##### Table of Contents



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




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##### 



INX Inc. and Subsidiaries
 FORM 10-Q/A for the Quarter Ended March 31, 2006
 INDEX
 Explanatory
NotePart I. Financial InformationItem 1. Financial Statements (Unaudited):Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005Condensed Consolidated Balance Sheets at March 31, 2006 and December 31, 2005Condensed Consolidated Statement of Stockholders Equity for the three months ended March 31, 2006Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005Notes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 6. ExhibitsSignatureRule 13a-14(a)/15d-14(a) Certification of PEORule 13a-14(a)/15d-14(a) Certification of PFOSection 1350 Certification of PEOSection 1350 Certification of PFO
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EXPLANATORY NOTE
  Total Cost ofTotal Revenue
    
    Products and Services
    
    Gross ProfitThree Months Ended March 31, 2006:As previously reported
    
    $
    30,787
    
    
    $
    25,380
    
    
    $
    5,407As restated
    
    $
    26,276
    
    
    $
    20,869
    
    
    $
    5,407Three Months Ended March 31, 2005:As previously reported
    
    $
    24,661
    
    
    $
    21,000
    
    
    $
    3,661As restated
    
    $
    21,282
    
    
    $
    17,621
    
    
    $
    3,661
 This Form 10-Q/A does not update any other information set forth in the original filing of our
Quarterly Report on Form 10-Q for the period ended March 31, 2006. This Form 10-Q/A does not
reflect any events or developments occurring subsequent to May 5, 2006.
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements (Unaudited):
  
 
 Three months endedMarch 31,2006
    
    
    2005(as restated
Note 11)Revenue:Products
    
    $
    22,311
    
    
    $
    19,774Services
    
    
    3,965
    
    
    
    1,508Total revenue
    
    
    26,276
    
    
    
    21,282Cost of products and services:Products
    
    
    17,893
    
    
    
    16,437Services
    
    
    2,976
    
    
    
    1,184Total cost of products and services
    
    
    20,869
    
    
    
    17,621Gross profit
    
    
    5,407
    
    
    
    3,661Selling, general and administrative expenses
    
    
    5,845
    
    
    
    9,010Operating loss
    
    
    (438
    )
    
    
    (5,349
    )Interest and other income (expense), net
    
    
    (85
    )
    
    
    (68
    )Loss from continuing operations before income taxes
    
    
    (523
    )
    
    
    (5,417
    )Income tax expense
    
    
    1
    
    
    
    121Net loss from continuing operations
    
    
    (524
    )
    
    
    (5,538
    )Loss from discontinued operations, net of income taxes
    
    
    (4
    )
    
    
    (970
    )Net loss
    
    $
    (528
    )
    
    $
    (6,508
    )Net loss per share:Basic:Loss from continuing operations
    
    $
    (0.09
    )
    
    $
    (1.06
    )Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (0.19
    )Net loss per share
    
    $
    (0.09
    )
    
    $
    (1.25
    )Diluted:Loss from continuing operations
    
    $
    (0.09
    )
    
    $
    (1.06
    )Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (0.19
    )Net loss per share
    
    $
    (0.09
    )
    
    $
    (1.25
    )Shares used in computing net loss per share:Basic and diluted
    
    
    6,047,840
    
    
    
    5,210,794
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March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,915
    
    
    $
    2,597Accounts receivable, net of allowance of $383 and $161
    
    
    27,325
    
    
    
    24,903Inventory
    
    
    1,260
    
    
    
    79Other current assets
    
    
    837
    
    
    
    881Current assets of discontinued operations
    
    
    1,307
    
    
    
    2,564Total current assets
    
    
    33,644
    
    
    
    31,024Property and equipment, net of accumulated depreciation of $2,516 and $2,344
    
    
    2,258
    
    
    
    2,050Goodwill
    
    
    8,602
    
    
    
    7,121Intangible and other assets, net of accumulated amortization of $1,103 and $1,007
    
    
    298
    
    
    
    393Noncurrent assets of discontinued operations
    
    
    106
    
    
    
    1,057Total assets
    
    $
    44,908
    
    
    $
    41,645LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Notes payable and current portion of long-term debt
    
    $
    849
    
    
    $
    2,707Accounts payable
    
    
    19,670
    
    
    
    13,825Accrued expenses
    
    
    4,228
    
    
    
    3,696Other current liabilities
    
    
    309
    
    
    
    468Current liabilities of discontinued operations
    
    
    1,415
    
    
    
    2,936Total current liabilities
    
    
    26,471
    
    
    
    23,632Long-term liabilities of discontinued operations
    
    
    
    
    
    
    7Commitments and contingenciesStockholders Equity:Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued
    
    
    
    
    
    
    Common stock, $.01 par value, 15,000,000 shares authorized, 6,174,404 and
5,975,626 shares issued
    
    
    62
    
    
    
    60Additional paid-in capital
    
    
    28,503
    
    
    
    27,546Retained deficit
    
    
    (10,128
    )
    
    
    (9,600
    )Total stockholders equity
    
    
    18,437
    
    
    
    18,006Total liabilities and stockholders equity
    
    $
    44,908
    
    
    $
    41,645
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$.01 par value
    
    
    AdditionalCommon Stock
    
    
    Paid-In
    
    
    RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance at December 31, 2005
    
    
    5,975,626
    
    
    $
    60
    
    
    $
    27,546
    
    
    $
    (9,600
    )
    
    $
    18,006Exercise of common stock options
    
    
    125,670
    
    
    
    1
    
    
    
    255
    
    
    
    
    
    
    
    256Issuance of shares for Datatran acquisition
    
    
    73,108
    
    
    
    1
    
    
    
    514
    
    
    
    
    
    
    
    515Share-based compensation expense related
to employee stock options
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    60Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    128Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (528
    )
    
    
    (528
    )Balance at March 31, 2006
    
    
    6,174,404
    
    
    $
    62
    
    
    $
    28,503
    
    
    $
    (10,128
    )
    
    $
    18,437
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Three months endedMarch 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (528
    )
    
    $
    (6,508
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Net loss from discontinued operations
    
    
    4
    
    
    
    970Tax benefit from discontinued operations
    
    
    
    
    
    
    (121
    )Minority interest
    
    
    
    
    
    
    23Depreciation and amortization
    
    
    274
    
    
    
    178Share-based compensation expense related to employee stock options
    
    
    58
    
    
    
    Loss on retirement of assets
    
    
    2
    
    
    
    12Bad debt expense
    
    
    19
    
    
    
    (74
    )Exchange of options in merger of subsidiary
    
    
    
    
    
    
    5,729Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,441
    )
    
    
    3,284Inventory (net of effect of acquisition)
    
    
    (1,156
    )
    
    
    283Accounts payable
    
    
    5,845
    
    
    
    5,560Other assets and liabilities
    
    
    417
    
    
    
    728Net cash provided by continuing operations
    
    
    2,494
    
    
    
    10,064Net operating activities of discontinued operations
    
    
    (310
    )
    
    
    522Net cash provided by operating activities
    
    
    2,184
    
    
    
    10,586CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of Datatran Network Systems
    
    
    (1,000
    )
    
    
    Transaction costs paid for acquisitions
    
    
    (29
    )
    
    
    Capital expenditures (net of effect of acquisitions)
    
    
    (351
    )
    
    
    (92
    )Net cash used in investing activities of continuing operations
    
    
    (1,380
    )
    
    
    (92
    )Net investing activities of discontinued operations:Proceeds from sale of Stratasoft stock, net of transaction costs
    
    
    1,117
    
    
    
    Capital expenditures
    
    
    
    
    
    
    (41
    )Net cash used in investing activities
    
    
    (263
    )
    
    
    (133
    )CASH FLOWS FROM FINANCING ACTIVITIES:Exercise of stock options
    
    
    256
    
    
    
    12Net payments of short-term interest bearing credit facilities
    
    
    (1,742
    )
    
    
    (8,122
    )Payments on notes payable
    
    
    (116
    )
    
    
    (3
    )Net cash used in financing activities of continuing operations
    
    
    (1,602
    )
    
    
    (8,113
    )Net financing activities of discontinued operations
    
    
    (1
    )
    
    
    (22
    )Net cash used in financing activities
    
    
    (1,603
    )
    
    
    (8,135
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    318
    
    
    
    2,318CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    2,597
    
    
    
    4,975CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    2,915
    
    
    $
    7,293SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    74
    
    
    $
    219Cash paid for income taxes
    
    $
    1
    
    
    $
    25SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:Acquisition of INX minority interest:Issuance of common stock
    
    
    
    
    
    $
    1,530Transaction costs accrued
    
    
    
    
    
    
    180Minority interest acquired
    
    
    
    
    
    
    (302
    )Acquisition of Datatran Network Systems:Fair value of assets acquired
    
    $
    1,544
    
    
    
    Common stock issued
    
    
    (515
    )
    
    
    Sale of Stratasoft  warrants issued
    
    
    128
    
    
    
    
  7




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\

INX INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
 1. Description of Business
  2. Basis of Presentation
   3. Revenue Recognition
   Products revenue
  8




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Software
 Technical support services revenue,
 Revenue for fixed and flat fee services contracts
 Other service revenue
 Arrangements with multiple deliverables
  
    
    The customer is required to pay the product billing in its entirety independent
of any services performed.
    
    The product has value to the customer on a stand alone basis and pricing is
comparable whether sold with or without services.
    
    The product is standard equipment not significantly altered by installation.
    
    Installation of the product can be performed by many other companies.
    
    Although there is a general right of return relative to delivered product,
delivery of the undelivered items is considered probable and is substantially in the
control of the Company.
   9




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4. Share-Based Compensation
   Equity Compensation Plans
  1996 Incentive Stock Plan and the 1996 Non-Employee Director Stock Option Plan
 2000 Stock Incentive Plan
 Grant-Date Fair Value
  10




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Three MonthsEnded March 31,2006
    
    2005Expected volatility
    
    
    65.1
    %
    
    
    78.6
    %Expected term (in years)
    
    
    6.5
    
    
    
    8.0Risk-free interest rate
    
    
    4.83
    %
    
    
    3.63
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
  Share-Based Compensation Expense
   Three Months EndedMarch 31,2006Cost of products and services  services
    
    $
    14Selling, general and administrative expenses
    
    
    44Share-based compensation from continuing operations before income taxes
    
    
    58Income tax benefit
    
    
    Share-based compensation from continuing operations
    
    
    58Share-based compensation from discontinued operations
    
    
    2Total share-based compensation
    
    $
    60
  Three Months EndedMarch 31, 2005Basic and diluted:Net loss as reported
    
    $
    (6,508
    )Deduct: share-based employee compensation, net of related income tax effect
    
    
    40Pro forma net loss
    
    $
    (6,548
    )Net loss per share:Basic  as reported
    
    $
    (1.25
    )Basic  pro forma
    
    $
    (1.26
    )Diluted  as reported
    
    $
    (1.25
    )Diluted  pro forma
    
    $
    (1.26
    )
 11




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Option Activity
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term (Years)
    
    ValueOptions outstanding at December 31,
2005
    
    
    1,944,610
    
    
    $
    2.66Granted
    
    
    28,367
    
    
    
    6.10
    
    
    
    
    
    
    $
    3Exercised
    
    
    (125,670
    )
    
    
    2.04
    
    
    
    
    
    
    $
    612Canceled
    
    
    (1,800
    )
    
    
    5.26Options outstanding March 31, 2006
    
    
    1,845,507
    
    
    $
    2.75
    
    
    
    6.84
    
    
    $
    6,684Options exercisable at March 31, 2006
    
    
    1,541,724
    
    
    $
    2.12
    
    
    
    6.40
    
    
    $
    6,407Options vested and options expected to vest at March 31, 2006
    
    
    1,802,714
    
    
    $
    2.70
    
    
    
    6.79
    
    
    $
    6,626
   5. Acquisitions
  Datatran Network Systems
    12




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Network Architects, Corp.
   InfoGroup Northwest, Inc.
    Datatran
    
    
    Network
    
    
    InfoGroupNetwork
    
    
    Architects,
    
    
    Northwest,Systems
    
    
    Corp.
    
    
    Inc.Allocated acquisition cost:Intangibles  customer relationships and noncompete agreements amortized over 3 years
    
    $
    
    
    
    $
    241
    
    
    $
    134Inventory
    
    
    25
    
    
    
    
    
    
    
    Property and equipment
    
    
    38
    
    
    
    500
    
    
    
    297Security deposits
    
    
    
    
    
    
    4
    
    
    
    6Goodwill
    
    
    1,481
    
    
    
    3,620
    
    
    
    2,086Total acquisition cost
    
    $
    1,544
    
    
    $
    4,365
    
    
    $
    2,523
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Pro Forma Summary (Unaudited)
  Three Months EndedMarch 31,2006
    
    
    2005Revenues
    
    $
    26,321
    
    
    $
    32,320Net loss from continuing operations
    
    $
    (643
    )
    
    $
    (5,250
    )Net loss per share from continuing operations:Basic
    
    $
    (0.11
    )
    
    $
    (0.93
    )Diluted
    
    $
    (0.11
    )
    
    $
    (0.93
    )Weighted average shares used in calculation:Basic and diluted
    
    
    6,074,763
    
    
    
    5,655,584
 6. Discontinued Operations
  
    
    All outstanding Stratasoft common stock was sold for a purchase price of $3,000, which
has been or is subject to reduction as follows:
 
    
    $800 placed in escrow, which is available to satisfy indemnified losses, if
any, as defined in the Agreement. Funds placed in escrow are excluded from the
estimated gain stated above. Approximately $100 in indemnified losses have been
incurred as of March 31, 2006.
    
    $221 representing a preliminary net working capital adjustment, as defined.
The final working capital adjustment recorded during the three months ended March 31,
2006, resulted in the further reduction of the sale proceeds of $40.
    
    The Company indemnified the buyer for potential losses as defined in the
Agreement to a maximum of $1,400, inclusive of amounts placed in escrow. Excess funds
held in escrow will be released on January 26, 2008 unless retained in escrow for
potential indemnified losses as allowed in the Agreement under certain circumstances.
 
    
    The Company may receive additional consideration in the form of 10% of the outstanding
Stratasoft common stock if revenue exceeds $10,000 for any consecutive twelve month period
within two years of closing.
    
    The Company may receive additional cash consideration if Stratasoft is sold by the buyer
to another party for an amount in excess of $15,000.
   14




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Three Months Ended March 31,2006
    
    
    2005Revenues:Stratasoft
    
    $
    268
    
    
    $
    1,441Valerent
    
    
    1,682
    
    
    
    1,666Total
    
    $
    1,950
    
    
    $
    3,107Income (loss) from operations of discontinued subsidiaries:Stratasoft
    
    $
    (260
    )
    
    $
    (527
    )Valerent
    
    
    (46
    )
    
    
    2Total
    
    
    (306
    )
    
    
    (525
    )Gain on disposal of discontinued operations:Stratasoft
    
    
    302
    
    
    
    Cumulative effect of change in accounting method at Stratasoft
    
    
    
    
    
    
    566Income tax benefit
    
    
    
    
    
    
    (121
    )Loss from discontinued operations, net of taxes
    
    $
    (4
    )
    
    $
    (970
    )
  March 31,
    
    
    December 31,2006
    
    
    2005(Audited)Current assets of discontinued operations:Accounts receivable, net
    
    $
    1,271
    
    
    $
    1,533Inventory
    
    
    36
    
    
    
    592Costs and earnings in excess of billings
    
    
    
    
    
    
    266Notes receivable and other current assets
    
    
    
    
    
    
    173Total
    
    $
    1,307
    
    
    $
    2,564Noncurrent assets of discontinued operations:Property and equipment, net
    
    $
    106
    
    
    $
    392Patents, net
    
    
    
    
    
    
    653Other noncurrent assets
    
    
    
    
    
    
    12Total
    
    $
    106
    
    
    $
    1,057Current liabilities of discontinued operations:Accounts payable
    
    $
    441
    
    
    $
    620Billings in excess of costs and earnings
    
    
    
    
    
    
    201Accrued expenses
    
    
    940
    
    
    
    1,376Deferred revenue
    
    
    34
    
    
    
    644Current portion of long-term debt
    
    
    
    
    
    
    95Total
    
    $
    1,415
    
    
    $
    2,936Long-term liabilities of discontinued operations:Long-term debt
    
    $
    
    
    
    $
    7
 7. Earnings Per Share
   15




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Three months endedMarch 31,2006
    
    
    2005Numerator for basic earnings per share:Net loss from continuing operations
    
    $
    (524
    )
    
    $
    (5,538
    )Loss on disposal of discontinued operations, net of income taxes
    
    
    (4
    )
    
    
    (970
    )Net loss
    
    $
    (528
    )
    
    $
    (6,508
    )Numerator for diluted earnings per share:Net loss from continuing operations
    
    $
    (524
    )
    
    $
    (5,538
    )Loss on disposal of discontinued operations, net of income taxes
    
    
    (4
    )
    
    
    (970
    )Net loss
    
    $
    (528
    )
    
    $
    (6,508
    )Denominator for basic earnings per share  weighted-average shares outstanding
    
    
    6,047,840
    
    
    
    5,210,794Effect of dilutive securities  shares issuable from assumed conversion of
common stock options and restricted stock
    
    
    
    
    
    
    Denominator for diluted earnings per share  weighted-average shares outstanding
    
    
    6,047,840
    
    
    
    5,210,794
 8. Stockholders Equity
  9. Elimination of Minority Interest in InterNetwork Experts, Inc.
  10. Commitments and Contingencies
 Litigation Inacom Corp v. I-Sector Corporation, f/k/a Allstar Systems, Inc.
  11. Restatement
  Total Cost ofTotal Revenue
    
    Products and Services
    
    Gross ProfitThree Months Ended March 31, 2006:As previously reported
    
    $
    30,787
    
    
    $
    25,380
    
    
    $
    5,407As restated
    
    $
    26,276
    
    
    $
    20,869
    
    
    $
    5,407Three Months Ended March 31, 2005:As previously reported
    
    $
    24,661
    
    
    $
    21,000
    
    
    $
    3,661As restated
    
    $
    21,282
    
    
    $
    17,621
    
    
    $
    3,661
 16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Special notice regarding forward-looking statements
  General
    
    
    Transfer of listing from American Stock Exchange to The Nasdaq Capital Market
    
    Elimination of holding company structure and sale of two subsidiaries
    
    Acquisitions completed during the first quarter of 2006 and second quarter of 2005
    
    Adoption of Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, (SFAS 123R)
 Transfer of listing from American Stock Exchange to The Nasdaq Capital Market
  17




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##### Table of Contents



Elimination of Holding Company Structure and Sale of Two Subsidiaries
  
    
    All outstanding Stratasoft common stock was sold for a purchase price of $3,000, which
has been or is subject to reduction as follows:
 
    
    $800 placed in escrow, which is available to satisfy indemnified losses, if
any, as defined in the Agreement. Funds placed in escrow are excluded from the
estimated gain stated above. Approximately $100 in indemnified losses have been
incurred as of March 31, 2006.
    
    $221 representing a preliminary net working capital adjustment, as defined.
The final working capital adjustment recorded during the three months ended March 31,
2006, resulted in the further reduction of the sale proceeds of $40.
    
    We indemnified the buyer for potential losses as defined in the Agreement to
a maximum of $1,400, inclusive of amounts placed in escrow. Excess funds held in
escrow will be released on January 26, 2008 unless retained in escrow for potential
indemnified losses as allowed in the Agreement under certain circumstances.
 
    
    We may receive additional consideration in the form of 10% of the outstanding Stratasoft
common stock if revenue exceeds $10,000 for any consecutive twelve month period within two
years of closing.
    
    We may receive additional cash consideration if Stratasoft is sold by the buyer to
another party for an amount in excess of $15,000.
  Acquisitions
  Datatran Network Systems
   18




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##### Table of Contents



Network Architects, Corp.
   InfoGroup Northwest, Inc.
   Adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (SFAS 123R)
  19




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##### Table of Contents



Grant-Date Fair Value
  Three MonthsEnded March 31,2006
    
    2005Expected volatility
    
    
    65.1
    %
    
    
    78.6
    %Expected term (in years)
    
    
    6.5
    
    
    
    8.0Risk-free interest rate
    
    
    4.83
    %
    
    
    3.63
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
  Share-Based Compensation Expense
   Three Months EndedMarch 31, 2006Cost of products and services  services
    
    $
    14Selling, general and administrative expenses
    
    
    44Share-based compensation from continuing operations before income taxes
    
    
    58Income tax benefit
    
    
    Share-based compensation from continuing operations
    
    $
    58Share-based compensation from discontinued operations
    
    
    2Total share-based compensation
    
    $
    60
  20




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##### Table of Contents



Three Months EndedMarch 31, 2005Basic and diluted:Net loss as reported
    
    $
    (6,508
    )Deduct: share-based employee compensation, net of related tax effect
    
    
    40Pro forma net loss
    
    $
    (6,548
    )Net loss per share:Basic  as reported
    
    $
    (1.25
    )Basic  pro forma
    
    $
    (1.26
    )Diluted  as reported
    
    $
    (1.25
    )Diluted  pro forma
    
    $
    (1.26
    )
 Option Activity
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term (Years)
    
    ValueOptions outstanding at December 31, 2005
    
    
    1,944,610
    
    
    $
    2.66Granted
    
    
    28,367
    
    
    
    6.10
    
    
    
    
    
    
    $
    3Exercised
    
    
    (125,670
    )
    
    
    2.04
    
    
    
    
    
    
    $
    612Canceled
    
    
    (1,800
    )
    
    
    5.26Options outstanding March 31, 2006
    
    
    1,845,507
    
    
    $
    2.75
    
    
    
    6.84
    
    
    $
    6,684Options exercisable at March 31, 2006
    
    
    1,541,724
    
    
    $
    2.12
    
    
    
    6.40
    
    
    $
    6,407Options vested and options expected to vest at March 31, 2006
    
    
    1,802,714
    
    
    $
    2.70
    
    
    
    6.79
    
    
    $
    6,626
   Results Of Operations
 Period Comparisons.
 21




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##### Table of Contents



Three Months Ended March 31,2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %(As
restated
Note 11)Revenue:Products
    
    $
    22,311
    
    
    
    84.9
    
    
    $
    19,774
    
    
    
    92.9Services
    
    
    3,965
    
    
    
    15.1
    
    
    
    1,508
    
    
    
    7.1Total revenue
    
    
    26,276
    
    
    
    100.0
    
    
    
    21,282
    
    
    
    100.0Gross profit:Products
    
    
    4,418
    
    
    
    19.8
    
    
    
    3,337
    
    
    
    16.9Services
    
    
    989
    
    
    
    24.9
    
    
    
    324
    
    
    
    21.5Total gross profit
    
    
    5,407
    
    
    
    20.6
    
    
    
    3,661
    
    
    
    17.2Selling, general and administrative expenses
    
    
    5,845
    
    
    
    22.3
    
    
    
    9,010
    
    
    
    42.3Operating loss
    
    
    (438
    )
    
    
    (1.7
    )
    
    
    (5,349
    )
    
    
    (25.1
    )Interest and other (income) expense, net
    
    
    85
    
    
    
    0.3
    
    
    
    68
    
    
    
    0.3Income tax expense
    
    
    1
    
    
    
    0.0
    
    
    
    121
    
    
    
    0.6Net loss from continuing operations
    
    
    (524
    )
    
    
    (2.0
    )
    
    
    (5,538
    )
    
    
    (26.0
    )Loss from discontinued operations, net of income taxes
    
    
    (4
    )
    
    
    (0.0
    )
    
    
    (970
    )
    
    
    (4.6
    )Net loss
    
    $
    (528
    )
    
    
    (2.0
    )
    
    $
    (6,508
    )
    
    
    (30.6
    )
 Three Months Ended March 31, 2006 Compared To the Three Months Ended March 31, 2005
 Revenue
 Gross Profit
 Selling, General and Administrative Expenses
 Operating Loss
 Interest and Other Income (Expense), Net
 Loss from discontinued operations, net of tax.
 22




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##### Table of Contents



Net loss
 Tax Loss Carryforward.
 Liquidity and Capital Resources
 Sources of Liquidity
  Accounts Receivable.
 Inventory.
 Contractual Obligations
  Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 Years(Dollars in thousands)Lease obligations
    
    $
    2,051
    
    
    $
    910
    
    
    $
    1,097
    
    
    $
    44
    
    
    $
    
  Datatran Network Systems (DNS).
 23




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##### Table of Contents



Network Architects, Corp (Netarch).
 InfoGroup Northwest, Inc. (InfoGroup).
    Credit Facility.
 
    
    The agreement provides a discretionary line of credit up to a maximum aggregate amount of
$40,000 to purchase inventory from CPC approved vendors.
    
    The agreement provides a working capital revolving line of credit under the above line of
credit with an aggregate outstanding sublimit of $10,000 within the overall $40,000 limit.
    
    The working capital revolving line of credit incurs interest payable monthly at the rate
of prime plus 0.5%.
    
    The agreement contains customary covenants regarding maintenance of insurance coverage,
maintenance of and reporting collateral, and submission of financial statements. The
agreement also contains restrictive financial covenants measured as of the end of each
calendar quarter as detailed further below.
    
    The line of credit is collateralized by substantially all of our assets.
  Total Credit Facility
    
    $
    40,000Borrowing base limitation
    
    
    (20,638
    )Total borrowing capacity
    
    
    19,362Less interest-bearing borrowings
    
    
    (722
    )Less non-interest bearing advances included in accounts payable
    
    
    (15,621
    )Total unused availability
    
    $
    3,019
 24




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##### Table of Contents



60-day 60-day
   Cash Flows.
 Operating Activities.
  Investing Activities.
 Financing Activities.
 Restatement
  Total Cost ofTotal Revenue
    
    
    Products and Services
    
    
    Gross ProfitThree Months Ended March 31, 2006:As previously reported
    
    $
    30,787
    
    
    $
    25,380
    
    
    $
    5,407As restated
    
    $
    26,276
    
    
    $
    20,869
    
    
    $
    5,407Three Months Ended March 31, 2005:As previously reported
    
    $
    27,661
    
    
    $
    21,000
    
    
    $
    3,661As restated
    
    $
    21,282
    
    
    $
    17,621
    
    
    $
    3,661
 Related Party Transactions
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  25




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##### Table of Contents



Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Inacom Corp v. I-Sector Corporation, f/k/a Allstar Systems, Inc.
 
 Item 6. Exhibits
  26




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##### Table of Contents



INX Inc.Date: August 18, 2006
    By:
    /s/ BRIAN FONTANABrian Fontana, Vice Presidentand Chief Financial Officer 27




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##### Table of Contents



Index to Exhibits
 ExhibitNo.
    
    Description
    
    Filed Herewith or Incorporated by Reference From:2.1
    
    Stock Purchase Agreement by and among The Resource Group
International Limited and INX Inc. dated January 26, 2006
    
    Exhibit 2.1 to Form 8-K filed January 31, 20063.1
    
    Certificate of Ownership and Merger
    
    Exhibit 3.1 to Form 8-K filed January 6, 200610.1
    
    Asset Purchase Agreement by and among INX Inc., Datatran Network
Systems and Mel Sarowitz dated February 3, 2006
    
    Exhibit 1.1 to Form 8-K filed February 6, 200610.2
    
    Amendment Seven, dated March 2, 2006, to Systems Integrator
Agreement by and between Cisco Systems, Inc. and Internetwork
Experts, Inc., dated November 13, 2001
    
    Exhibit 10.25 to Form 10-K filed March 27, 200610.3
    
    Amendment Eight, dated March 20, 2006, to Systems Integrator
Agreement by and between Cisco Systems, Inc. and INX Inc. (formerly
Internetwork Experts, Inc.), dated November 13, 2001
    
    Exhibit 10.26 to Form 10-K filed March 27, 200631.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
    
    Filed herewith.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
    
    Filed herewith.32.1
    
    Section 1350 Certification of Principal Executive Officer
    
    Filed herewith.32.2
    
    Section 1350 Certification of Principal Financial Officer
    
    Filed herewith.
 28