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
      1934





For
the quarterly period ended September 30, 2008





OR





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





For
the transition period from January 1, 2008 to September 30, 2008





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 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 8,742,977 shares of common stock outstanding as of October 31,
2008.




1




INX
Inc. and Subsidiaries


FORM
10-Q for the Quarter Ended September 30, 2008





INDEX







Part I. Financial
      Information
                    3Item 1. Financial Statements
      (Unaudited):
                    3Condensed Consolidated
      Statements of Earnings for the three months endedSeptember30,
      2008 and 2007
                    3Condensed Consolidated
      Statements of Earnings for theninemonths endedSeptember30,
      2008 and 2007
                    4Condensed Consolidated Balance
      Sheets atSeptember30, 2008 and December 31,
      2007
                    5Condensed Consolidated Statement
      of Stockholders’ Equity for theninemonths endedSeptember30,
      2008
                    6Condensed Consolidated Statements
      of Cash Flows for theninemonths endedSeptember30,
      2008 and 2007
                    8Notes to Condensed Consolidated
      Financial Statements
                    9Item 2. Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
                    14Item 4T. Controls and
      Procedures
                    18Part II. Other
      Information
                    19Item 1. Legal
      Proceedings
                    19Item 1A. Risk Factors
                    19Item 2. Unregistered Sales of
      Equity Securities and Use of Proceeds
                    28Item 6.
      Exhibits
                    29Signature
                    29


2
 Index


PART 1. FINANCIAL INFORMATION





Item 1. Financial Statements (Unaudited):





INX INC.
AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS


(In
thousands, except share and per share amounts)


(Unaudited)





Three
      MonthsEnded
      September 30,2008
                                                  
                                                  
                                                  2007Revenue:Products
                                                  
                                                  $
                                                  59,576
                                                  
                                                  
                                                  $
                                                  45,222Services
                                                  
                                                  
                                                  12,366
                                                  
                                                  
                                                  
                                                  6,776Total
      revenue
                                                  
                                                  
                                                  71,942
                                                  
                                                  
                                                  
                                                  51,998Cost
      of products and services:Products
                                                  
                                                  
                                                  49,509
                                                  
                                                  
                                                  
                                                  37,335Services
                                                  
                                                  
                                                  9,107
                                                  
                                                  
                                                  
                                                  5,110Total
      cost of products and services
                                                  
                                                  
                                                  58,616
                                                  
                                                  
                                                  
                                                  42,445Gross
      profit
                                                  
                                                  
                                                  13,326
                                                  
                                                  
                                                  
                                                  9,553Selling,
      general and administrative expenses
                                                  
                                                  
                                                  12,545
                                                  
                                                  
                                                  
                                                  8,543Operating
      income
                                                  
                                                  
                                                  781
                                                  
                                                  
                                                  
                                                  1,010Interest
      and other income (expense), net
                                                  
                                                  
                                                  106
                                                  
                                                  
                                                  
                                                  (17
                                                  )Income
      from continuing operations before income taxes
                                                  
                                                  
                                                  887
                                                  
                                                  
                                                  
                                                  993Income
      tax expense
                                                  
                                                  
                                                  470
                                                  
                                                  
                                                  
                                                  7Net
      income from continuing operations
                                                  
                                                  
                                                  417
                                                  
                                                  
                                                  
                                                  986Income
      from discontinued operations, net of income taxes
                                                  
                                                  
                                                  9
                                                  
                                                  
                                                  
                                                  38Net
      income
                                                  
                                                  $
                                                  426
                                                  
                                                  
                                                  $
                                                  1,024Net
      income per share:Basic:Income
      from continuing operations
                                                  
                                                  $
                                                  0.05
                                                  
                                                  
                                                  $
                                                  0.14Income
      from discontinued operations, net of income taxes
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —Net
      income per share
                                                  
                                                  $
                                                  0.05
                                                  
                                                  
                                                  $
                                                  0.14Diluted:Income
      from continuing operations
                                                  
                                                  $
                                                  0.05
                                                  
                                                  
                                                  $
                                                  0.12Income
      from discontinued operations, net of income taxes
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  0.01Net
      income per share
                                                  
                                                  $
                                                  0.05
                                                  
                                                  
                                                  $
                                                  0.13Shares
      used in computing net income per share:Basic
                                                  
                                                  
                                                  8,746,691
                                                  
                                                  
                                                  
                                                  7,081,511Diluted
                                                  
                                                  
                                                  9,338,353
                                                  
                                                  
                                                  
                                                  8,037,221





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


3
 Index


INX INC.
AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS


(In
thousands, except share and per share amounts)


(Unaudited)





Nine
      MonthsEnded
      September 30,2008
                                                  
                                                  
                                                  2007Revenue:Products
                                                  
                                                  $
                                                  161,497
                                                  
                                                  
                                                  $
                                                  131,690Services
                                                  
                                                  
                                                  34,079
                                                  
                                                  
                                                  
                                                  19,678Total
      revenue
                                                  
                                                  
                                                  195,576
                                                  
                                                  
                                                  
                                                  151,368Cost
      of products and services:Products
                                                  
                                                  
                                                  132,457
                                                  
                                                  
                                                  
                                                  108,696Services
                                                  
                                                  
                                                  23,894
                                                  
                                                  
                                                  
                                                  14,567Total
      cost of products and services
                                                  
                                                  
                                                  156,351
                                                  
                                                  
                                                  
                                                  123,263Gross
      profit
                                                  
                                                  
                                                  39,225
                                                  
                                                  
                                                  
                                                  28,105Selling,
      general and administrative expenses
                                                  
                                                  
                                                  34,800
                                                  
                                                  
                                                  
                                                  25,757Operating
      income
                                                  
                                                  
                                                  4,425
                                                  
                                                  
                                                  
                                                  2,348Interest
      and other (expense), net
                                                  
                                                  
                                                  (65
                                                  )
                                                  
                                                  
                                                  —Income
      from continuing operations before income taxes
                                                  
                                                  
                                                  4,360
                                                  
                                                  
                                                  
                                                  2,348Income
      tax expense
                                                  
                                                  
                                                  1,833
                                                  
                                                  
                                                  
                                                  21Net
      income from continuing operations
                                                  
                                                  
                                                  2,527
                                                  
                                                  
                                                  
                                                  2,327Income
      from discontinued operations, net of income taxes
                                                  
                                                  
                                                  23
                                                  
                                                  
                                                  
                                                  97Net
      income
                                                  
                                                  $
                                                  2,550
                                                  
                                                  
                                                  $
                                                  2,424Net
      income per share:Basic:Income
      from continuing operations
                                                  
                                                  $
                                                  0.32
                                                  
                                                  
                                                  $
                                                  0.34Income
      from discontinued operations, net of income taxes
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  0.01Net
      income per share
                                                  
                                                  $
                                                  0.32
                                                  
                                                  
                                                  $
                                                  0.35Diluted:Income
      from continuing operations
                                                  
                                                  $
                                                  0.30
                                                  
                                                  
                                                  $
                                                  0.30Income
      from discontinued operations, net of income taxes
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  0.01Net
      income per share
                                                  
                                                  $
                                                  0.30
                                                  
                                                  
                                                  $
                                                  0.31Shares
      used in computing net income per share:Basic
                                                  
                                                  
                                                  7,958,966
                                                  
                                                  
                                                  
                                                  6,870,521Diluted
                                                  
                                                  
                                                  8,579,268
                                                  
                                                  
                                                  
                                                  7,853,269





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


4
 Index


INX INC.
AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(In
thousands, except share and par value amounts)





September
      30,
                                      
                                      
                                      December 31,2008
                                      
                                      
                                      2007(Unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                      
                                      $
                                      15,806
                                      
                                      
                                      $
                                      9,340Accounts
      receivable, net of allowance of $201 and $470
                                      
                                      
                                      51,077
                                      
                                      
                                      
                                      45,128Inventory,
      net
                                      
                                      
                                      1,872
                                      
                                      
                                      
                                      1,439Deferred
      income taxes
                                      
                                      
                                      2,100
                                      
                                      
                                      
                                      2,100Other
      current assets
                                      
                                      
                                      1,101
                                      
                                      
                                      
                                      2,062Total
      current assets
                                      
                                      
                                      71,956
                                      
                                      
                                      
                                      60,069Property
      and equipment, net of accumulated depreciation of $4,822 and
      $3,728
                                      
                                      
                                      5,593
                                      
                                      
                                      
                                      4,421Goodwill
                                      
                                      
                                      21,438
                                      
                                      
                                      
                                      16,603Intangible
      and other assets, net of accumulated amortization of $2,076 and
      $1,592
                                      
                                      
                                      4,146
                                      
                                      
                                      
                                      3,148Total
      assets
                                      
                                      $
                                      103,133
                                      
                                      
                                      $
                                      84,241LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Notes
      payable
                                      
                                      $
                                      36
                                      
                                      
                                      $
                                      6,200Current
      portion of capitalized lease obligations
                                      
                                      
                                      77
                                      
                                      
                                      
                                      —Accounts
      payable
                                      
                                      
                                      42,719
                                      
                                      
                                      
                                      37,233Accrued
      expenses
                                      
                                      
                                      8,409
                                      
                                      
                                      
                                      5,363Other
      current liabilities
                                      
                                      
                                      757
                                      
                                      
                                      
                                      1,440Total
      current liabilities
                                      
                                      
                                      51,998
                                      
                                      
                                      
                                      50,236Long-term
      Liabilities:Deferred
      income taxes
                                      
                                      
                                      1,565
                                      
                                      
                                      
                                      1,565Long-term
      portion of capitalized lease obligations
                                      
                                      
                                      176
                                      
                                      
                                      
                                      —Other
      long-term liabilities
                                      
                                      
                                      301
                                      
                                      
                                      
                                      413Total
      long-term liabilities
                                      
                                      
                                      2,042
                                      
                                      
                                      
                                      1,978Commitments
      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, 8,704,977 and
      7,548,892 shares issued
                                      
                                      
                                      87
                                      
                                      
                                      
                                      75Additional
      paid-in capital
                                      
                                      
                                      51,001
                                      
                                      
                                      
                                      36,497Accumulated
      deficit
                                      
                                      
                                      (1,995
                                      )
                                      
                                      
                                      (4,545
                                      )Total
      stockholders’ equity
                                      
                                      
                                      49,093
                                      
                                      
                                      
                                      32,027Total
      liabilities and stockholders’ equity
                                      
                                      $
                                      103,133
                                      
                                      
                                      $
                                      84,241





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


5
 Index


INX INC.
AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’
EQUITY


(In
thousands, except share amounts)


(Unaudited)





$.01
      par value
                          
                          
                          AdditionalCommon
      Stock
                          
                          
                          Paid-In
                          
                          
                          AccumulatedShares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Deficit
                          
                          
                          TotalBalance
      at December 31, 2007
                          
                          
                          7,548,892
                          
                          
                          $
                          75
                          
                          
                          $
                          36,497
                          
                          
                          $
                          (4,545
                          )
                          
                          $
                          32,027Exercise
      of common stock options
                          
                          
                          149,224
                          
                          
                          
                          2
                          
                          
                          
                          825
                          
                          
                          
                          —
                          
                          
                          
                          827Issuance
      of vested restricted common stock
                          
                          
                          8,015
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Issuance
      of shares as purchase price consideration and broker fees for Access Flow,
      Inc. acquisition
                          
                          
                          250,627
                          
                          
                          
                          2
                          
                          
                          
                          3,270
                          
                          
                          
                          —
                          
                          
                          
                          3,272Issuance
      of shares as additional purchase price consideration for Network
      Architects, Corp. acquisition
                          
                          
                          75,000
                          
                          
                          
                          1
                          
                          
                          
                          739
                          
                          
                          
                          —
                          
                          
                          
                          740Share-based
      compensation expense related to employee stock options
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          476
                          
                          
                          
                          —
                          
                          
                          
                          476Share-based
      compensation expense related to employee restricted stock
      grants
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          507
                          
                          
                          
                          —
                          
                          
                          
                          507Share-based
      compensation expense related to Employee Stock Purchase
    Plan
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          82
                          
                          
                          
                          —
                          
                          
                          
                          82Share-based
      compensation expense related to directors’ stock grants
                          
                          
                          7,443
                          
                          
                          
                          —
                          
                          
                          
                          90
                          
                          
                          
                          —
                          
                          
                          
                          90Excess
      tax benefit from stock option exercises
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          1,590
                          
                          
                          
                          —
                          
                          
                          
                          1,590Purchase
      and retirement of treasury stock resulting from grantee election to fund
      payroll taxes out of restricted stock grant
                          
                          
                          (1,568
                          )
                          
                          
                          —
                          
                          
                          
                          (12
                          )
                          
                          
                          —
                          
                          
                          
                          (12
                          )Issuance
      of common stock, net of issuance costs
                          
                          
                          900,000
                          
                          
                          
                          9
                          
                          
                          
                          8,861
                          
                          
                          
                          —
                          
                          
                          
                          8,870Purchase
      and retirement of common stock
                          
                          
                          (264,271
                          )
                          
                          
                          (2
                          )
                          
                          
                          (2,094
                          )
                          
                          
                          —
                          
                          
                          
                          (2,096
                          )Issuance
      of common stock under the Employee Stock Purchase Plan
                          
                          
                          28,460
                          
                          
                          
                          —
                          
                          
                          
                          164
                          
                          
                          
                          —
                          
                          
                          
                          164Exercise
      of warrants
                          
                          
                          3,155
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Other
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          6
                          
                          
                          
                          —
                          
                          
                          
                          6Net
      income
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          2,550
                          
                          
                          
                          2,550Balance
      at September 30, 2008
                          
                          
                          8,704,977
                          
                          
                          $
                          87
                          
                          
                          $
                          51,001
                          
                          
                          $
                          (1,995
                          )
                          
                          $
                          49,093





The
accompanying notes are an integral part of this condensed consolidated financial
statement


6
 Index


INX INC.
AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)





Nine
      MonthsEnded
      September 30,2008
                                        
                                        
                                        2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                        
                                        $
                                        2,550
                                        
                                        
                                        $
                                        2,424Adjustments
      to reconcile net income to net cash provided by operating
      activities:Net
      (income) from discontinued operations
                                        
                                        
                                        (23
                                        )
                                        
                                        
                                        (97
                                        )Tax
      expense from discontinued operations
                                        
                                        
                                        7
                                        
                                        
                                        
                                        —Depreciation
      and amortization
                                        
                                        
                                        1,766
                                        
                                        
                                        
                                        1,143Share-based
      compensation expense for stock options, stock grants, and employee stock
      purchase plan
                                        
                                        
                                        1,155
                                        
                                        
                                        
                                        520Issuance
      of warrants
                                        
                                        
                                        —
                                        
                                        
                                        
                                        86Loss
      on retirement of assets
                                        
                                        
                                        27
                                        
                                        
                                        
                                        11Bad
      debt expense
                                        
                                        
                                        —
                                        
                                        
                                        
                                        29Changes
      in operating assets and liabilities, net of effect of
      acquisitions:Accounts
      receivable
                                        
                                        
                                        (5,949
                                        )
                                        
                                        
                                        6,031Inventory
                                        
                                        
                                        (428
                                        )
                                        
                                        
                                        13Accounts
      payable
                                        
                                        
                                        5,474
                                        
                                        
                                        
                                        (1,343
                                        )Other
      assets and liabilities
                                        
                                        
                                        3,147
                                        
                                        
                                        
                                        81Net
      cash provided by continuing operations
                                        
                                        
                                        7,726
                                        
                                        
                                        
                                        8,898Net
      operating activities of discontinued operations
                                        
                                        
                                        16
                                        
                                        
                                        
                                        43Net
      cash provided by operating activities
                                        
                                        
                                        7,742
                                        
                                        
                                        
                                        8,941CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of Access Flow, Inc.
                                        
                                        
                                        (2,500
                                        )
                                        
                                        
                                        —Acquisition
      of Select, Inc. purchase price adjustments
                                        
                                        
                                        10
                                        
                                        
                                        
                                        (3,386
                                        )Acquisition
      of Datatran Network Systems
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (250
                                        )Transaction
      costs paid for acquisitions
                                        
                                        
                                        (161
                                        )
                                        
                                        
                                        (354
                                        )Capital
      expenditures (net of effect of acquisitions)
                                        
                                        
                                        (1,785
                                        )
                                        
                                        
                                        (1,127
                                        )Net
      cash used in investing activities of continuing operations
                                        
                                        
                                        (4,436
                                        )
                                        
                                        
                                        (5,117
                                        )Net
      investing activities of discontinued operations
                                        
                                        
                                        —
                                        
                                        
                                        
                                        15Net
      cash used in investing activities
                                        
                                        
                                        (4,436
                                        )
                                        
                                        
                                        (5,102
                                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Issuance
      of common stock
                                        
                                        
                                        8,870
                                        
                                        
                                        
                                        —Issuance
      of common stock for purchases under Employee Stock Purchase
      Plan
                                        
                                        
                                        164
                                        
                                        
                                        
                                        —Exercise
      of stock options
                                        
                                        
                                        827
                                        
                                        
                                        
                                        1,029Excess
      tax benefits from stock option exercises
                                        
                                        
                                        1,590
                                        
                                        
                                        
                                        —Purchase
      of common stock
                                        
                                        
                                        (2,096
                                        )
                                        
                                        
                                        —Purchase
      of treasury stock resulting from grantee election
                                        
                                        
                                        (12
                                        )
                                        
                                        
                                        —Net
      (payments) borrowings of short-term interest bearing credit
      facilities
                                        
                                        
                                        (6,000
                                        )
                                        
                                        
                                        1,650Debt
      issuance costs paid
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (12
                                        )Proceeds
      from other short-term borrowings
                                        
                                        
                                        251
                                        
                                        
                                        
                                        472Payments
      on notes payable and capitalized lease obligations
                                        
                                        
                                        (434
                                        )
                                        
                                        
                                        (259
                                        )Net
      cash provided by financing activities of continuing
    operations
                                        
                                        
                                        3,160
                                        
                                        
                                        
                                        2,880NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                                        
                                        
                                        6,466
                                        
                                        
                                        
                                        6,719CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                                        
                                        
                                        9,340
                                        
                                        
                                        
                                        1,795CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                                        
                                        $
                                        15,806
                                        
                                        
                                        $
                                        8,514





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


7
 Index


INX INC.
AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)





Nine
      MonthsEnded
      September 30,2008
                    
                    
                    2007SUPPLEMENTAL
      NONCASH INVESTING AND FINANCING ACTIVITIES:Acquisition
      of Access Flow, Inc.:Fair
      value of net assets acquired
                    
                    $
                    6,011
                    
                    
                    $
                    —Common
      stock issued
                    
                    
                    (3,272
                    )
                    
                    
                    —Transaction
      costs and noncompete agreements accrued
                    
                    
                    (78
                    )
                    
                    
                    —Acquisition
      of Select, Inc.:Fair
      value of net assets acquired
                    
                    
                    —
                    
                    
                    
                    6,566Common
      stock issued
                    
                    
                    —
                    
                    
                    
                    (2,362
                    )Noncompete
      agreement liability
                    
                    
                    —
                    
                    
                    
                    (450
                    )Transaction
      costs and noncompete agreements accrued
                    
                    
                    —
                    
                    
                    
                    (50
                    )Acquisition
      of Network Architects, Corp.:Fair
      value of assets acquired
                    
                    
                    740
                    
                    
                    
                    500Common
      stock issued
                    
                    
                    (740
                    )
                    
                    
                    (250
                    )Acquisition
      of Datatran Network Systems:Fair
      value of assets acquired
                    
                    
                    —
                    
                    
                    
                    677Common
      stock issued
                    
                    
                    —
                    
                    
                    
                    (677
                    )Debt
      issuance costs accrued
                    
                    
                    —
                    
                    
                    
                    (53
                    )





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


8
 Index


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 Internet Protocol (“IP”) network-based
solutions for enterprise-class organizations such as corporations, schools and
federal, state and local governmental agencies based primarily on Cisco System,
Inc. (“Cisco”) technology. These solutions consist of network infrastructure, IP
voice and video communications systems, wireless network connectivity, network
storage systems, data center, and network and data security and include
planning, design and implementation professional services as well as managed
support services.





The
condensed consolidated financial statements of INX Inc. include the wholly owned
subsidiaries Select, Inc. and Valerent, Inc.





2.
Basis of Presentation





The
accompanying unaudited financial data as of September 30, 2008 and for the
three-month and nine-month periods ended September 30, 2008 and 2007 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, 2007 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,
2007.





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 September 30, 2008, results of operations for the
three-month and nine-month periods ended September 30, 2008 and 2007, cash flows
for the nine month periods ended September 30, 2008 and 2007, and stockholders’
equity for the nine month period ended September 30, 2008, have been included.
The results of the interim periods are not necessarily indicative of results for
the full year or any future period.





Certain
prior period amounts in the balance sheet presented herein have been
reclassified to conform to the current period presentation. $250 in long-term
rent has been reclassified from current liabilities to other long-term
liabilities at December 31, 2007.





3.
Recent Accounting Pronouncements





In
October 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position SFAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (“FSP
157-3”). FSP 157-3 clarified the application of SFAS 157.  FSP 157-3
demonstrated how the fair value of a financial asset is determined when the
market for that financial asset is inactive.  FSP 157-3 was effective
upon issuance, including prior periods for which financial statements had not
been issued.  The implementation of this standard did not have an
impact on our consolidated financial statements.





In June
2008, the FASB issued 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. FSP EITF 03-6-1 is effective
for fiscal years beginning after December 15, 2008.  The Company is
currently assessing the impact of FSP EITF 03-6-1 and anticipates any impact to
basic earnings per share will be immaterial.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles(“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS 162 is effective on November 16, 2008. The Company does not
expect the adoption of SFAS 162 to have a material effect on its
consolidated financial statements.





In April
2008, the FASB issued a FASB Staff Position on SFAS No. 142-3, Determination of the Useful Life of
Intangible Assets(“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful
life of a recognized intangible asset under Statement 142 and the period of
expected cash flows used to measure the fair value of the asset under FASB
Statement No. 141 (revised 2007), Business Combinations,and
other U.S. generally accepted accounting principles. This FSP is effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
Company does not expect the adoption of SFAS No. 142-3 to have a
material effect on its consolidated financial statements.





In
December 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 110 (“SAB 110”) to extend the use of “simplified method”
for estimating the expected term of “plain vanilla” employee stock options for
award valuation. The method was initially allowed under Staff Accounting
Bulletin No. 107 (“SAB 107”) in contemplation of the adoption of SFAS 123(R) to
expense the compensation cost based on the grant date fair value of the award.
SAB 110 does not provide an expiration date for the use of the method. However,
as more external information about exercise behavior will be available over
time, it is expected that this method will not be used when more relevant
guidance is available.  The adoption of SAB 110 did not have a
material impact on the Company’s consolidated financial
statements.


9
 Index


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 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 does anticipate that the adoption of SFAS 141R will
have a future impact on the way in which business combinations will be accounted
for compared to current practice. SFAS 141R is effective for the Company
beginning January 1, 2009. Early adoption is not permitted. The Company is
currently evaluating the impact that SFAS 141R will have on its future
acquisitions.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated
Financial Statements — an amendment of ARB No. 51” (SFAS 160). SFAS 160
was issued to improve the relevance, comparability, and transparency of
financial information provided to investors by requiring all entities to report
noncontrolling (minority) interests in subsidiaries in the same way, that is, as
equity in the consolidated financial statements. Moreover, SFAS 160 eliminates
the diversity that currently exists in accounting for transactions between an
entity and noncontrolling interests by requiring they be treated as equity
transactions. SFAS 160 is effective for the Company beginning January 1, 2009.
The adoption of SFAS 160 is not expected to have a material impact on the
Company’s consolidated financial statements.





In
September 2006, the FASB issued Statement on Financial Accounting Standards No.
157 “Fair Value Measurements”(“SFAS 157”). SFAS 157 clarifies the definition of fair value for
financial reporting, establishes a framework for measuring fair value and
requires additional disclosures about the use of fair value measurements. SFAS
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. However,
on February 12, 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-2
(“FSP 157-2”) which delays the effective date of SFAS 157 for all non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). FSP 157-2 partially defers the effective date of SFAS 157 to
fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years for items within the scope of FSP 157-2. In addition, FASB issued a
staff position, FSP SFAS No. 157-1, to clarify that SFAS No. 157 does not apply
under SFAS No. 13, Accounting
for Leases,
and other accounting pronouncements that address fair value measurements for
purposes of lease classifications under SFAS No. 13 and FSP SFAS No. 157-3 to
provide guidance for determining the fair value of a financial asset when the
market for that asset is not active. The Company elected to defer adoption
of SFAS 157 relating to non-recurring, non-financial assets and liabilities
until January 1, 2009. The Company has not yet determined the impact, if any, of
adopting SFAS 157 with respect to non-recurring, non-financial assets and
liabilities on its consolidated financial statements. The partial adoption of
SFAS No. 157 did not have a material effect on the Company’s consolidated
financial statements.





4.
Acquisitions





Access
Flow, Inc.





Under an
Asset Purchase Agreement dated June 6, 2008 (the “APA”), the Company purchased
the operations andcertain assets,
and assumed specified liabilities of Access Flow, Inc.
(“AccessFlow”).  AccessFlow isa 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)
238,692 shares of the Company’s common stock.  The common stock was
valued at $13.06 per share or $3,116.  The number of common stock
shares issued was determined by dividing $2,626,920 by the lesser of (i) the
average closing price per share for the common stock, as reported by NASDAQ for
the five consecutive trading days ending prior to the second day before June 6,
2008, which was $12.96 per share or (ii) $10.00 per share.  An
additional 24,000 shares of common stock are issuable by the Company under
holdback provisions defined in the APA.  To the extent such shares
held by the Company are not retained as reimbursement for contingencies defined
in the APA, such shares will be issued to AccessFlow and recorded as additional
purchase consideration. The two shareholders of AccessFlow entered into
five-year noncompete agreements at closing, which provide for payments to each
in the aggregate amount of $50 in equal monthly installments of approximately
$8 each per month over the six month period subsequent to
closing.  Broker costs and professional fees of $345 were incurred in
the purchase, of which $161 was paid in cash, $28 accrued, and $156 was paid
through the issuance of 11,935 shares of common stock.


10
 Index


Additional
purchase consideration is payable to AccessFlow based on certain financial
performance during each of the two-year periods ending June 30, 2009 and 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 of the two years.  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.





The
following table summarizes the estimated fair values, including professional
fees and other related acquisition costs, at the date of
acquisition.





Intangibles:Noncompete
      agreements, amortized over 5 years
                        
                        $
                        556Customer
      relationships, amortized over 4 years
                        
                        
                        169Strategic
      relationships, amortized over 3 years
                        
                        
                        308Trademark,
      amortized over 3 years
                        
                        
                        319Service
      contracts, amortized over 4 years
                        
                        
                        131Inventory
                        
                        
                        5Property
      and equipment
                        
                        
                        696Goodwill
                        
                        
                        4,099Less
      capital lease obligations assumed
                        
                        
                        (272
                        )Total
      acquisition cost
                        
                        $
                        6,011





Included
under property and equipment is the cost of the capital lease obligations
assumed of $272.





Select,
Inc.





Under a
Stock Purchase Agreement dated August 31, 2007 (the “SPA”), the Company
purchased all issued and outstanding capital stock of Select, Inc. (“Select”).
Located in Boston, Massachusetts, Select is a Cisco-centric solutions provider
focused on delivering IP Telephony, IP Storage and network infrastructure
solutions throughout New England with approximately $40,000 in annual revenues.
The Company completed the acquisition simultaneously with the execution of the
SPA. The SPA contains customary representations and warranties and requires
Select’s shareholders (“Shareholders”) to indemnify the Company for certain
liabilities arising under the SPA, subject to certain limitations and
conditions.





The
consideration paid at closing pursuant to the SPA was (a) $6,250 in cash,
including $1,000 placed in escrow under holdback provisions defined in the SPA
and (b) 231,958 shares of the Company’s Common Stock, $0.01 par value (the
“Common Stock”) valued at $10.60 per share or $2,459, which amount of shares was
determined by dividing $2,250 by $9.70, which is the greater of (i) average
closing price per share for the Common Stock as reported by Nasdaq for the five
consecutive trading days ending August 28, 2007 and (ii) $9.50. The President
and major shareholder of Select entered into a five-year noncompete agreement at
closing providing for equal monthly payments of $21 over two years, which were
recorded at their present value of $450. Cash of $6,000 was borrowed from the
Acquisition Facility under the Credit Agreement with Castle Pines Capital LLC
(“Acquisition Facility”). In connection with the stock purchase, the Credit
Agreement with Castle Pines Capital LLC was amended for the modification of
certain financial covenants and for the addition of Select as a party to the
Credit Agreement. Broker costs and professional fees of $512 were incurred in
the purchase, of which $389 was paid in cash and $123 was paid through the
issuance of 11,598 shares of common stock.





Additional
purchase consideration may be payable based on the Select branch office revenue
and operating profit during the two years subsequent to the date of the SPA. For
the twelve-month period ending August 31, 2008, the revenue and operating profit
contribution was less than the minimum required under the SPA resulting in no
additional purchase consideration due the Shareholders. For the twelve-month
period ending August 31, 2009, if revenue is greater than $53,000 and operating
profit contribution is greater than or equal to $3,710, then the Company shall
pay the Shareholders additional purchase consideration of $600 and will pay an
additional $50 for each $150 of operating profit contribution in excess of
$3,710 up to a maximum of $600 with an aggregate maximum of $1,200 in additional
purchase consideration. At the Company’s option, 50% of such additional purchase
price may be paid in the form of Common Stock. Additional purchase price
consideration, if any, will be recorded as goodwill.


11
 Index


Pro
Forma Summary





The
following pro forma consolidated amounts give effect to the Company’s
acquisition of AccessFlow and Select as if they had occurred January 1, 2007.
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
                                
                                
                                Nine
      Months EndedSeptember 30,
                                
                                
                                September 30,2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007Revenues
                                
                                $
                                71,942
                                
                                
                                $
                                60,656
                                
                                
                                $
                                200,722
                                
                                
                                $
                                186,150Net
      income from continuing operations
                                
                                $
                                417
                                
                                
                                $
                                928
                                
                                
                                $
                                2,475
                                
                                
                                $
                                2,619Net
      income per share from continuing operations:Basic
                                
                                $
                                0.05
                                
                                
                                $
                                0.12
                                
                                
                                $
                                0.30
                                
                                
                                $
                                0.36Diluted
                                
                                $
                                0.05
                                
                                
                                $
                                0.11
                                
                                
                                $
                                0.28
                                
                                
                                $
                                0.31Weighted
      average shares used in calculation:Basic
                                
                                
                                8,746,691
                                
                                
                                
                                7,519,138
                                
                                
                                
                                8,127,860
                                
                                
                                
                                7,361,456Diluted
                                
                                
                                9,338,353
                                
                                
                                
                                8,474,848
                                
                                
                                
                                8,748,161
                                
                                
                                
                                8,344,204





Network
Architects, Corp.





Effective
May 26, 2005, the Company acquired the operations and certain assets of Network
Architects, Corp. (“Network Architects”), a data network and IP telephony
systems design, installation and support business with branches in Albuquerque,
New Mexico, and El Paso, Texas. Additional purchase price consideration
consisting of 75,000 shares of the Company’s common stock was issued to Network
Architects in July 2008 for achievement of certain operating profit milestones
during the twelve-month period ending May 31, 2008.  The additional
purchase price consideration was valued at $740 and was recorded as additional
goodwill.





5.
Earnings Per Share





Basic
earnings per share is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
is based on the weighted-average number of shares outstanding during each period
and the assumed exercise of dilutive stock options and warrants less the number
of treasury shares assumed to be purchased from the exercise proceeds using the
average market price of the Company’s common stock for each of the periods
presented.





The
following table presents the calculation of basic and diluted earnings per
share:





Three
      Months Ended September 30,
                            
                            
                            Nine
      Months Ended September 30,2008
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2007Numerator
      for basic and diluted earnings per share:Net
      income from continuing operations
                            
                            $
                            417
                            
                            
                            $
                            986
                            
                            
                            $
                            2,527
                            
                            
                            $
                            2,327Income
      on disposal of discontinued operations, net of income
taxes
                            
                            
                            9
                            
                            
                            
                            38
                            
                            
                            
                            23
                            
                            
                            
                            97Net
      income
                            
                            $
                            426
                            
                            
                            $
                            1,024
                            
                            
                            $
                            2,550
                            
                            
                            $
                            2,424Denominator
      for basic earnings per share — weighted-average shares
      outstanding
                            
                            
                            8,746,691
                            
                            
                            
                            7,081,511
                            
                            
                            
                            7,958,966
                            
                            
                            
                            6,870,521Effect
      of dilutive securities — shares issuable from assumed conversion of common
      stock options, restricted stock, and warrants
                            
                            
                            591,662
                            
                            
                            
                            955,710
                            
                            
                            
                            620,301
                            
                            
                            
                            982,748Denominator
      for diluted earnings per share — weighted-average shares
      outstanding
                            
                            
                            9,338,353
                            
                            
                            
                            8,037,221
                            
                            
                            
                            8,579,268
                            
                            
                            
                            7,853,269


12
 Index


For the
three-month period ended September 30, 2008 and 2007, warrants to purchase
common stock of 575,000 and 625,000 shares, respectively, were excluded from the
determination of the dilutive shares since they are antidilutive.  For
the nine-month period ended September 30, 2008 and 2007, warrants to purchase
common stock of 619,955 and 625,000 shares, respectively, were excluded from the
determination of the dilutive shares since they are antidilutive.  For
the three-month period ended September 30, 2008 and 2007, options to purchase
214,100 and 0 shares, respectively, were excluded in the calculation of diluted
earnings since they are antidilutive. For the nine-month period ended September
30, 2008 and 2007, options to purchase 189,100 and 0 shares, respectively, were
excluded in the calculation of diluted earnings since they are
antidilutive.





6.
Share-Based Compensation





The
Company recognized employee share-based compensation expense for stock option
and restricted stock grants of $347 and $163 during the three months ended
September 30, 2008 and 2007, respectively, and $983 and $422 during the
nine months ended September 30, 2008 and 2007, respectively. In addition, during
the second quarter of 2008 the Company issued 7,443 shares 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 13,
2008.  During the second quarter of 2007, the Company issued
9,072 shares to its non-employee directors valued at $90.





The
unrecognized compensation cost related to the Company's unvested stock options
as of September 30, 2008 and 2007 was $1,764 and $2,120, respectively and is
expected to be recognized over a weighted-average period of 1.8 years and
2.0 years, respectively.  The unrecognized compensation cost related
to the Company's unvested restricted shares as of September 30, 2008 and 2007
was $3,250 and $298, respectively and is expected to be recognized over a
weighted-average period of 4.1 years and 4.3 years,
respectively.





On April
3, 2008, the Company’s Board of Directors approved the INX Inc. 2008 Employee
Stock Purchase Plan (the “Purchase Plan”) which was approved by Company
stockholders at the Annual Meeting on May 13, 2008. The purpose of the Purchase
Plan is to provide employees of the Company and its designated subsidiaries with
an opportunity to purchase common stock of the Company. The aggregate number of
shares of the Company’s common stock that will be available for issuance under
the Purchase Plan is 500,000 shares, which shares may be authorized but unissued
shares or treasury shares. Eligible employees may elect to participate in each
offering period by electing to contribute between 1% and 6% of such employee’s
compensation to the Purchase Plan on each payroll date during the offering
period. The Purchase Plan was initially implemented with a $6 limit on the
amount of contributions that may be made to the Purchase Plan during any
offering period. The purchase price per share is equal to 85% of the fair market
value on the first trading day of the offering period or, if less, 85% of the
fair market value on the last trading day of the purchase period. Under the
Purchase Plan, the company issued 28,460 shares during the three months ended
September 30, 2008 and recognized share based compensation expense of
$82.





7.
Senior Credit Facility





On June
3, 2008, the Company entered into an amendment to the Castle Pines Capital
LLC (“CPC”) senior credit facility (“Amendment”) to increase the maximum
aggregate line of credit to $60,000 from $50,000.  The Amendment also
modified a financial covenant. The CPC senior credit facility is used
primarily for inventory financing and working capital
requirements.  At September 30, 2008, $39,409 was outstanding under
the Facility and reported under accounts payable, and the unused availability
was $1,124.  At September 30, 2008, the Company was in compliance with
the loan covenants of the senior credit facility, as amended.





8.
Stockholders’ Equity





Registered
Direct Offering





In June,
2008, the Company sold 900,000 shares of common stock through a registered
direct offering to certain institutional investors at a price of $11.00 per
share.  The net cash proceeds, after deducting the placement agent’s
fee and other offering expenses of $1,030, were approximately
$8,870.  The net cash proceeds were partially used to repay the $6,000
outstanding balance under the Acquisition Facility, with the remainder to be
used for general corporate purposes including possible future
acquisitions.





Common
Stock Repurchase Plan





Effective
December 4, 2007, the Board of Directors authorized the purchase of up to $2,000
of the Company’s common stock on or before March 31, 2008. These 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. During the three-month
period ended March 31, 2008, 184,985 shares were purchased for $1,536, of which
3,800 shares were purchased in 2007 and settled and recorded in 2008. From
inception of the repurchase plan to March 31, 2008, 186,785 shares were
purchased for $1,554, an average purchase price of $8.27 per share. The December
4, 2007 repurchase plan expired on March 31, 2008.


13
 Index


On May 2,
2008, the Board of Directors authorized a repurchase plan of up to $2,000 of the
Company’s common stock on or before July 31, 2008 under similar terms as the
plan authorized on December 4, 2007.  During July, 2008, 346 shares
were purchased under the plan for $3, an average purchase price of $8.15 per
share.  The May 2, 2008 repurchase plan expired on July 31,
2008.





On
September 10, 2008, the Board of Directors authorized a new repurchase plan of
up to $2,000 of the Company’s common stock on or before December 31, 2008 under
similar terms as the plan authorized on December 4, 2007.  During
September 2008, 78,940 shares were purchased under the plan for $557, an average
purchase price of $7.03 per share.  As of September 30, 2008 $1,443
was available to repurchase the Company’s common stock under the September 10,
2008 plan.





9.
Commitments and 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, 2007, the Company had an accounts receivable from CoCom of $325,
less an allowance for doubtful accounts of $250. The remaining net accounts
receivable of $75 was covered by a subcontractor bond, which was collected in
July 2008. 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 or financial
position.





INX sold
all outstanding shares of Stratasoft, Inc. common stock for a pretax gain on
disposal of $302 under a Stock Purchase Agreement (“Agreement”) dated January
26, 2006, Terms of the sale required $800 be 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 $717 in indemnified losses, net of interest earned, have been paid
or presented for payment as of September 30, 2008. 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 were
scheduled to be released on January 26, 2008. However, certain potential
third-party claims remain outstanding, including the Schneider Rucinski lawsuit
discussed further below. As provided in the Agreement, funds of $83 held in
escrow at September 30, 2008 will not be released until such claims are
resolved.





On
January 24, 2008, Schneider Rucinski Enterprises (“Plaintiff”) filed a lawsuit
in the United States District Court Southern District of California (“Court”)
styled Schneider Rucinski
Enterprises v. Touch Asia Outsourcing Solutions, Stratasoft, Inc., INX
Inc., et alclaiming damages of $555 and other relief. On April 29, 2008,
the Court granted the motion of the Company and Stratasoft, Inc. to dismiss the
lawsuit in its entirety, without prejudice. The Plaintiff has various options
available to it including, but not limited to, filing a Motion to Reconsider,
appealing the Court’s verdict, or amending the original pleadings. INX cannot
predict the final outcome of this matter, including whether it could have a
materially adverse effect on its results of operations or financial
position.





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
or financial position.





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 consolidated financial statements, including the notes
thereto included elsewhere in this Form 10-Q and our annual report on Form 10-K
for the fiscal year ended December 31, 2007, as previously filed with the
Securities and Exchange Commission. Amounts are presented in thousands except
for share and per share data.





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, 2007, 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.


14
 Index


Registered
Direct Offering





In June,
2008, we sold 900,000 shares of common stock through a registered direct
offering to certain institutional investors at a price of $11.00 per
share.  The net cash proceeds were approximately $8,870, after
deducting the placement agent’s fee and other offering expenses of
$1,030.  The net cash proceeds were partially used to repay the $6,000
outstanding balance under the Acquisition Facility, with the remainder to be
used for general corporate purposes including possible future
acquisitions.





Acquisition
of Access Flow, Inc.





Under an
Asset Purchase Agreement dated June 6, 2008 (the “APA”), we purchased the operations andcertain assets,
and assumed specified liabilities of Access Flow, Inc.
(“AccessFlow”).  AccessFlow isa 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
acquisition was completed simultaneously with the execution of the APA. Neither
AccessFlow nor any shareholder of AccessFlow has any prior affiliation with us.
The APA contains customary representations and warranties and requires
AccessFlow and its Shareholders to indemnify us 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)
238,692 shares of our common stock.  The common stock was valued at
$13.06 per share or $3,116.  The number of common stock shares issued
was determined by dividing $2,626,920 by the lesser of (i) the average closing
price per share for the common stock, as reported by NASDAQ for the five
consecutive trading days ending prior to the second day before June 6, 2008,
which was $12.96 per share or (ii) $10.00 per share.  An additional
24,000 shares of common stock are issuable by the Company under holdback
provisions defined in the APA.  To the extent such shares held by the
Company are not retained as reimbursement for contingencies defined in the APA,
such shares will be issued to AccessFlow and recorded as additional purchase
consideration. The two shareholders of AccessFlow entered into five-year
noncompete agreements at closing, which provide for payments to each in the
aggregate amount of $50 in equal monthly installments of approximately
$8 each per month over the six month period subsequent to
closing.  Broker costs and professional fees of $345 were incurred in
the purchase, of which $161 was paid in cash, $28 accrued, and $156 was paid
through the issuance of 11,935 shares of common stock.





Additional
purchase consideration is payable to AccessFlow based on certain financial
performance during each of the two-year periods ending June 30, 2009 and 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 our 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 of the two years.  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 our 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.





Results
Of Operations





Period Comparisons.The
following tables set forth, for the periods indicated, certain financial data
derived from our condensed consolidated statements of earnings. 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 September 30, 2008
Compared To the Three Months Ended September 30, 2007





Three
      Months Ended September 30,2008
                                    
                                    
                                    2007Amount
                                    
                                    
                                    %
                                    
                                    
                                    Amount
                                    
                                    
                                    %Revenue:Products
                                    
                                    $
                                    59,576
                                    
                                    
                                    
                                    82.8
                                    
                                    
                                    $
                                    45,222
                                    
                                    
                                    
                                    87.0Services
                                    
                                    
                                    12,366
                                    
                                    
                                    
                                    17.2
                                    
                                    
                                    
                                    6,776
                                    
                                    
                                    
                                    13.0Total
      revenue
                                    
                                    
                                    71,942
                                    
                                    
                                    
                                    100.0
                                    
                                    
                                    
                                    51,998
                                    
                                    
                                    
                                    100.0Gross
      profit:Products
                                    
                                    
                                    10,067
                                    
                                    
                                    
                                    16.9
                                    
                                    
                                    
                                    7,887
                                    
                                    
                                    
                                    17.4Services
                                    
                                    
                                    3,259
                                    
                                    
                                    
                                    26.4
                                    
                                    
                                    
                                    1,666
                                    
                                    
                                    
                                    24.6Total
      gross profit
                                    
                                    
                                    13,326
                                    
                                    
                                    
                                    18.5
                                    
                                    
                                    
                                    9,553
                                    
                                    
                                    
                                    18.4Selling,
      general and administrative expenses
                                    
                                    
                                    12,545
                                    
                                    
                                    
                                    17.4
                                    
                                    
                                    
                                    8,543
                                    
                                    
                                    
                                    16.5Operating
      income
                                    
                                    
                                    781
                                    
                                    
                                    
                                    1.1
                                    
                                    
                                    
                                    1,010
                                    
                                    
                                    
                                    1.9Interest
      and other income (expense), net
                                    
                                    
                                    106
                                    
                                    
                                    
                                    0.2
                                    
                                    
                                    
                                    (17
                                    )
                                    
                                    
                                    —Income
      tax expense
                                    
                                    
                                    470
                                    
                                    
                                    
                                    0.7
                                    
                                    
                                    
                                    7
                                    
                                    
                                    
                                    —Net
      income from continuing operations
                                    
                                    
                                    417
                                    
                                    
                                    
                                    0.6
                                    
                                    
                                    
                                    986
                                    
                                    
                                    
                                    1.9Income
      from discontinued operations, net of income taxes
                                    
                                    
                                    9
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    38
                                    
                                    
                                    
                                    0.1Net
      income
                                    
                                    $
                                    426
                                    
                                    
                                    
                                    0.6
                                    
                                    
                                    $
                                    1,024
                                    
                                    
                                    
                                    2.0


15
 Index


Revenue. Total revenue
increased by $19,944, or 38.4%, to $71,942 from $51,998. Products revenue
increased $14,354, or 31.7% to $59,576 from $45,222. The increase in products
revenue was primarily due to substantially increased sales in our Northwest,
National, and North Texas Regions and a full quarter of revenue in
2008 from operations acquired in the Select acquisition compared to one month in
2007. Services revenue increased $5,590 or 82.5% to $12,366 from $6,776. The
increase in services revenue was due to higher revenue under Federal Government
subcontracts, significant services revenue increases across substantially all
regions, and revenue from operations acquired in the AccessFlow
acquisition.





Gross Profit. Total gross
profit increased by $3,773, or 39.5%, to $13,326 from $9,553. Gross profit as a
percentage of sales increased to 18.5% from 18.4%, due to proportionately higher
services revenue which earns a higher margin compared to products
revenue partially offset by lower 2008 products margins. Gross profit on
the products sales component increased $2,180 or 27.6%, to $10,067 from $7,887
and, as a percentage of sales, decreased to 16.9% from 17.4%, primarily due to
an increase in larger, lower margin projects.  Gross profit on
services revenue increased $1,593 or 95.6% to $3,259 from $1,666 and gross
profit as a percent of services revenue increased to 26.4% from 24.6%. The
increase in services gross margin was primarily due to improved utilization of
technical personnel in 2008.





Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by
$4,002, or 46.8% to $12,545 from $8,543. As a percentage of total revenue, these
expenses increased to 17.4% in 2008 versus 16.5% in 2007. Increased 2008
expenses reflect slightly higher sales compensation costs as a percentage of
gross profit, additional sales and administrative personnel costs from increased
share based compensation expense and headcount increases, and selling, general
and administrative expenses of the operations acquired in the AccessFlow
acquisition.





Operating Income. Operating
income decreased $229 to $781 from $1,010, primarily due to higher selling,
general and administrative expenses as a percentage of revenue, partially offset
by increased gross profit on higher products and services
revenues.





Interest and Other Income (Expense),
Net. Interest and other income (expense), net, changed by $123 to income
of $106 from expense of $17, primarily due to interest earned in 2008 on
invested cash.  Interest earned in 2007 was offset by interest expense
incurred on borrowings funding the cash portion of the purchase price of Select,
Inc., acquired in August 2007.  The borrowings were repaid in June
2008 from proceeds of issuance of common stock.





Income Tax Expense. Income
tax expense increased by $463 to $470 from $7, primarily due to the utilization
of all net operating loss carryforwards for book purposes in
2007.  The availability of net operating loss carryforwards for
federal income tax purposes are discussed further under “Tax Loss Carryforward”
below.





Net Income. Net income
decreased $598 to $426 from $1,024, primarily due to higher selling, general and
administrative expenses and income tax expense.





Nine Months Ended September 30, 2008
Compared To the Nine Months Ended September 30, 2007





Nine
      Ended September 30,2008
                                    
                                    
                                    2007Amount
                                    
                                    
                                    %
                                    
                                    
                                    Amount
                                    
                                    
                                    %Revenue:Products
                                    
                                    $
                                    161,497
                                    
                                    
                                    
                                    82.6
                                    
                                    
                                    $
                                    131,690
                                    
                                    
                                    
                                    87.0Services
                                    
                                    
                                    34,079
                                    
                                    
                                    
                                    17.4
                                    
                                    
                                    
                                    19,678
                                    
                                    
                                    
                                    13.0Total
      revenue
                                    
                                    
                                    195,576
                                    
                                    
                                    
                                    100.0
                                    
                                    
                                    
                                    151,368
                                    
                                    
                                    
                                    100.0Gross
      profit:Products
                                    
                                    
                                    29,040
                                    
                                    
                                    
                                    18.0
                                    
                                    
                                    
                                    22,994
                                    
                                    
                                    
                                    17.5Services
                                    
                                    
                                    10,185
                                    
                                    
                                    
                                    29.9
                                    
                                    
                                    
                                    5,111
                                    
                                    
                                    
                                    26.0Total
      gross profit
                                    
                                    
                                    39,225
                                    
                                    
                                    
                                    20.1
                                    
                                    
                                    
                                    28,105
                                    
                                    
                                    
                                    18.6Selling,
      general and administrative expenses
                                    
                                    
                                    34,800
                                    
                                    
                                    
                                    17.8
                                    
                                    
                                    
                                    25,757
                                    
                                    
                                    
                                    17.0Operating
      income
                                    
                                    
                                    4,425
                                    
                                    
                                    
                                    2.3
                                    
                                    
                                    
                                    2,348
                                    
                                    
                                    
                                    1.6Interest
      and other income (expense), net
                                    
                                    
                                    (65
                                    )
                                    
                                    
                                    (0.1
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Income
      tax expense
                                    
                                    
                                    1,833
                                    
                                    
                                    
                                    0.9
                                    
                                    
                                    
                                    21
                                    
                                    
                                    
                                    —Net
      income from continuing operations
                                    
                                    
                                    2,527
                                    
                                    
                                    
                                    1.3
                                    
                                    
                                    
                                    2,327
                                    
                                    
                                    
                                    1.6Income
      from discontinued operations, net of income taxes
                                    
                                    
                                    23
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    97
                                    
                                    
                                    
                                    —Net
      income
                                    
                                    $
                                    2,550
                                    
                                    
                                    
                                    1.3
                                    
                                    
                                    $
                                    2,424
                                    
                                    
                                    
                                    1.6


16
 Index


Revenue. Total revenue
increased by $44,208, or 29.2%, to $195,576 from $151,368. Products revenue
increased $29,807, or 22.6% to $161,497 from $131,690. The increase in products
revenue was primarily due to substantially increased sales in our Northwest and
National Regions and nine months revenue in 2008 from operations acquired
in the Select acquisition compared to one month in 2007.  Other
regions experienced significant products revenue increases but were offset by
lower Federal products sales which were due to increased price pressure on
certain competitive bids awarded in the 2008 period. Services revenue increased
$14,401 or 73.2% to $34,079 from $19,678. The increase in services revenue was
due to higher revenue under Federal Government subcontracts, significant
services revenue increases across substantially all regions, and revenue from
operations acquired in the Select and AccessFlow
acquisitions.





Gross Profit. Total gross
profit increased by $11,120, or 39.6%, to $39,225 from $28,105. Gross profit as
a percentage of sales increased to 20.1% from 18.6%, due to proportionately
higher services revenue which earns a higher margin compared to products
revenue, partially offset by lower 2008 products margins. Gross profit on the
products sales component increased $6,046 or 26.3%, to $29,040 from $22,994
and, as a percentage of sales, increased to 18.0% from 17.5% primarily due to
higher vendor rebates.  Gross profit on services revenue increased
$5,074 or 99.3% to $10,185 from $5,111 and gross profit as a percent of services
revenue increased to 29.9% from 26.0%. The increase in services gross margin was
primarily due to improved profitability of Federal contracts, improved
utilization of technical personnel in 2008, and costs incurred during the 2007
period to expand into new markets.





Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by
$9,043, or 35.1% to $34,800 from $25,757. As a percentage of total revenue,
these expenses increased to 17.8% in 2008 versus 17.0% in 2007. Increased 2008
expenses reflect selling, general and administrative expenses of the operations
acquired in the Select and AccessFlow acquisitions, higher sales compensation
costs resulting from increased revenues, and additional sales and administrative
personnel costs from higher share based compensation expense and headcount
increases.





Operating Income. Operating
income increased $2,077 to $4,425 from $2,348, primarily due to higher products
and services revenues and improved margins, partially offset by increased
selling, general and administrative expenses.





Interest and Other Income (Expense),
Net. Interest and other income (expense), net, changed by $65 to expense
of $65 from expense of $0, primarily due to the interest on borrowings to fund
the cash portion of the purchase price of Select, Inc., acquired in August
2007.  The borrowings were repaid in June 2008 from proceeds of
issuance of common stock.





Income Tax Expense. Income
tax expense increased by $1,812 to $1,833 from $21, primarily due to higher 2008
pretax income and the utilization of all net operating loss carryforwards for
book purposes in 2007.  The availability of net operating loss
carryforwards for federal income tax purposes is discussed further under “Tax Loss Carryforward”
below.





Net Income. Net income
increased $126 to $2,550 from $2,424, primarily due to increased products and
services revenues and improved margins, offset by higher selling, general and
administrative expenses and income tax expense.





Tax Loss Carryforward.Because of our operating losses in 2003, 2005 and 2006 and exercises of
stock options, we have accumulated a net operating loss carryforward for federal
income tax purposes that, at September 30, 2008, was approximately $1,266. 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 September 30, 2008, windfall tax benefits included in NOL
carryforward but not reflected in deferred tax assets are
$1,266.





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 2007, we
reversed the 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 be able to use the assets to reduce future tax
liabilities.





Liquidity
and Capital Resources





Sources
of Liquidity





During
the nine month period ended September 30, 2008, our principal sources of
liquidity were sales of common stock , cash flows from operations  and
our credit facility with Castle Pines Capital LLC (the “Credit
Facility”).  We believe cash on hand, cash flows from operations and
availability under our credit facilities 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
$19,958 at September 30, 2008 from $9,833 at December 31, 2007, primarily due to
cash generated from operations and the issuance of common
stock.


17
 Index


On June
3, 2008, we entered into an amendment to the Credit Facility (“Amendment”) to
increase the maximum aggregate line of credit to $60,000 from
$50,000.  The Credit Facility includes 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. In connection with the Select acquisition, $6,000 was borrowed under
the Acquisition Facility, which was repaid on June 26, 2008 from the proceeds of
the common stock issuance.  As of September 30, 2008 all of the $10
million Acquisition Facility was available for future
acquisitions.





As of
September 30, 2008, borrowing capacity and availability were as
follows:





Total
      Credit Facility
                      
                      $
                      60,000Borrowing
      base limitation
                      
                      
                      (20,591
                      )Total
      borrowing capacity
                      
                      
                      39,409Less
      interest-bearing borrowings
                      
                      
                      —Less
      non-interest bearing advances
                      
                      
                      (38,285
                      )Total
      unused availability
                      
                      $
                      1,124





In
addition to unused borrowing availability, liquidity at September 30, 2008
included our cash balance of $15,806. 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 classified as accounts payable in our
balance sheet. To the extent that we have credit availability under the Credit
Facility, it gives us the ability to extend the payment terms past the Free
Finance Period. Amounts extended past the Free Finance Period accrue interest
and are classified as notes payable on our balance sheet. The interest rate of
the Credit Facility is the prime rate plus 0.5% (5.50% at September 30, 2008)
and the interest rate of the Acquisition Facility is the prime rate plus 2.0%
(7.00% at September 30, 2008).





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 September 30, 2008, 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 nine
months ended September 30, 2008, our cash increased by $6,466. Operating
activities provided cash of $7,742, investing activities used $4,436, and
financing activities provided $3,160.





Operating Activities.Operating activities provided $7,742 in the nine months ended September
30, 2008, as compared to providing cash of $8,941 in the comparable 2007 period.
During the nine months ended September 30, 2008, net income and noncash
adjustments to net income provided cash of $5,482 and changes in asset and
liability accounts provided cash of $2,260.





Investing Activities.Investing activities used $4,436 in the nine months ended September 30,
2008, compared to $5,102 used during the comparable period in 2007. Our
investing activities in 2008 primarily consisted of the acquisition of Access
Flow, Inc. ($2,661, including transaction costs) and capital expenditures
($1,785).  Our investing activities in the 2007 period primarily
consisted of Select acquisition purchase price and related transaction
costs ($3,704), capital expenditures ($1,127), and additional purchase price
paid to Datatran Network Systems ($280).  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, of which we cannot predict the certainty or
magnitude.





Financing Activities.Financing activities provided $3,160 in the nine months ended September
30, 2008, as compared to providing $2,880 in the comparable period in 2007. The
financing activities during the nine months ended September 30, 2008 generated
cash primarily from the sale of common stock to investors ($8,870, net of
issuance costs) and employees ($164), the exercise of stock options ($827), and
excess tax benefits from stock option exercises ($1,590), partially offset by
the repayment of the Acquisition Facility ($6,000) and common stock repurchases
discussed in Note 8 to the Consolidated Condensed Financial Statements in Part
I, Item 1 ($2,096). Funds provided in the comparable 2007 period were primarily
from borrowings under the acquisition credit facility and the exercise of stock
options partially offset by net payments of the short-term credit
facility.


18
 Index


Related
Party Transactions





We leased
office space from Allstar Equities, Inc., a Texas corporation, a company wholly
owned by James H. Long, our Chief Executive Officer under a lease that
originally expired on January 31, 2014 and has a rental rate of $20 per month.
On January 25, 2008, Allstar sold the building and rights under the Lease to the
General Consulate of Equatorial Guinea (“Consulate”), an unrelated third party.
Other than the lessor, no changes were made to the terms of the existing lease
except for those modified under a First Amendment to INX Inc. Lease Agreement
(“Amendment”), as follows:





•
              INX
      has the sole option to terminate its lease with 120 days notice for
      reasons specified in the Amendment. INX is not required to pay rent during
      the 120 day notice period.





•
              INX
      has the right of first refusal on additional space on the second floor of
      the building.





The Audit
Committee of the Board of Directors reviewed and approved the related party
transaction contemplated by the Amendment.





Item 4T. Controls and Procedures





Under the
supervision and with the participation of certain members of our management,
including our Chairman of the Board, 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 at September 30, 2008 were
effective 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, and are designed to ensure that information required to be disclosed
by us in these reports is accumulated and communicated to our management, as
appropriate to allow timely decisions regarding required disclosures. In the
quarter ended September 30, 2008, there has been no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to affect, our internal control over financial
reporting.





We will
consider further actions and continue to evaluate the effectiveness of our
disclosure controls and internal controls and procedures on an ongoing basis,
taking corrective action as appropriate. Management does not expect that
disclosure controls and procedures or internal controls can prevent all errors
and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable and not absolute assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. While management believes that its
disclosure controls and procedures provide reasonable assurance that fraud can
be detected and prevented, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been
detected.





PART II. OTHER INFORMATION





Item 1. Legal Proceedings





See Note
9 to condensed consolidated financial statements in Part I, Item
1.


Item1A. Risk Factors
  Global
market and economic conditions, including those related to the credit markets,
may adversely affect our business and results of operations.
  In the
United States (U.S.), recent market and economic conditions have been
unprecedented and have led to tighter credit conditions and slower growth.
Continued concerns about the systemic impact of inflation, volatility in energy
costs, geopolitical issues, the availability and cost of credit, the U.S.
mortgage market, a declining real estate market in the U.S. and added concerns
fueled by the federal government interventions in the U.S. financial and credit
markets have contributed to instability in both U.S. and international capital
and credit markets and diminished expectations for the U.S. and global economy.
These conditions, combined with declining business and consumer confidence and
increased unemployment, have in the period subsequent to the end of the quarter
contributed to volatility of unprecedented levels and an economic
slowdown.
  As a
result of these market conditions, the cost and availability of capital and
credit has been and may continue to be adversely affected by illiquid credit
markets and wider credit spreads. If these market conditions continue, they may
limit our ability, and the ability of our customers, to timely borrow and access
the capital and credit markets to meet liquidity needs, and result in an adverse
effect on our financial condition and results of operations. The economic
slowdown may lead to reduced customer spending for technology and reduced demand
for our products which would have a negative impact on revenue, gross profit and
results of operations. This may reduce product pricing, which would also have a
negative impact on revenue, gross profit and results of operations.
  We
have a history of losses and may continue to incur losses.
  While we
have generated positive operating profits for the past two years and nine
months, we incurred a net loss from continuing operations in 2000, 2001, 2002
and 2004. During 2005, our income from continuing operations was $812 excluding
the noncash charge for remeasurement of stock options discussed in Note 11 to
the consolidated financial statements in Part II, Item 8 of our Annual Report on
Form 10-K for the year ended December 31, 2007. We cannot assure you that we
will achieve profitability or continue to remain profitable in upcoming quarters
or years. In order to maintain profitability, we will have to maintain or
increase our operating margin, and we cannot provide any assurance that we will
be able to do so. If we are unable to increase revenue, if our gross margins
decrease, or if we are unable to control our operating expenses, our business
could produce losses. We have only recently become consistently profitable on a
quarterly basis during less than the past two years, and are in a rapidly
changing industry. In addition, our business depends upon winning new contracts
with new customers, the size of which may vary from contract to contract. When
we open new branch offices to expand our geographic presence, we expect the
newly opened branch offices to produce operating losses for a period of six to
eighteen months or more. Whether we are able to remain profitable in the future
will depend on many factors, but primarily upon the commercial acceptance of the
technologies and product lines that we promote the use of, including,
importantly, the network routing and switching products and IP telephony
products developed and marketed by Cisco.
  Our
success depends upon maintaining our relationship with Cisco and other key
vendors.
  Substantially
all of our revenue during 2008 and for the years ended December 31, 2007, 2006,
and 2005 was derived from or dependent upon the sale of Cisco products and
related services. We anticipate that these products and related services will
continue to account for a substantial portion of our revenue for the foreseeable
future. We have a contract with Cisco to purchase the products that we resell,
and we purchase substantially all of our Cisco products directly from Cisco.
Cisco can terminate this agreement on relatively short notice. Cisco has
designated us an authorized reseller and we receive certain benefits from this
designation, including special pricing and payment terms. We have in the past,
and may in the future, purchase Cisco-centric products from other sources. When
we purchase Cisco-centric products from sources other than Cisco, the prices are
typically higher and the payment terms are not as favorable. Accordingly, if we
are unable to purchase directly from Cisco and maintain our status as an
authorized reseller of Cisco network products, our business could be
significantly harmed. In addition, we also depend upon maintaining our
relationship with a number of other key vendors, including Netapp and VMware. If
we are unable to purchase products from any of our key vendors, including Cisco,
Netapp and VMware, or from other sources on terms that are comparable to the
terms we currently receive, our business would be harmed and our operating
results and financial condition would be materially and adversely
affected.
  19
 Index
  Our
success depends upon broad market acceptance of IP telephony.
  A
substantial portion of our revenue is derived directly from or dependent upon
our customers implementing IP telephony. The market for IP telephony products
and services is relatively new and is characterized by rapid technological
change, evolving industry standards and strong customer demand for new products,
applications and services. As is typical of a new and rapidly evolving industry,
the demand for, and market acceptance of, recently introduced IP telephony
products and services are highly uncertain. We cannot assure you that the use of
IP telephony will become widespread. The commercial acceptance of IP telephony
products, including Cisco-centric products, may be affected by a number of
factors including:
  ·
                quality
      of infrastructure;
  ·
                security
      concerns;
  ·
                equipment,
      software or other technology
failures;
  ·
                government
      regulation;
  ·
                inconsistent
      quality of service;
  ·
                poor
      voice quality over IP networks; and
  ·
                lack
      of availability of cost-effective, high-speed network
      capacity.
  If the
market for IP telephony fails to develop, develops more slowly than we
anticipate, or if IP telephony products fail to achieve market acceptance, our
business will be adversely affected.
  Although
our success is generally dependent upon the market acceptance of IP telephony,
our success also depends upon a broad market acceptance of Cisco-centric IP
telephony.
  We cannot
assure you that the Cisco-centric IP telephony products we offer will obtain
broad market acceptance. Competition, technological advances and other factors
could reduce demand for, or market acceptance of, the Cisco-centric IP telephony
products and services we offer. In addition, new products, applications or
services may be developed that are better adapted to changing technology or
customer demands and thus could render our Cisco-centric products and services
unmarketable or obsolete. To compete successfully, the Cisco-centric IP
telephony products we offer must achieve broad market acceptance and we must
continually enhance our related software and customer services in a timely and
cost- effective manner. If the Cisco-centric IP telephony products we offer fail
to achieve broad market acceptance, or if we do not adapt our existing services
to customer demands or evolving industry standards, our business, financial
condition and results of operation could be significantly harmed.
  Our
success depends upon broad market acceptance of virtualization technology, and
in particular the virtualization technology of VMware.
  A key
part of our growth strategy is dependent upon broad market acceptance of
virtualization technology, and in particular the virtualization technology of
VMware. The market for virtualization software is relatively new and is
characterized by rapid technological change, evolving industry standards and
strong customer demand for new products, applications and services. As is
typical of a new and rapidly evolving industry, the demand for, and market
acceptance of virtualization technology is highly uncertain. We cannot assure
you that the use of virtualization technology will be widespread.
  Our
business depends on the level of capital spending by enterprises for the
advanced technology products and services we offer.
  As a
supplier of advanced technology solutions for enterprises, our business depends
on the level of capital spending for such solutions by enterprises in our
markets. We believe that an enterprise’s investment in advanced technology
systems such as network infrastructure, IP telephony, wireless networking,
network data storage and network security, and related services depends largely
on general economic conditions that can vary significantly as a result of
changing conditions in the economy as a whole. The market for the solutions we
provide may continue to grow at a modest rate or not at all, or may decrease. If
our customers decrease their level of spending, our revenue and operating
results would likely be adversely affected. In the latter part of 2007, and
continuing into early 2008, we witnessed decreased spending by customers due to
what we believe was uncertainty surrounding the status of the U.S. economy. The
same factors that drove slowing customer demand then have returned later in
2008; including worries over the economy, anticipation of lower interest rates,
a possible additional economic stimulus package, and reduced availability of
credit to fund projects. To the extent that customers continue to delay moving
forward with projects because of actual or perceived economic uncertainty and
reduced credit availability, our revenue and profitability will be negatively
impacted.
  20
 Index
  Our
profitability depends on Cisco product pricing and incentive
programs.
  Our
annual and quarterly gross profits and gross margins on product sales are
materially affected by Cisco product pricing and incentive programs. These
incentive programs currently enable us to qualify for cash rebates or product
pricing discounts and are generally earned based on sales volumes of particular
Cisco products and customer satisfaction levels. We recognized vendor incentives
as a reduction of cost of sales amounting to $7,511 for the nine months ended
September 30, 2008 and $7,200, $6,303 and $2,876 in 2007, 2006 and 2005,
respectively, representing 3.8%, 3.5%, 4.0%, and 2.7% of total revenues. From
time to time Cisco changes the criteria upon which qualification for these
incentives are based, and there is no assurance that we will continue to meet
the program qualifications. Cisco is under no obligation to continue these
incentive programs. In addition, we expect our future profitability to be
impacted not only by pricing and incentive programs of Cisco, but also by the
pricing and incentive programs of NetApp, VMware and other key
vendors.
  A
significant portion of our customers are based in Texas.
  Until
mid-2005 we were primarily a Texas-based organization and the majority of our
customers were in Texas. While we are much less dependent upon Texas customers
now than we were two years ago, a significant portion of our customers are still
based in Texas. Therefore, our revenue and hence our profitability would be
materially affected by a downturn in economic conditions in Texas, in addition
to any general economic downturn in the United States. If demand for the
products and services we provide to customers in Texas decreases, our business,
financial condition and results of operations could be significantly
harmed.
  Our
strategy contemplates rapid geographic expansion, which we may be unable to
achieve and which is subject to numerous uncertainties.
  A
component of our strategy is to become one of the leading national providers of
the advanced technology solutions we provide. To achieve this objective, we must
either acquire existing businesses or hire qualified personnel in various
locations throughout the country, fund a rapid increase in operations and
implement corporate governance and management systems that will enable us to
function efficiently on a national basis. Identifying and acquiring existing
businesses is a time-consuming process and is subject to numerous risks.
Qualified personnel are in demand, and we expect the demand to increase as the
market for the advanced technology solutions that we provide grows. We will also
likely face competition from our existing competitors and from local and
regional competitors in the markets we attempt to enter. A rapid expansion in
the size and geographical scope of our business is likely to introduce
management challenges that may be difficult to overcome. We cannot assure you
that we will be successful in expanding our operations or achieving our goal of
becoming a national provider of advanced technology solutions. An unsuccessful
expansion effort would consume capital and human resources without achieving the
desired benefit and would have an adverse affect on our business, financial
condition and results of operations.
  We
may require financing to achieve expansion of our business operations, and
failure to obtain financing may prevent us from carrying out our business
plan.
  We may
need additional capital to grow our business. Our business plan calls for the
expansion of sales of our advanced technology solutions to enterprises in
geographical markets where we currently do not operate, including expansion
through acquisitions. If we do not have adequate capital or are not able to
raise the capital to fund our business objectives, we may have to delay the
implementation of our business plan. We can provide no assurance that we will be
able to obtain financing if required, or, if financing is available, there is no
assurance that the terms would be favorable to existing stockholders. Our
ability to obtain financing is subject to a number of factors, including general
market conditions, investor acceptance of our business plan, our operating
performance and financial condition, and investor sentiment. These factors may
affect the timing, amount, terms or conditions of additional financing available
to us.
  21
 Index
  We
require access to significant working capital and vendor credit to fund our
day-to-day operations. Our failure to comply with the financial and other
covenants under our working capital facility could lead to a termination of the
agreement and an acceleration of our outstanding debt.
  We
require access to significant working capital and vendor credit to fund our
day-to-day operations. Our credit facility with Castle Pines contains a number
of financial and other covenants. A breach of these financial or other
covenants, unless waived, would be a default under the credit facility. Upon an
event of default, Castle Pines may terminate the credit facility and/or declare
all amounts outstanding under the credit facility immediately due and payable.
The acceleration of our debt could have a material adverse effect on our
financial condition and liquidity. Additionally, the amount of working capital
available to us under the credit facility is dependent upon the amount and
quality of our accounts receivable. A significant default or payment delays of
our accounts receivable could materially adversely affect our borrowing base and
our access to sufficient working capital, which would have an adverse affect on
our business, financial condition and results of operations.
  We
may be unable to manage our growth effectively, which may harm our
business.
  The
ability to operate our business in a rapidly evolving market requires effective
planning and management. Our efforts to grow have placed, and are expected to
continue to place, a significant strain on our personnel, management systems,
infrastructure and other resources. Our ability to manage future growth
effectively will require us to successfully attract, train, motivate and manage
new employees, to integrate new employees into our operations and to continue to
improve our operational, financial and management controls and procedures. If we
are unable to implement adequate controls or integrate new employees into our
business in an efficient and timely manner, our operations could be adversely
affected and our growth could be impaired.
  Our
operating results have historically been volatile, and may continue to be
volatile, particularly from quarter to quarter.
  Our
quarter-to-quarter revenue, gross profit and operating profitability have
fluctuated significantly. During quarterly periods in which we realize lower
levels of revenue our profitability is generally negatively impacted. Our
quarterly operating results have historically depended on, and may fluctuate in
the future as a result of, many factors including:
  ·
                volume
      and timing of orders received during the
  quarter;
  ·
                amount
      and timing of supplier incentives received in any particular quarter,
      which can vary substantially;
  ·
                gross
      margin fluctuations associated with the mix of products
    sold;
  ·
                general
      economic conditions;
  ·
                patterns
      of capital spending by enterprises for communications
      products;
  ·
                the
      timing of new product announcements and
  releases;
  ·
                pricing
      pressures;
  ·
                the
      cost and effect of acquisitions;
  ·
                the
      amount and timing of sales incentives we may receive from our suppliers,
      particularly Cisco;
  ·
                the
      availability and cost of products and components from our suppliers;
      and
  ·
                credit
      availability.
  As a
result of these and other factors, we have historically experienced, and may
continue to experience, fluctuations in sales and operating results. In
addition, it is possible that in the future our operating results may fall below
the expectations of analysts and investors, and as a result, the price of our
securities may fall.
  We
have many competitors and expect new competitors to enter our market, which
could increase price competition and may affect the amount of business available
to us and the prices that we can charge for our products and
services.
  The
markets for all of the products and services we offer are extremely competitive
and subject to rapid change. Substantial growth in demand for the advanced
technology products we provide has been predicted by industry analysts, and we
therefore expect competition to increase as existing competitors enhance and
expand their products and services and as new participants enter the market. A
rapid increase in competition could negatively affect the amount of business
that we obtain and the prices that we are able to charge.
  22
 Index
  Additionally,
many of our competitors and potential competitors have substantially greater
financial resources, customer support, technical and marketing resources, larger
customer bases, longer operating histories, greater name recognition and more
established relationships than we do. We cannot be sure that we will have the
resources or expertise to compete successfully. Compared to us, our competitors
may be able to:
  ·
                develop
      and expand their products and services more
  quickly;
  ·
                adapt
      faster to new or emerging technologies and changing customer
      needs;
  ·
                take
      advantage of acquisitions and other opportunities more
      readily;
  ·
                negotiate
      more favorable agreements with
vendors;
  ·
                devote
      greater resources to marketing and selling their products;
    and
  ·
                address
      customer service issues more
effectively.
  Some of
our competitors may also be able to increase their market share by providing
customers with additional benefits or by reducing their prices. We cannot be
sure that we will be able to match price reductions by our competitors. In
addition, our competitors may form strategic relationships with each other to
better compete with us. These relationships may take the form of strategic
investments, joint-marketing agreements, licenses or other contractual
arrangements that could increase our competitors’ ability to serve customers. A
material and/or rapid increase in competition would likely have an adverse
affect on our business, financial condition and results of
operations.
  Business
acquisitions, dispositions or joint ventures entail numerous risks and may
disrupt our business, dilute stockholder value or distract management
attention.
  As part
of our business strategy, we have completed acquisitions and plan to continue to
consider acquisitions of, or significant investments in, businesses that offer
products, services and technologies complementary to ours. Any acquisition could
materially adversely affect our operating results and/or the price of our
securities. Acquisitions involve numerous risks, some of which we have
experienced and may continue to experience, including:
  ·
                unanticipated
      costs and liabilities;
  ·
                difficulty
      of integrating the operations, products and personnel of the acquired
      business;
  ·
                difficulty
      retaining key personnel of the acquired
  business;
  ·
                difficulty
      retaining customers of the acquired
businesses;
  ·
                difficulties
      in managing the financial and strategic position of acquired or developed
      products, services and
technologies;
  ·
                difficulties
      in maintaining customer relationships, in particular where a substantial
      portion of the target’s sales were derived from products that compete with
      products that we currently offer;
  ·
                the
      diversion of management’s attention from the core
  business;
  ·
                inability
      to maintain uniform standards, controls, policies and procedures;
      and
  ·
                damage
      to relationships with acquired employees and customers as a result of
      integration of the acquired
business.
  Finally,
to the extent that shares of our common stock or rights to purchase common stock
are issued in connection with any future acquisitions, dilution to our existing
stockholders will result and our earnings per share may suffer. Any future
acquisitions may not generate the anticipated level of revenue and earnings or
provide any benefit to our business, and we may not achieve a satisfactory
return on our investment in any acquired businesses.
  Our
international operations, which we plan to expand, will subject us to additional
risks that may adversely affect our operating results due to increased
costs.
  Revenue
generated by products delivered and services provided outside the United States,
as a percentage of consolidated revenue, was approximately 3.7%, 4.9% and 3.5%
for 2007, 2006 and 2005, respectively, and 3.4% for the first nine months of
2008. Substantially all of our international revenue represents products
delivered or services provided in foreign countries for companies based in the
United States or for the United States Armed Forces under contracts entered
into, administered and paid in the United States. We intend to continue to
pursue international opportunities. Pursuit of international opportunities may
require us to make significant investments for an extended period before returns
on such investments, if any, are realized. International operations are subject
to a number of risks and potential costs, including:
  23
 Index
  ·
                unexpected
      changes in regulatory requirements and telecommunication
      standards;
  ·
                tariffs
      and other trade barriers;
  ·
                risk
      of loss in currency exchange
transactions;
  ·
                exchange
      controls or other currency
restrictions;
  ·
                difficulty
      in collecting receivables;
  ·
                difficulty
      in staffing and managing foreign
operations;
  ·
                the
      need to customize marketing and
products;
  ·
                inadequate
      protection of intellectual property in countries outside the United
      States;
  ·
                adverse
      tax consequences; and
  ·
                political
      and economic instability.
  Any of
these factors could prevent us from increasing our revenue and therefore
adversely affect our operating results. We may not be able to overcome some of
these barriers and may incur significant costs in addressing
others.
  If
we lose key personnel we may not be able to achieve our objectives.
  We are
dependent on the continued efforts of our senior management team, including our
Chairman and Chief Executive Officer, James Long, our President and Chief
Operating Officer, Mark Hilz, and our Vice President and Chief Financial
Officer, Brian Fontana. If for any reason, these or other senior executives or
other key members of management do not continue to be active in management, our
business, financial condition or results of operations could be adversely
affected. We cannot assure you that we will be able to continue to retain our
senior executives or other personnel necessary for the maintenance or
development of our business.
  We
may not be able to hire and retain highly skilled technical employees, which
could affect our ability to compete effectively and could adversely affect our
operating results.
  We depend
on highly skilled technical personnel to research and develop and to market and
service our advanced technology solutions and to provide the services we provide
to our customers. To succeed, we must hire and retain employees who are highly
skilled in rapidly changing communications technologies. In particular, as we
implement our strategy of focusing on advanced technology solutions, we will
need to:
  ·
                hire
      more employees with experience developing and providing advanced
      technology products and services;
  ·
                retrain
      our current personnel to sell and support the advanced technology
      solutions that we intend to market in the future;
  and
  ·
                retain
      personnel to service our products.
  Individuals
who can perform the services we need to provide our products and services are
scarce. Because the competition for qualified employees in our industry is
intense, hiring and retaining qualified employees is both time-consuming and
expensive. We may not be able to hire enough qualified personnel to meet our
needs as our business grows or to retain the employees we currently have. Our
inability to hire and retain the individuals we need could hinder our ability to
sell our existing products, systems, software or services or to develop and sell
new ones. If we are not able to attract and retain qualified employees, we will
not be able to successfully implement our business plan and our business will be
harmed.
  24
 Index
  If
we are unable to protect our intellectual property rights, our business may be
harmed.
  Although
we attempt to protect our intellectual property through patents, trademarks,
trade secrets, copyrights, confidentiality and non-disclosure agreements and
other measures, intellectual property is difficult to protect and these measures
may not provide adequate protection. Patent filings by third parties, whether
made before or after the date of our patent filings, could render our
intellectual property less valuable. Competitors may misappropriate our
intellectual property, disputes as to ownership of intellectual property may
arise and our intellectual property may otherwise become known or independently
developed by competitors. The failure to protect our intellectual property could
seriously harm our business because we believe that developing new products and
technology that are unique to us is important to our success. If we do not
obtain sufficient international protection for our intellectual property, our
competitiveness in international markets could be significantly impaired, which
would limit our growth and future revenue.
  We
may be found to infringe on third-party intellectual property
rights.
  Third
parties may in the future assert claims or initiate litigation related to their
patent, copyright, trademark and other intellectual property rights in
technology that is important to us. The asserted claims and/or litigation could
include claims against us or our suppliers alleging infringement of intellectual
property rights with respect to our products or components of those products.
Regardless of the merit of the claims, they could be time consuming, result in
costly litigation and diversion of technical and management personnel, or
require us to develop a non-infringing technology or enter into license
agreements. There can be no assurance that licenses will be available on
acceptable terms, if at all. Furthermore, because of the potential for high
court awards, which are not necessarily predictable, it is not unusual to find
even arguably unmeritorious claims resulting in large settlements. If any
infringement or other intellectual property claim made against us by any third
party is successful, or if we fail to develop non-infringing technology or
license the proprietary rights on commercially reasonable terms and conditions,
our business, operating results and financial condition could be materially
adversely affected.
  Costs
of compliance with the Sarbanes-Oxley Act of 2002 and the related SEC
regulations may harm our results of operations.
  The
Sarbanes-Oxley Act of 2002 requires heightened financial disclosure and
corporate governance for all publicly traded companies. Although the costs of
compliance with the Sarbanes-Oxley Act are uncertain due to several factors, we
expect that our general and administrative expenses will increase. Failure to
comply with the Sarbanes-Oxley Act of 2002, SEC regulations or the listing
requirements of the NASDAQ Stock Market LLC (“NASDAQ”) may result in penalties,
fines or delisting of our securities from NASDAQ, which could limit our ability
to access the capital markets, having a negative impact on our financial
condition and results of operations.
  Changes
in accounting standards and subjective assumptions, estimates and judgments by
management related to complex accounting matters could significantly affect our
financial results.
  Generally
accepted accounting principles and related accounting pronouncements,
implementation guidelines and interpretations with regard to a wide range of
matters that are relevant to our business, including but not limited to, revenue
recognition, sales returns reserves, impairment of goodwill and long-lived
assets, income taxes, and litigation, are highly complex and involve many
subjective assumptions, estimates and judgments by our management. Changes in
these rules or their interpretation or changes in underlying assumptions,
estimates or judgments by our management could significantly change our reported
or expected financial performance.
  Failure
of our internal control over financial reporting could limit our ability to
report our financial results accurately and timely.
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting for external purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reporting includes:
maintaining records that in reasonable detail accurately and fairly reflect our
transactions; providing reasonable assurance that transactions are recorded as
necessary for preparation of the financial statements; providing reasonable
assurance that our receipts and expenditures of our assets are made in
accordance with management authorization; and providing reasonable assurance
that unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial statements would be prevented or detected on
a timely basis. Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance that a
misstatement of our financial statements would be prevented or detected. Any
failure to maintain an effective system of internal control over financial
reporting could limit our ability to report our financial results accurately and
timely or to detect and prevent fraud.
  25
 Index
   We
rely extensively on computer systems to process transactions, summarize results
and manage our business. Disruptions in both our primary and secondary (back-up)
systems could harm our ability to run our business.
  Although
we have independent, redundant, and primary and secondary computer systems,
given the number of individual transactions we have each year, it is critical
that we maintain uninterrupted operation of our business-critical computer
systems. Our computer systems, including our back-up systems, are subject to
damage or interruption from power outages, computer and telecommunications
failures, computer viruses, internal or external security breaches, catastrophic
events such as fires, earthquakes, tornadoes and hurricanes, and/or errors by
our employees. If our computer systems and our back-up systems are damaged or
cease to function properly, we may have to make significant investment to fix or
replace them, and we may suffer interruptions in our operations in the interim.
Any material interruption in both of our computer systems and back-up systems
may have a material adverse effect on our business or results of
operations.
  Natural
disasters could unfavorably affect our financial performance.
 
 The
occurrence of natural disasters, such as hurricanes or earthquakes, particularly
in Texas where our centralized operating systems and administrative personnel
are located, could unfavorably affect our operations and financial performance.
Such events could result in physical damage to one or more of our properties,
the temporary closure of one or more properties, the temporary lack of an
adequate work force in a market, and the temporary or long-term disruption in
the supply of products from suppliers.
 
 Substantial
future sales of our common stock in the public market or otherwise may depress
our stock price and make it difficult for you to recover the full value of your
investment in our shares.
  The
market price of our common stock could decline significantly if we or our
existing stockholders sell a large number of shares, if we issue a large number
of shares of our common stock in connection with future financing activities,
acquisitions or otherwise, or due to the perception that such sales could occur.
These factors also could make it more difficult to raise funds through future
offerings of common stock.
  Over
19% of our stock is controlled by our chairman and chief executive officer, who
has the ability to substantially influence the election of directors and other
matters submitted to stockholders.
  James H.
Long, beneficially owns 1,853,880 shares of our common stock, which represent
approximately 19.2% of our shares outstanding. As a result, he has and is
expected to continue to have the ability to significantly influence the election
of our board of directors and the outcome of all other issues submitted to our
stockholders. The interests of this principal stockholder may not always
coincide with our interests or the interests of other stockholders, and he may
act in a manner that advances his best interests and not necessarily those of
other stockholders. One consequence to this substantial influence or control is
that it may be difficult for investors to remove management of the company. It
could also deter unsolicited takeovers, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices.
  Our
stock price may be subject to substantial volatility, and the value of your
investment may decline.
  Our
common stock is traded on The Nasdaq Global Market, and trading volume may be
limited or sporadic.  The market price of our common stock has
experienced, and may continue to experience, substantial volatility. Over 2008,
our common stock traded between $5.11 and $13.25 per share, on volume ranging
from approximately 1,200 to 191,000 shares per day.  As a result, the
current price for our common stock on The Nasdaq Global Market is not
necessarily a reliable indicator of our fair market value. The price at which
our common stock will trade may fluctuate as a result of a number of factors,
including the number of shares available for sale in the market, quarterly
variations in our operating results, new products or services by us or
competitors, regulatory investigations or determinations, acquisitions or
strategic alliances by us or our competitors, recruitment or departures of key
personnel, the gain or loss of significant customers, changes in the estimates
of our operating performance, actual or threatened litigation, market conditions
in our industry and the economy as a whole. Volatility in the price of our
common stock on The Nasdaq Global Market may depress the trading price of the
common stock our common stock.  The risk of volatility and depressed
prices of our common stock also applies to warrant holders who receive shares of
common stock upon conversion.
  26
 Index
  Numerous
factors, including many over which we have no control, may have a significant
impact on the market price of our common stock, including:
  ·
                announcements
      of new products or services by us or our competitors; current events
      affecting the political, economic and social situation in the United
      States and other countries where we
operate;
  ·
                trends
      in our industry and the markets in which we
  operate;
  ·
                changes
      in financial estimates and recommendations by securities
      analysts;
  ·
                acquisitions
      and financings by us or our
competitors;
  ·
                the
      gain or loss of a significant
customer;
  ·
                quarterly
      variations in operating results;
  ·
                the
      operating and stock price performance of other companies that investors
      may consider to be comparable; and
  ·
                purchases
      or sales of blocks of our
securities.
  Furthermore,
stockholders may initiate securities class action lawsuits if the market price
of our stock drops significantly, which may cause us to incur substantial costs
and could divert the time and attention of our management.
  Future
issuances of common stock and hedging activities may depress the trading price
of our common stock.
  Any
future issuance of equity securities, including the issuance of shares upon
exercise of outstanding warrants, could dilute the interests of our existing
stockholders, and could substantially decrease the trading price of our common
stock.  As of October 31, 2008, we had outstanding more than 2.0
million warrants and options to acquire our common stock at prices between $0.82
and $12.63 per share.   We may issue equity securities in the
future for a number of reasons, including to finance our operations and business
strategy, in connection with acquisitions, to adjust our ratio of debt to
equity, to satisfy our obligations upon the exercise of outstanding warrants or
options or for other reasons.
  Provisions in our certificate of
incorporation, bylaws, charter documents and Delaware law could discourage a
change in control, or an acquisition of us by a third party, even if the
acquisition would be favorable to you, thereby and adversely affect existing
stockholders
 
 Our
certificate of incorporation and the Delaware General Corporation Law contain
provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of our company, even when these attempts
may be in the best interests of stockholders. For example, our certificate of
incorporation also authorizes our board of directors, without stockholder
approval, to issue one or more series of preferred stock, which could have
voting and conversion rights that adversely affect or dilute the voting power of
the holders of common stock. Delaware law also imposes conditions on certain
business combination transactions with “interested stockholders.”
  These
provisions and others that could be adopted in the future could deter
unsolicited takeovers or delay or prevent changes in our control or management,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. These provisions may also
limit the ability of stockholders to approve transactions that they may deem to
be in their best interests.
  We
do not expect to pay dividends in the foreseeable future, and accordingly you
must rely on stock appreciation for any return on your investment
  We have
paid no cash dividends on our common stock to date, and we currently intend to
retain our future earnings, if any, to fund the continued development and growth
of our business. As a result, we do not expect to pay any cash dividends in the
foreseeable future.  Further, any payment of cash dividends will also
depend on our financial condition, results of operations, capital requirements
and other factors, including contractual restrictions to which we may be
subject, and will be at the discretion of our board of directors.
  27
 Index


Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds





See Note
4 to condensed consolidated financial statements in Part I, Item 1 regarding
issuance of additional purchase price consideration consisting of 75,000
unregistered shares of the Company’s common stock to Network Architects, Corp.
in July 2008 for achievement of certain operating profit milestones during the
twelve-month period ending May 31, 2008.





The
following table provides information regarding purchases by the Company of its
common stock during the third quarter ended September 30, 2008:





Period
                  
                  Total
      Number
                    of
      Shares
                    Purchased
                  
                  
                  Average
                    Price
      Paid
                    per Share
                  
                  
                  Total
      Number of Shares Purchased as Part of Publicly Announced Plans or Programs
                  
                  
                  Approximate
      Dollar Amount of Shares That May yet be Purchased Under the Plans or Programs(In
      Thousands)July
      1 to July 31, 2008
                  
                  
                  346
                  
                  
                  $
                  8.15
                  
                  
                  
                  346
                  
                  
                  NoneAugust
      1 to August 31, 2008
                  
                  None
                  
                  
                  
                  N/A
                  
                  
                  None
                  
                  
                  NoneSeptember
      1 to September 30, 2008
                  
                  
                  78,940
                  
                  
                  $
                  7.03
                  
                  
                  
                  78,940
                  
                  
                  $
                  1,443Total
                  
                  
                  79,286
                  
                  
                  $
                  7.06
                  
                  
                  
                  79,286


28
 Index




Effective
September 10, 2008, the Board of Directors authorized the purchase of up to
$2,000 of the Company’s common stock on or before December 31, 2008. These
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 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.





Item 6. Exhibits





See
exhibit list in the Index to Exhibits 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:
      November 7, 2008
              By:
              /s/
      BRIAN FONTANABrian
      Fontana, Vice Presidentand
      Chief Financial Officer


29
 Index


Index
to Exhibits





Exhibit
                No.
              
              Description
              
              Filed
      Herewith or
                Incorporated
      by
                Reference
      From: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.




30