and are presented as notes payable
on our balance sheet.  No such amounts related to this Credit Facility
were outstanding at June 30, 2009 or December 31, 2008.  The interest
rate of the Credit Facility is the prime rate plus 0.5% (3.75% at June 30, 2009)
and the interest rate of the Acquisition Facility is the prime rate plus 2.0%
(5.25% at June 30, 2009).
 
 As
defined in the Credit Facility there are restrictive covenants measured at each
quarter and year-end regarding minimum tangible net worth, maximum debt to
tangible net worth ratio, minimum working capital and a minimum current ratio.
At June 30, 2009, we were in compliance with the loan covenants and we
anticipate that we will be able to comply with the loan covenants during the
next twelve months. If we violate any of the loan covenants, we would be
required to seek waivers from CPC for those non-compliance events. If CPC
refused to provide waivers, the amount due under the Credit Facility could be
accelerated and we could be required to seek other sources of
financing.
 
 Cash Flows.During the six
months ended June 30, 2009, our cash increased by $2,244. Operating activities
provided cash of $6,637, investing activities used $307, and financing
activities used $4,086.
 
 Operating Activities.Operating activities provided $6,637 in the six months ended June 30,
2009, as compared to providing cash of $697 in the comparable 2008 period.
During the six months ended June 30, 2009, net income and noncash adjustments to
net income provided cash of $2,548, which was offset by changes in asset and
liability accounts using cash of $4,089.
 
 Investing Activities.Investing activities used $307 in the six months ended June 30, 2009,
compared to $3,609 used during the comparable period in 2008. Our 2009 investing
activities consisted of capital expenditures of $254 and a security deposit of
restricted cash under a lease agreement of $53.  Our investing
activities in 2008 primarily consisted of the acquisition of Access Flow, Inc.
($2,598, including transaction costs) and capital expenditures
($1,001).   Capital expenditures in both years were primarily related
to purchases of computer equipment and software, and to a lesser degree,
leasehold improvements. During the next twelve months, we do not expect to incur
significant capital expenditures requiring cash, except for acquisitions, for
which we cannot predict the certainty or magnitude.  During the third
quarter of 2009, additional purchase price consideration of $364 will be paid to
AccessFlow for achievement of certain customer billing milestones during the
twelve-month period ending June 30, 2009.  At the Company’s option,
50% of such additional consideration may be paid in the form of common stock. As
further described in Note 4 to the condensed consolidated financial statements,
the AccessFlow, NetTeks, VocalMash, and AdvancedNetworX acquisition agreements
contain contingent payment provisions that may be earned in future
periods.
 
 27
 Financing Activities.Financing activities used $4,086 in the six months ended June 30, 2009,
as compared to providing $6,176 in the comparable period in 2008. Funds used in
the six months ended June 30, 2009 were primarily from net payments under the
floor plan financing ($4,066) and the issuance of stock under the employee stock
purchase plan ($167).  The financing activities during the six months
ended June 30, 2008 generated cash primarily from the issuance of common stock
($8,809, net of issuance costs), net borrowings under the floor plan financing
($3,017), the exercise of stock options ($827), and excess tax benefits from
stock option exercises ($1,195), partially offset by the repayment of the
Acquisition Facility ($6,000) and common stock repurchases
($1,536).
 
 Critical
Accounting Policies
 
 In
preparing our condensed consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”) and pursuant to the rules and regulations of the SEC, we make
assumptions, judgments and estimates that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosures of contingent assets
and liabilities. We base our assumptions, judgments and estimates on historical
experience and various other factors that we believe to be reasonable under the
circumstances. Actual results could differ materially from these estimates under
different assumptions or conditions. On a regular basis, we evaluate our
assumptions, judgments and estimates. We also discuss our critical accounting
policies and estimates with the Audit Committee of the Board of
Directors.
  We
believe that the assumptions, judgments and estimates involved in the accounting
for revenue recognition, stock-based compensation, goodwill impairment and
income taxes have the greatest potential impact on our condensed consolidated
financial statements. These areas are key components of our results of
operations and are based on complex rules which require us to make judgments and
estimates, so we consider these to be our critical accounting policies.
Historically, our assumptions, judgments and estimates relative to our critical
accounting policies have not differed materially from actual
results.
  The
following disclosure is provided as an enhancement to prior disclosures on
accounting for goodwill and long-lived assets.  There have been no
significant changes in our critical accounting policies and estimates during the
six months ended June 30, 2009 as compared to the critical accounting policies
and estimates disclosed in Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in our Annual Report on
Form 10-K for the year ended December 31, 2008.
  Goodwill
 
 We test
our recorded goodwill annually for impairment as of the end of our fiscal year
as well as whenever events or changes in circumstances indicate that the
carrying value may not be recoverable, in accordance with FASB Statement No.
142, Goodwill and Other
Intangibles Assets (“SFAS 142”). Circumstances that could trigger an
interim impairment test include but are not limited to: a significant adverse
change in the business climate or legal factors; an adverse action or assessment
by a regulator; unanticipated competition; loss of key personnel; the likelihood
that a reporting unit or significant portion of a reporting unit will be sold or
otherwise disposed; or results of testing for recoverability of a significant
asset group within a reporting unit.
 
 The
goodwill impairment test consists of a two-step process.  Step 1 of
the impairment test involves comparing the fair values of the applicable
reporting units with their carrying values, including goodwill. If the carrying
amount of a reporting unit exceeds the reporting unit’s fair value, we perform
Step 2 of the goodwill impairment test to determine the amount of impairment
loss. Step 2 of the goodwill impairment test involves comparing the implied fair
value of the affected reporting unit’s goodwill against the carrying value of
that goodwill.  In performing the first step of the impairment test,
we reconcile the aggregate estimated fair value of our reporting units to our
market capitalization (together with an implied control premium).
  SFAS 142
requires the testing of goodwill for impairment be performed at a level referred
to as a reporting unit. We currently have twelve reporting units based primarily
on our geographical regions, of which eleven reporting units have goodwill
assigned.  Goodwill is assigned based on (1) goodwill incurred in the
purchase of the reporting unit and (2) goodwill allocated to reporting units
existing at the time of an acquisition and directly benefiting from the business
combination.
 
 To
estimate the fair value of our reporting units, we use the income approach and
the market approach.  Once the fair value of each reporting unit is
determined under each valuation method, we apply a weighting of 90% to the
income approach and 10% to the market approach. We place greater reliance on the
income approach because we believe the discounted cash flow projections are a
more reliable methodology.
 
 28
 The
income approach is based on a discounted cash flow analysis (“DCF”) and
calculates the fair value by estimating the after-tax cash flows attributable to
a reporting unit and then discounting the after-tax cash flows to a present
value using a risk-adjusted discount rate. Assumptions used in the DCF require
the exercise of significant judgment, including judgment about appropriate
discount rates and terminal values, growth rates, and the amount and timing of
expected future cash flows. The forecasted cash flows are based on our most
recent budget and for years beyond the budget, the estimates are based on
assumed growth rates. We believe the assumptions are consistent with the plans
and estimates used to manage the underlying businesses. The discount rates,
which are intended to reflect the risks inherent in future cash flow
projections, used in the DCF are based on estimates of the weighted-average cost
of capital (“WACC”) of a market participant relative to each respective
reporting unit. Such estimates are derived from our analysis of peer companies
and considered the industry weighted average return on debt and equity from a
market participant perspective for its reporting units.  Specific
assumptions used were as follows:
  December 31, 2008
                          
                          December 31, 2007Weighted
      average cost of capital
                          28.4
      - 28.7%
                          
                          21.7
      – 25.1%Compound
      annual revenue growth rate for five years
                          (9.9)
      - 32.7%
                          
                          13.8
      – 22.1%Terminal
      year stable growth rate
                          3.5
      – 4.0%
                          
                          4.0%
 
 The
market approach considers comparable market data based on multiples of revenue,
gross profit, earnings before taxes, depreciation and amortization (“EBITDA”),
and net income. We believe the assumptions used to determine the fair value of
our respective reporting units are reasonable. If different assumptions were
used, particularly with respect to forecasted cash flows, WACCs, or market
multiples, different estimates of fair value may result and there could be the
potential that an impairment charge could result. Actual operating results and
the related cash flows of the reporting units could differ from the estimated
operating results and related cash flows. The valuation multiples calculated
were as follows, where MVIC represents the market value of invested capital
(market capitalization plus interest bearing debt):
  December 31, 2008
                      
                      December 31, 2007MVIC/Revenues
                      0.17x
                      
                      N/AMVIC/Gross
      profit
                      0.83x
                      
                      1.1xMVIC/EBITDA
                      4.75x
                      
                      12.5xMarket
      cap/Net income
                      10.23x
                      
                      16.2x
 
 The 2008
impairment charges for the reporting units are primarily attributable to the
assumption of higher discount rates and lower projected future cash flows as
compared to those used in the annual impairment test performed in 2007. The
higher discount rates for the three reporting units, which ranged from 28.4% to
28.7% compared to 21.7% to 25.1% used the previous year, reflect an increase in
the risks inherent in the estimated future cash flows and the higher rate of
return a market participant would require based on the current macro-economic
environment.
 
 As of
December 31, 2008, the North Texas, Central Texas, Federal, and National
reporting units with goodwill totaling $1,940, had estimated fair values
exceeding their carrying values by a minimum of 70 percent. The Southwest, Gulf
Coast, and Southern California reporting units with goodwill totaling $4,323,
had estimated fair values exceeding their carrying values by 9 to 15 percent.
The NetTeks and VocalMash reporting units with goodwill totaling $504 had
carrying values that approximated fair value as these reporting units were
recently acquired. Lastly ,the Northwest, New England, and Northern California
reporting units with goodwill totaling $5,983, had estimated fair values which
approximated their carrying values as a result of the impairment charge recorded
at December 31, 2008.  During 2009 the National reporting unit was
merged into the Gulf Coast reporting unit and the NetTeks reporting unit was
merged into the New England reporting unit.
 
 29
 With the
exception of potential regional economic differences, the fair value of all of
our reporting units are primarily affected by the forecasted demand and spending
on technology products in our principal markets which are:  network
infrastructure, unified communications and data center products and
services.  Some of the inherent assumptions and estimates used in
determining the estimated fair value of these reporting units are outside the
control of management, including interest rates, cost of capital, and tax
rates.  It is possible that changes in circumstances, existing at the
measurement date or at other times in the future, or in the numerous estimates
associated with management’s judgments, assumptions and estimates made in
assessing the fair value of our goodwill, may result in an impairment charge of
a portion or all of the goodwill amounts previously noted.  If we
record an impairment charge, our financial position and results of operations
could be adversely affected.
 
 For
illustrative purposes, had the December 31, 2008 fair values of each reporting
unit been lower by 10%, an additional goodwill impairment charge of $2,108 would
have been recorded. Our goodwill balance was $12,751 as of December 31, 2008 and
$16,603 at December 31, 2007.
 
 There
were no events or changes in circumstances in the first or second quarter of
2009 that required an interim impairment test. In making this assessment, we
relied on a number of factors including market value of our common stock, actual
and forecasted operating cash flows, and business plans in comparison to the
operating forecast on which the previous impairment test was
based.  The actual operating income for the six-month period ended
June 30, 2009 of the Federal, New England and Gulf Coast reporting units
has trailed the impairment test forecasted operating income.  During
the second and third quarters of 2009, we made several strategic changes,
including replacing key personnel, reducing headcount, and consolidating
facilities designed to improve performance in future periods and mitigate
operating forecast shortfalls.  At this time we believe it is more
likely than not that the fair value of these reporting units is greater than
their carrying value. However, we can provide no assurance that future goodwill
impairments will not occur.
 
 Impairment
of Long-Lived Assets
 
 We record
impairment losses on long-lived assets, such as amortizable intangible assets
and property and equipment, when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those
assets.  Evaluation of long-lived assets for impairment is performed
at the asset group level, which represents the lowest level for which
identifiable cash flows are largely independent of the cash flows of other
groups of assets and liabilities.  Our asset group level corresponds
to the same level as the reporting units used in our goodwill impairment
testing.
 
 Item 4T. Controls and
Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 Under the
supervision and with the participation of certain members of our management,
including our Chief Executive Officer and Chief Financial Officer, we completed
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  Based
on that evaluation, we and our management have concluded that our disclosure
controls and procedures were not effective as of June 30, 2009, to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC.  Our
disclosure controls and procedures were not effective due to the material
weaknesses in internal control over financial reporting as described
below.
  Material
Weaknesses in Internal Control over Financial Reporting and Status of
Remediation Efforts
 
 A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company's annual or interim financial
statements will not be prevented or detected in a timely basis.
 
 We did
not maintain effective internal controls over the review of the services revenue
accrual.   Specifically, during the three months ended June 30,
2009, a computational error was discovered in the calculation of the services
revenue accrual at March 31, 2009.  Because of this deficiency, the
services revenue accrual was overstated for the period ended March 31, 2009, by
approximately $208,000, as more fully described in Note 10 to the condensed
consolidated financial statements and which required a restatement of our
condensed consolidated financial statements for the three months ended March 31,
2009.  Management has concluded that this deficiency represents a
material weakness in internal control over financial reporting as of March 31,
2009.
 
 30
 We did
not maintain effective controls over the application, monitoring and reporting
of the appropriate accounting policies related to non-standard financing
contracts.  Specifically, we did not consider or validate the
significant facts and assumptions underlying our accounting conclusions related
to the floor plan financing arrangement in a timely manner  This
deficiency, which was identified during the three months ended June 30, 2009,
resulted in  an error in the classification of our non-interest
bearing floor plan amounts payable and which resulted in a restatement of our
consolidated balance sheet and the related consolidated statement of cash flows
for the two and three year periods ended December 31, 2008, respectively, as
more fully described in Note 10 to the condensed consolidated financial
statements included in the Form 10-Q for the quarter ended June 30,
2009.  This deficiency represents a material weakness in internal
control over financial reporting as of December 31, 2008.
 
 In light
of the material weaknesses described above, we performed additional analysis and
other post-closing procedures to ensure that our financial statements were
prepared in accordance with generally accepted accounting
principles.  Accordingly, we believe that the financial statements
included in this report fairly present in all material respects, our financial
condition, results of operations, changes in shareholders’ equity and cash flows
for the periods presented.
 
 Management's
Remediation Initiatives
  To
address the aforementioned material weakness in internal control related to the
calculation of our service revenue accrual we have implemented or expect that
our remediation efforts will include, but not be limited to, the
following:
 
 ·
                Require
      the final services revenue accrual report be compared and validated
      against the report subjected to detailed review and for this comparison to
      be subjected to supervisory
review;
 
 ·
              Modify
      access to underlying project reports to prevent changes to project
      data.
 
  To
address the aforementioned material weakness in internal control related to the
review over the application and monitoring and reporting of the appropriate
accounting policies related to non-standard financing contracts, our remediation
efforts will include, but not be limited to, the following:
  ·
              Consider,
      validate and document all significant facts and assumptions underlying our
      accounting conclusions related to such financing arrangement on a
      quarterly basis.
  We
anticipate these actions will improve our internal control over financial
reporting and will address the related material weakness
identified.   However, because the institutionalization of the
internal control process requires repeatable process execution, and because this
control relies extensively on manual review and approval, the successful
execution of this control, for at least several periods, may be required prior
to management being able to definitively conclude that the material weakness has
been fully remediated.
 
 Changes
in Internal Control over Financial Reporting
 
 There
have not been any changes in our internal controls over financial reporting
during the quarter ended June 30, 2009 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
 
 PART II. OTHER
INFORMATION
 
 Item
1. Legal Proceedings
 
 See Note
9 to condensed consolidated financial statements in Part I, Item 1, which is
incorporated herein by reference.
 
 Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 Issuer
Purchases of Equity Securities
 
 On May
12, 2009, the Board of Directors authorized a new common stock repurchase plan
of up to $2,000 of the Company’s common stock on or before October 31, 2009. The
purchases are required to be made in open market or privately negotiated
transactions in compliance with Rule 10b-18 under the Securities Exchange
Act of 1934, as amended, subject to market and business conditions, applicable
legal requirements and other factors. The plan also requires the purchased
shares to be retired as soon as practicable following the purchase. The plan
does not obligate the Company to purchase any particular amount of common stock
and could be suspended at any time at the Company’s discretion.  No
shares of common stock were repurchased during the period May 12, 2009 to June
30, 2009.
 
 31
 Item
4. Submission of Matters to a Vote of Security Holders
 
 See Item
8.01 to Form 8-K filed May 12, 2009 which is incorporated herein by reference as
the results of matters submitted to a vote of security holders required as part
of this report.
 
 Item
6. Exhibits
 
 See
exhibit list in the Index to Exhibits, which is incorporated herein by reference
as the list of exhibits required as part of this report.
 
 
 
 
 SIGNATURE
 
 Pursuant
to the requirements 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.
  INX
      Inc.Date:
      August 14, 2009
                  By:
                  /s/ Brian
      Fontana,Brian
      Fontana, Vice President
                    and
      Chief Financial Officer
 
 32
 
 Index
to Exhibits
 
 Exhibit
                No.
              
              Description
              
              Filed
      Herewith or
                Incorporated
      by
                Reference
      From:10.1
              
              Seventh
      Amendment to INX Inc. Incentive Plan
              
              Exhibit
      10.1 to Form 8-K filed May 12, 2009.10.2
              
              First
      Amendment to Asset Purchase Agreement by and among INX Inc., NetTeks
      Technology Consultants, Inc., Ethan F. Simmons, Matthew J. Field, and
      Michael P. DiCenzo dated June 19, 2009.
              
              Exhibit
      10.1 to Form 8-K filed June 24, 2009.31.1
              
              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.
 
  33