##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 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 June 30, 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
 R £
  £ £ R
 £ R




---



##### 



INX Inc. and Subsidiaries
 FORM 10-Q for the Quarter Ended June 30, 2006
 INDEX
  
 Part I. Financial InformationItem 1. Financial Statements (Unaudited):Condensed Consolidated Statements of Operations for the three months ended June 30, 2006 and 2005Condensed Consolidated Statements of Operations for the six months ended June 30, 2006 and 2005Condensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005Condensed Consolidated Statement of Stockholders Equity for the six months ended June 30, 2006Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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 4. Submission of Matters to a Vote of Security HoldersItem 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
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements (Unaudited):
  
 
 Three months endedJune 30,2006
    
    
    2005(As restated-
Note 12)Revenue:Products
    
    $
    33,322
    
    
    $
    25,543Services
    
    
    5,356
    
    
    
    2,822Total revenue
    
    
    38,678
    
    
    
    28,365Cost of products and services:Products
    
    
    26,962
    
    
    
    22,063Services
    
    
    4,084
    
    
    
    1,846Total cost of products and services
    
    
    31,046
    
    
    
    23,909Gross profit
    
    
    7,632
    
    
    
    4,456Selling, general and administrative expenses
    
    
    7,001
    
    
    
    4,044Operating income
    
    
    631
    
    
    
    412Interest and other income (expense), net
    
    
    (18
    )
    
    
    (26
    )Income from continuing operations before income taxes
    
    
    613
    
    
    
    386Income tax expense (benefit)
    
    
    
    
    
    
    (27
    )Net income from continuing operations
    
    
    613
    
    
    
    413Income (loss) from discontinued operations, net of income taxes
    
    
    143
    
    
    
    (831
    )Net income (loss)
    
    $
    756
    
    
    $
    (418
    )Net income per share:Basic:Income from continuing operations
    
    $
    0.10
    
    
    $
    0.07Income (loss) from discontinued operations, net of income taxes
    
    
    0.02
    
    
    
    (0.15
    )Net income (loss) per share
    
    $
    0.12
    
    
    $
    (0.08
    )Diluted:Income from continuing operations
    
    $
    0.08
    
    
    $
    0.07Income (loss) from discontinued operations, net of income taxes
    
    
    0.02
    
    
    
    (0.15
    )Net income (loss) per share
    
    $
    0.10
    
    
    $
    (0.08
    )Shares used in computing net income per share:Basic
    
    
    6,223,118
    
    
    
    5,621,589Diluted
    
    
    7,324,469
    
    
    
    5,621,589
  3




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##### Table of Contents



Six months endedJune 30,2006
    
    
    2005(As restated
Note 12)Revenue:Products
    
    $
    55,633
    
    
    $
    45,317Services
    
    
    9,321
    
    
    
    4,330Total revenue
    
    
    64,954
    
    
    
    49,647Cost of products and services:Products
    
    
    44,855
    
    
    
    38,500Services
    
    
    7,060
    
    
    
    3,030Total cost of products and services
    
    
    51,915
    
    
    
    41,530Gross profit
    
    
    13,039
    
    
    
    8,117Selling, general and administrative expenses
    
    
    12,846
    
    
    
    13,054Operating income (loss)
    
    
    193
    
    
    
    (4,937
    )Interest and other income (expense), net
    
    
    (103
    )
    
    
    (94
    )Income (loss) from continuing operations before income taxes
    
    
    90
    
    
    
    (5,031
    )Income tax expense (benefit)
    
    
    1
    
    
    
    (50
    )Net income (loss) from continuing operations
    
    
    89
    
    
    
    (4,981
    )Income (loss) from discontinued operations, net of income taxes
    
    
    139
    
    
    
    (1,945
    )Net income (loss)
    
    $
    228
    
    
    $
    (6,926
    )Net income per share:Basic:Income (loss) from continuing operations
    
    $
    0.01
    
    
    $
    (0.92
    )Income (loss) from discontinued operations, net of income taxes
    
    
    0.03
    
    
    
    (0.35
    )Net income (loss) per share
    
    $
    0.04
    
    
    $
    (1.27
    )Diluted:Income (loss) from continuing operations
    
    $
    0.01
    
    
    $
    (0.92
    )Income (loss) from discontinued operations, net of income taxes
    
    
    0.02
    
    
    
    (0.35
    )Net income (loss) per share
    
    $
    0.03
    
    
    $
    (1.27
    )Shares used in computing net income per share:Basic
    
    
    6,135,350
    
    
    
    5,433,778Diluted
    
    
    7,202,067
    
    
    
    5,433,778
  4




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June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    4,290
    
    
    $
    2,597Accounts receivable, net of allowance of $222 and $161
    
    
    35,339
    
    
    
    24,903Inventory
    
    
    690
    
    
    
    79Other current assets
    
    
    858
    
    
    
    881Current assets of discontinued operations
    
    
    733
    
    
    
    2,564Total current assets
    
    
    41,910
    
    
    
    31,024Property and equipment, net of accumulated depreciation of $2,730 and $2,344
    
    
    2,818
    
    
    
    2,050Goodwill
    
    
    10,905
    
    
    
    7,121Intangible and other assets, net of accumulated amortization of $1,166 and $1,007
    
    
    409
    
    
    
    393Noncurrent assets of discontinued operations
    
    
    106
    
    
    
    1,057Total assets
    
    $
    56,148
    
    
    $
    41,645LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Notes payable and current portion of long-term debt
    
    $
    4,646
    
    
    $
    2,707Accounts payable
    
    
    24,411
    
    
    
    13,825Accrued expenses
    
    
    4,532
    
    
    
    3,696Other current liabilities
    
    
    1,005
    
    
    
    468Current liabilities of discontinued operations
    
    
    573
    
    
    
    2,936Total current liabilities
    
    
    35,167
    
    
    
    23,632Long-term liabilities of discontinued operations
    
    
    
    
    
    
    7Other long-term liabilities
    
    
    142
    
    
    
    Commitments 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, 6,347,098 and
5,975,626 shares issued
    
    
    64
    
    
    
    60Additional paid-in capital
    
    
    29,395
    
    
    
    27,546Common stock issuable
    
    
    752
    
    
    
    Retained deficit
    
    
    (9,372
    )
    
    
    (9,600
    )Total stockholders equity
    
    
    20,839
    
    
    
    18,006Total liabilities and stockholders equity
    
    $
    56,148
    
    
    $
    41,645
  5




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##### Table of Contents



$.01 par value
    
    
    Additional
    
    
    CommonCommon Stock
    
    
    Paid-In
    
    
    Stock
    
    
    RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    Issuable
    
    
    Deficit
    
    
    TotalBalance at December 31, 2005
    
    
    5,975,626
    
    
    $
    60
    
    
    $
    27,546
    
    
    $
    
    
    
    $
    (9,600
    )
    
    $
    18,006Exercise of common stock options
    
    
    199,431
    
    
    
    2
    
    
    
    441
    
    
    
    
    
    
    
    
    
    
    
    443Issuance of shares for Datatran acquisition
    
    
    73,108
    
    
    
    1
    
    
    
    514
    
    
    
    
    
    
    
    
    
    
    
    515Issuance of shares as additional purchase
price consideration for Network Architect,
Corp. acquisition
    
    
    97,413
    
    
    
    1
    
    
    
    570
    
    
    
    
    
    
    
    
    
    
    
    571Value of shares to be issued as additional
purchase price consideration for InfoGroup
Northwest, Inc. acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    752
    
    
    
    
    
    
    
    752Share-based compensation expense related
to employee stock options
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    186Common stock grant to employee
    
    
    1,520
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    128Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    228
    
    
    
    228Balance at June 30, 2006
    
    
    6,347,098
    
    
    $
    64
    
    
    $
    29,395
    
    
    $
    752
    
    
    $
    (9,372
    )
    
    $
    20,839
  6




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##### Table of Contents



Six months endedJune 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    228
    
    
    $
    (6,926
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Net (income) loss from discontinued operations
    
    
    (139
    )
    
    
    1,928Tax expense from discontinued operations
    
    
    
    
    
    
    17Minority interest
    
    
    
    
    
    
    23Depreciation and amortization
    
    
    549
    
    
    
    409Share-based compensation expense related to employee stock options and stock grant
    
    
    182
    
    
    
    Loss on retirement of assets
    
    
    3
    
    
    
    28Bad debt expense
    
    
    26
    
    
    
    (44
    )Exchange of options in merger of subsidiary
    
    
    
    
    
    
    5,729Issuance of stock options
    
    
    10
    
    
    
    57Changes in operating assets and liabilities:Accounts receivable
    
    
    (10,462
    )
    
    
    (4,970
    )Inventory (net of effect of acquisition)
    
    
    (586
    )
    
    
    (7,761
    )Accounts payable
    
    
    10,586
    
    
    
    14,549Other assets and liabilities
    
    
    785
    
    
    
    1,116Net cash provided by continuing operations
    
    
    1,182
    
    
    
    4,155Net operating activities of discontinued operations
    
    
    (433
    )
    
    
    583Net cash provided by operating activities
    
    
    749
    
    
    
    4,738CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of Datatran Network Systems
    
    
    (1,000
    )
    
    
    Acquisition of Network Architects, Corp.
    
    
    (394
    )
    
    
    (2,300
    )Acquisition of InfoGroup Northwest, Inc.
    
    
    
    
    
    
    (1,900
    )Transaction costs paid for acquisitions
    
    
    (36
    )
    
    
    (332
    )Capital expenditures (net of effect of acquisitions)
    
    
    (1,124
    )
    
    
    (264
    )Net cash used in investing activities of continuing operations
    
    
    (2,554
    )
    
    
    (4,796
    )Net investing activities of discontinued operations:Proceeds from sale of Stratasoft stock, net of transaction costs
    
    
    1,117
    
    
    
    Capital expenditures
    
    
    
    
    
    
    (53
    )Net cash used in investing activities
    
    
    (1,437
    )
    
    
    (4,849
    )CASH FLOWS FROM FINANCING ACTIVITIES:Exercise of stock options
    
    
    443
    
    
    
    205Net borrowings (payments) of short-term interest bearing credit facilities
    
    
    2,016
    
    
    
    (78
    )Payments on notes payable
    
    
    (77
    )
    
    
    (11
    )Net cash provided by financing activities of continuing operations
    
    
    2,382
    
    
    
    116Net financing activities of discontinued operations
    
    
    (1
    )
    
    
    (46
    )Net cash provided by financing activities
    
    
    2,381
    
    
    
    70NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    1,693
    
    
    
    (41
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    2,597
    
    
    
    4,975CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    4,290
    
    
    $
    4,934
 7




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##### Table of Contents



Six months endedJune 30,2006
    
    2005SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    90
    
    
    $
    219Cash paid for income taxes
    
    $
    1
    
    
    $
    33SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:Acquisition of INX minority interest:Issuance of common stock
    
    $
    
    
    
    $
    1,530Transaction costs accrued
    
    
    
    
    
    
    180Minority interest acquired
    
    
    
    
    
    
    (302
    )Acquisition of Network Architects, Corp.:Fair value of assets acquired
    
    
    965
    
    
    
    4,300Common stock issued
    
    
    (571
    )
    
    
    (2,000
    )Acquisition of InfoGroup Northwest, Inc.:Fair value of assets acquired
    
    
    1,504
    
    
    
    2,400Additional purchase price payable
    
    
    (717
    )
    
    
    Transaction costs accrued
    
    
    (70
    )
    
    
    Common stock issuable
    
    
    (717
    )
    
    
    (500
    )Acquisition of Datatran Network Systems:Fair value of assets acquired
    
    
    1,551
    
    
    
    Common stock issued
    
    
    (515
    )
    
    
    Sale of Stratasoft  warrants issued
    
    
    128
    
    
    
    
  8




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##### Table of Contents



INX INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
 1. Description of Business
  2. Basis of Presentation
   3. Revenue Recognition
   Products revenue
  9




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##### Table of Contents



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.
   10




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##### Table of Contents



4. Recent Accounting Pronouncements
   5. Share-Based Compensation
   Equity Compensation Plans
  1996 Incentive Stock Plan and the 1996 Non-Employee Director Stock Option Plan
 11




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##### Table of Contents



2000 Stock Incentive Plan
 Grant-Date Fair Value
  Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2006
    
    2005
    
    2006
    
    2005Expected volatility
    
    
    64.1
    %
    
    
    58.6
    %
    
    
    64.4
    %
    
    
    66.4
    %Expected term (in years)
    
    
    6.2
    
    
    
    8.0
    
    
    
    6.3
    
    
    
    8.0Risk-free interest rate
    
    
    5.1
    %
    
    
    3.9
    %
    
    
    5.0
    %
    
    
    3.8
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  Share-Based Compensation Expense
   Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2006
    
    
    June 30, 2006Cost of products and services  services
    
    $
    14
    
    
    $
    28Selling, general and administrative expenses
    
    
    110
    
    
    
    154Share-based compensation from continuing operations before income taxes
    
    
    124
    
    
    
    182Income tax benefit
    
    
    
    
    
    
    Share-based compensation from continuing operations
    
    
    124
    
    
    
    182Share-based compensation from discontinued operations
    
    
    2
    
    
    
    4Total share-based compensation
    
    $
    126
    
    
    $
    186Impact of total share-based compensation on net income per share:Basic
    
    $
    (0.02
    )
    
    $
    (0.03
    )Diluted
    
    $
    (0.02
    )
    
    $
    (0.03
    )
  12




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Basic and diluted:Net loss as reported
    
    $
    (418
    )
    
    $
    (6,926
    )Add: share-based
employee compensation
recognized, net of
related income tax
effect
    
    
    57
    
    
    
    5,786Deduct: share-based
employee compensation,
net of related income
tax effect
    
    
    (557
    )
    
    
    (6,326
    )Pro forma net loss
    
    $
    (918
    )
    
    $
    (7,466
    )Net loss per share:Basic  as reported
    
    $
    (0.08
    )
    
    $
    (1.27
    )Basic  pro forma
    
    $
    (0.16
    )
    
    $
    (1.37
    )Diluted  as reported
    
    $
    (0.08
    )
    
    $
    (1.27
    )Diluted  pro forma
    
    $
    (0.16
    )
    
    $
    (1.37
    )
  Option Activity
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term (Years)
    
    ValueOptions outstanding at December 31, 2005
    
    
    1,944,610
    
    
    $
    2.66Granted
    
    
    113,367
    
    
    
    6.38
    
    
    
    
    
    
    $
    Exercised
    
    
    (199,431
    )
    
    
    2.22
    
    
    
    
    
    
    $
    753Canceled
    
    
    (17,790
    )
    
    
    5.53Options outstanding June 30, 2006
    
    
    1,840,756
    
    
    $
    2.91
    
    
    
    6.86
    
    
    $
    5,695Options exercisable at June 30, 2006
    
    
    1,506,880
    
    
    $
    2.21
    
    
    
    6.32
    
    
    $
    5,716Options vested and options expected to vest at June 30, 2006
    
    
    1,798,412
    
    
    $
    2.91
    
    
    
    6.93
    
    
    $
    5,550
   13




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##### Table of Contents



6. Acquisitions
  Datatran Network Systems
    Network Architects, Corp.
    14




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##### Table of Contents



InfoGroup Northwest, Inc.
 
  Datatran
    
    
    Network
    
    
    InfoGroupNetwork
    
    
    Architects,
    
    
    Northwest,Systems
    
    
    Corp.
    
    
    Inc.Allocated acquisition cost:Intangibles  customer relationships and noncompete agreements amortized over 3 years
    
    $
    168
    
    
    $
    241
    
    
    $
    134Inventory
    
    
    25
    
    
    
    
    
    
    
    Property and equipment
    
    
    38
    
    
    
    500
    
    
    
    297Security deposits
    
    
    5
    
    
    
    4
    
    
    
    6Goodwill
    
    
    1,315
    
    
    
    4,584
    
    
    
    3,591Total acquisition cost
    
    $
    1,551
    
    
    $
    5,329
    
    
    $
    4,028
 Pro Forma Summary (Unaudited)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    38,678
    
    
    $
    35,174
    
    
    $
    64,999
    
    
    $
    67,494Net income (loss) from continuing operations
    
    $
    613
    
    
    $
    39
    
    
    $
    (30
    )
    
    $
    (5,211
    )Net income (loss) per share from continuing operations:Basic
    
    $
    0.10
    
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    (0.89
    )Diluted
    
    $
    0.08
    
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    (0.89
    )Weighted average shares used in calculation:Basic
    
    
    6,223,118
    
    
    
    6,066,379
    
    
    
    6,162,273
    
    
    
    5,878,568Diluted
    
    
    7,324,469
    
    
    
    6,066,379
    
    
    
    7,228,990
    
    
    
    5,878,568
 7. Discontinued Operations
  15




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##### Table of Contents




    
    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 $339 in indemnified losses have been paid
as of July 31, 2006.
    
    $221 representing a preliminary net working capital adjustment, as defined.
The final working capital adjustment recorded during the six-month period ended June
30, 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.
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Stratasoft
    
    $
    
    
    
    $
    1,943
    
    
    $
    268
    
    
    $
    3,384Valerent
    
    
    1,364
    
    
    
    1,588
    
    
    
    3,045
    
    
    
    3,254Total
    
    $
    1,364
    
    
    $
    3,531
    
    
    $
    3,313
    
    
    $
    6,638Income (loss) from operations of discontinued
subsidiaries:Stratasoft
    
    $
    
    
    
    $
    (771
    )
    
    $
    (260
    )
    
    $
    (1,298
    )Valerent
    
    
    (326
    )
    
    
    (130
    )
    
    
    (372
    )
    
    
    (128
    )Total
    
    
    (326
    )
    
    
    (901
    )
    
    
    (632
    )
    
    
    (1,426
    )Gain on disposal of discontinued operations:Stratasoft
    
    
    
    
    
    
    
    
    
    
    302
    
    
    
    Telecom and Computer Products Divisions
    
    
    469
    
    
    
    64
    
    
    
    469
    
    
    
    64Cumulative effect of change in accounting method
at Stratasoft
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    566Income tax expense (benefit)
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    17Income (loss) from discontinued operations, net of
income taxes
    
    $
    143
    
    
    $
    (831
    )
    
    $
    139
    
    
    $
    (1,945
    )
  June 30,
    
    
    December 31,2006
    
    
    2005Current assets of discontinued operations:Accounts receivable, net
    
    $
    698
    
    
    $
    1,533Inventory
    
    
    35
    
    
    
    592Costs and earnings in excess of billings
    
    
    
    
    
    
    266Notes receivable and other current assets
    
    
    
    
    
    
    173Total
    
    $
    733
    
    
    $
    2,564Noncurrent assets of discontinued operations:Property and equipment, net
    
    $
    106
    
    
    $
    392Patents, net
    
    
    
    
    
    
    653Other noncurrent assets
    
    
    
    
    
    
    12Total
    
    $
    106
    
    
    $
    1,057
 16




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##### Table of Contents



June 30,
    
    
    December 31,2006
    
    
    2005Current liabilities of discontinued operations:Accounts payable
    
    $
    362
    
    
    $
    620Billings in excess of costs and earnings
    
    
    
    
    
    
    201Accrued expenses
    
    
    183
    
    
    
    1,376Deferred revenue
    
    
    28
    
    
    
    644Current portion of long-term debt
    
    
    
    
    
    
    95Total
    
    $
    573
    
    
    $
    2,936Long-term liabilities of discontinued operations:Long-term debt
    
    $
    
    
    
    $
    7
 8. Earnings Per Share
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator for basic and diluted earnings per share:Net income (loss) from continuing operations
    
    $
    613
    
    
    $
    413
    
    
    $
    89
    
    
    $
    (4,981
    )Income (loss) from discontinued operations,
net of income taxes
    
    
    143
    
    
    
    (831
    )
    
    
    139
    
    
    
    (1,945
    )Net income (loss)
    
    $
    756
    
    
    $
    (418
    )
    
    $
    228
    
    
    $
    (6,926
    )Denominator for basic earnings per share 
weighted-average shares outstanding
    
    
    6,223,118
    
    
    
    5,621,589
    
    
    
    6,135,350
    
    
    
    5,433,778Effect of dilutive securities  shares issuable from
assumed conversion of common stock options and
restricted stock
    
    
    1,101,351
    
    
    
    
    
    
    
    1,066,717
    
    
    
    Denominator for diluted earnings per share 
weighted-average shares outstanding
    
    
    7,324,469
    
    
    
    5,621,589
    
    
    
    7,202,067
    
    
    
    5,433,778
 9. Elimination of Minority Interest in InterNetwork Experts, Inc.
  10. Texas Margin Tax
  17




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##### Table of Contents



11. Commitments and Contingencies
 Litigation Inacom Corp v. I-Sector Corporation, f/k/a Allstar Systems, Inc.
  12. 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 June 30, 2005:As previously reported
    
    $
    30,817
    
    
    $
    26,361
    
    
    $
    4,456As restated
    
    $
    28,365
    
    
    $
    23,909
    
    
    $
    4,456Six Months Ended June 30, 2005:As previously reported
    
    $
    55,478
    
    
    $
    47,361
    
    
    $
    8,117As restated
    
    $
    49,647
    
    
    $
    41,530
    
    
    $
    8,117
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Special notice regarding forward-looking statements
  General
  18




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##### Table of Contents




    
    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
  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 $339 in indemnified losses have been paid
as of July 31, 2006.
    
    $221 representing a preliminary net working capital adjustment, as defined.
The final working capital adjustment recorded during the three-month period 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.
 19




---



##### Table of Contents



Acquisitions
  Datatran Network Systems
    Network Architects, Corp.
    InfoGroup Northwest, Inc.
  20




---



##### Table of Contents



Adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (SFAS 123R)
   Equity Compensation Plans
  1996 Incentive Stock Plan and the 1996 Non-Employee Director Stock Option Plan
 2000 Stock Incentive Plan
 21




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##### Table of Contents



Grant-Date Fair Value
  Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2006
    
    2005
    
    2006
    
    2005Expected volatility
    
    
    64.1
    %
    
    
    58.6
    %
    
    
    64.4
    %
    
    
    66.4
    %Expected term (in years)
    
    
    6.2
    
    
    
    8.0
    
    
    
    6.3
    
    
    
    8.0Risk-free interest rate
    
    
    5.1
    %
    
    
    3.9
    %
    
    
    5.0
    %
    
    
    3.8
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  Share-Based Compensation Expense
   Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2006
    
    
    June 30, 2006Cost of products and services  services
    
    $
    14
    
    
    $
    28Selling, general and administrative expenses
    
    
    110
    
    
    
    154Share-based compensation from continuing operations before income taxes
    
    
    124
    
    
    
    182Income tax benefit
    
    
    
    
    
    
    Share-based compensation from continuing operations
    
    
    124
    
    
    
    182Share-based compensation from discontinued operations
    
    
    2
    
    
    
    4Total share-based compensation
    
    $
    126
    
    
    $
    186Impact of total share-based compensation on net income per share:Basic
    
    $
    (0.02
    )
    
    $
    (0.03
    )Diluted
    
    $
    (0.02
    )
    
    $
    (0.03
    )
  22




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Basic and diluted:Net loss as reported
    
    $
    (418
    )
    
    $
    (6,926
    )Add: share-based
employee compensation
recognized, net of
related income tax
effect
    
    
    57
    
    
    
    5,786Deduct: share-based
employee compensation,
net of related income
tax effect
    
    
    (557
    )
    
    
    (6,326
    )Pro forma net loss
    
    $
    (918
    )
    
    $
    (7,466
    )Net loss per share:Basic  as reported
    
    $
    (0.08
    )
    
    $
    (1.27
    )Basic  pro forma
    
    $
    (0.16
    )
    
    $
    (1.37
    )Diluted  as reported
    
    $
    (0.08
    )
    
    $
    (1.27
    )Diluted  pro forma
    
    $
    (0.16
    )
    
    $
    (1.37
    )
  Option Activity
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term (Years)
    
    ValueOptions outstanding at December 31, 2005
    
    
    1,944,610
    
    
    $
    2.66Granted
    
    
    113,367
    
    
    
    6.38
    
    
    
    
    
    
    $
    Exercised
    
    
    (199,431
    )
    
    
    2.22
    
    
    
    
    
    
    $
    753Canceled
    
    
    (17,790
    )
    
    
    5.53Options outstanding June 30, 2006
    
    
    1,840,756
    
    
    $
    2.91
    
    
    
    6.86
    
    
    $
    5,695Options exercisable at June 30, 2006
    
    
    1,506,880
    
    
    $
    2.21
    
    
    
    6.32
    
    
    $
    5,716Options vested and options expected to vest at June 30, 2006
    
    
    1,798,412
    
    
    $
    2.91
    
    
    
    6.93
    
    
    $
    5,550
   23




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##### Table of Contents



Results Of Operations
 Period Comparisons.
 Three Months Ended June 30, 2006 Compared To the Three Months Ended June 30, 2005
 Three Months Ended June 30,2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %(As restated
Note 12)Revenue:Products
    
    $
    33,322
    
    
    
    86.2
    
    
    $
    25,543
    
    
    
    90.1Services
    
    
    5,356
    
    
    
    13.8
    
    
    
    2,822
    
    
    
    9.9Total revenue
    
    
    38,678
    
    
    
    100.0
    
    
    
    28,365
    
    
    
    100.0Gross profit:Products
    
    
    6,360
    
    
    
    19.1
    
    
    
    3,480
    
    
    
    13.6Services
    
    
    1,272
    
    
    
    23.7
    
    
    
    976
    
    
    
    34.6Total gross profit
    
    
    7,632
    
    
    
    19.7
    
    
    
    4,456
    
    
    
    15.7Selling, general and administrative expenses
    
    
    7,001
    
    
    
    18.1
    
    
    
    4,044
    
    
    
    14.2Operating income
    
    
    631
    
    
    
    1.6
    
    
    
    412
    
    
    
    1.5Interest and other income (expense), net
    
    
    (18
    )
    
    
    (0.0
    )
    
    
    (26
    )
    
    
    (0.1
    )Income tax expense (benefit)
    
    
    
    
    
    
    0.0
    
    
    
    (27
    )
    
    
    (0.1
    )Net income from continuing operations
    
    
    613
    
    
    
    1.6
    
    
    
    413
    
    
    
    1.5Income (loss) from discontinued operations, net of income taxes
    
    
    143
    
    
    
    0.4
    
    
    
    (831
    )
    
    
    (3.0
    )Net income (loss)
    
    $
    756
    
    
    
    2.0
    
    
    $
    (418
    )
    
    
    (1.5
    )
 Revenue
 Gross
Profit
 Selling, General and Administrative Expenses
 24




---



##### Table of Contents



Operating Income
 Interest and Other Income (Expense), Net
 Income (loss) from discontinued operations, net of tax.
 Net income (loss)
 Tax Loss Carryforward.
 Six Months Ended June 30, 2006 Compared To the Six Months Ended June 30, 2005
 Six Months Ended June 30,2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %(As restated note 12)Revenue:Products
    
    $
    55,633
    
    
    
    85.6
    
    
    $
    45,317
    
    
    
    91.3Services
    
    
    9,321
    
    
    
    14.4
    
    
    
    4,330
    
    
    
    8.7Total revenue
    
    
    64,954
    
    
    
    100.0
    
    
    
    49,647
    
    
    
    100.0Gross profit:Products
    
    
    10,778
    
    
    
    19.4
    
    
    
    6,817
    
    
    
    15.0Services
    
    
    2,261
    
    
    
    24.3
    
    
    
    1,300
    
    
    
    30.0Total gross profit
    
    
    13,039
    
    
    
    20.1
    
    
    
    8,117
    
    
    
    16.3Selling, general and administrative expenses
    
    
    12,846
    
    
    
    19.8
    
    
    
    13,054
    
    
    
    26.2Operating income
    
    
    193
    
    
    
    0.3
    
    
    
    (4,937
    )
    
    
    (9.9
    )Interest and other income (expense), net
    
    
    (103
    )
    
    
    (0.2
    )
    
    
    (94
    )
    
    
    (0.2
    )Income tax expense (benefit)
    
    
    1
    
    
    
    0.0
    
    
    
    (50
    )
    
    
    (0.1
    )Net income from continuing operations
    
    
    89
    
    
    
    0.1
    
    
    
    (4,981
    )
    
    
    (10.0
    )Income (loss) from discontinued operations, net of income taxes
    
    
    139
    
    
    
    0.3
    
    
    
    (1,945
    )
    
    
    (4.0
    )Net income (loss)
    
    $
    228
    
    
    
    0.4
    
    
    $
    (6,926
    )
    
    
    (14.0
    )
 Revenue
 Gross Profit
 25




---



##### Table of Contents



Selling, General and Administrative Expenses
 Operating Income (Loss)
 Interest and Other Income (Expense), Net
 Income (loss) from discontinued operations, net of tax.
 Net income (loss)
 Tax Loss Carryforward.
 Liquidity and Capital Resources
 Sources of Liquidity
  Accounts Receivable.
 26




---



##### Table of Contents



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
    
    $
    2,967
    
    
    $
    979
    
    
    $
    1,501
    
    
    $
    487
    
    
    $
    Purchase obligations
    
    
    284
    
    
    
    142
    
    
    
    142
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    3,251
    
    
    $
    1,121
    
    
    $
    1,643
    
    
    $
    487
    
    
    $
    
  Datatran Network Systems (DNS).
 Network Architects, Corp (Netarch).
 InfoGroup Northwest, Inc. (InfoGroup).
   27




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##### Table of Contents



Credit Facility.
 
    
    The agreement provides a discretionary line of credit up to a maximum aggregate amount of
$40,000 to purchase inventory from CPC approved vendors.
    
    The agreement provides a working capital revolving line of credit under the above line of
credit with an aggregate outstanding sublimit of $10,000 within the overall $40,000 limit.
    
    The working capital revolving line of credit incurs interest payable monthly at the rate
of prime plus 0.5%.
    
    The agreement contains customary covenants regarding maintenance of insurance coverage,
maintenance of and reporting collateral, and submission of financial statements. The
agreement also contains restrictive financial covenants measured as of the end of each
calendar quarter as detailed further below.
    
    The line of credit is collateralized by substantially all of our assets.
  Total Credit Facility
    
    $
    40,000Borrowing base limitation
    
    
    (13,093
    )Total borrowing capacity
    
    
    26,907Less interest-bearing borrowings
    
    
    (4,636
    )Less non-interest bearing advances included in accounts payable
    
    
    (21,264
    )Total unused availability
    
    $
    1,007
     Cash Flows.
 Operating Activities.
 28




---



##### Table of Contents



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 June 30, 2005:As previously reported
    
    $
    30,817
    
    
    $
    26,361
    
    
    $
    4,456As restated
    
    $
    28,365
    
    
    $
    23,909
    
    
    $
    4,456Six Months Ended June 30, 2005:As previously reported
    
    $
    55,478
    
    
    $
    47,361
    
    
    $
    8,117As restated
    
    $
    49,647
    
    
    $
    41,530
    
    
    $
    8,117 Related Party Transactions
  
    
    Renewal of the lease for five years from the date we exercise the option to renew.
    
    Base rental rate under the renewed lease would be 98% of the current base rent per month of $37.
    
    We are required to provide
Equities with written notice of our intention to
exercise this option no later than 90 days prior to the
current expiration of the lease, January 31, 2007.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
   29




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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 4. Submission of Matters to a Vote of Security Holders
  
 Item 6. Exhibits
  30




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##### Table of Contents



INX Inc.Date:
August 21, 2006
    
    By:
    
    /s/ BRIAN FONTANABrian Fontana, Vice Presidentand Chief Financial Officer
 31




---



##### Table of Contents



Index to Exhibits
 ExhibitNo.
    
    Description
    
    Filed Herewith or Incorporated by Reference From:10.1
    
    Fourth Amendment to I-Sector Corporate Incentive Plan
    
    Exhibit 10.1 to Form 8-K filed June 6, 200610.2
    
    Option to Renew Lease Between INX Inc. and Allstar Equities, Inc.
dated May 31, 2006
    
    Exhibit 10.1 to Form 8-K filed June 6, 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.
 32