UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





x
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended September 30, 2009





 ̈
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
    1934





For the
transition period from _______ to _______





Commission
file number 000-51720





InferX
Corporation


(Exact
name of registrant as specified in its charter)





Delaware
              
              54-1614664(State or other jurisdiction of incorporation or organization)
              
              (I.R.S. Employer Identification No.)





46950
      Jennings Farm DriveSuite
      290Sterling,
      Virginia
              
              20164(Address
      of principal executive offices)
              
              (Zip
      Code)





(703)
444-6030


(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  xNo o





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.





Large
      accelerated filer o
              Accelerated
      filer oNon-accelerated
      filer o
              Smaller
      reporting company x(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 Act). Yes oNo x





As
of  November 20, 2009, there were 886,955 outstanding shares of the
registrant’s common stock, $.0001 par value.





INFERX
CORPORATION
 INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 Condensed
      Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and
      December 31, 2008
                  
                  
                  F-2Condensed
      Consolidated Statements of Operations for the Nine and Three Months Ended
      September 30, 2009 and 2008 (Unaudited)
                  
                  
                  F-3Condensed
      Consolidated Statements of Cash Flows for the Nine Months Ended September
      30, 2009 and 2008 (Unaudited)
                  
                  
                  F-4Notes
      to Condensed Consolidated Financial Statements
                  
                  
                  F-5




F-1




INFERX CORPORATION
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 SEPTEMBER
30, 2009 (UNAUDITED) AND DECEMBER 31, 2008
 
 (UNAUDITED)SEPTEMBER30,
                      
                      
                      DECEMBER31,2009
                      
                      
                      2008ASSETSCURRENT
      ASSETSCash
                      
                      $
                      13,829
                      
                      
                      $
                      -Total
      current assets
                      
                      
                      13,829
                      
                      
                      
                      -Fixed
      assets, net of depreciation
                      
                      
                      24,398
                      
                      
                      
                      31,579Other
      AssetComputer
      software development costs, net of amortization
                      
                      
                      83,728
                      
                      
                      
                      140,249Total
      other asset
                      
                      
                      83,728
                      
                      
                      
                      140,249TOTAL
      ASSETS
                      
                      $
                      121,955
                      
                      
                      $
                      171,828LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                      
                      $
                      1,748,051
                      
                      
                      $
                      1,462,684Cash
      overdraft
                      
                      
                      -
                      
                      
                      
                      1,495Liability
      for stock to be issued
                      
                      
                      127,000
                      
                      
                      
                      -Current
      portion of notes payable, net of debt discount of $85,928
                      
                      
                      304,488
                      
                      
                      
                      395,278Total
      current liabilities
                      
                      
                      2,179,539
                      
                      
                      
                      1,859,457Long-term
      LiabilitiesNotes
      payable, net of current portion, net of debt discount of
      $1,059
                      
                      
                      341,461
                      
                      
                      
                      163,540TOTAL
      LIABILITIES
                      
                      
                      2,521,000
                      
                      
                      
                      2,022,997STOCKHOLDERS'
      EQUITY (DEFICIT)Preferred
      stock, par value $0.0001 per share, 10,000,000 shares authorized and no
      shares issued and outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, par value $0.0001 per share, 400,000,000 shares authorized and
      886,926 shares issued and outstanding, respectively
                      
                      
                      89
                      
                      
                      
                      89Additional
      paid-in capital
                      
                      
                      4,950,377
                      
                      
                      
                      4,950,377Retained
      earnings (defict)
                      
                      
                      (7,349,511
                      )
                      
                      
                      (6,801,635
                      )Total
      stockholders' equity (deficit)
                      
                      
                      (2,399,045
                      )
                      
                      
                      (1,851,169
                      )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                      
                      $
                      121,955
                      
                      
                      $
                      171,828
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  F-2
 
 INFERX
CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 FOR
THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 
 NINE MONTHSENDED
                  
                  
                  THREE MONTHSENDEDSEPTEMBER 30,
                  
                  
                  SEPTEMBER 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008REVENUE
                  
                  $
                  -
                  
                  
                  $
                  80,934
                  
                  
                  $
                  -
                  
                  
                  $
                  -COST
      OF REVENUESDirect
      labor and other finges
                  
                  
                  -
                  
                  
                  
                  43,261
                  
                  
                  
                  -
                  
                  
                  
                  -Subcontractor
                  
                  
                  -
                  
                  
                  
                  19,710
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      direct costs
                  
                  
                  -
                  
                  
                  
                  416
                  
                  
                  
                  -
                  
                  
                  
                  -Amortization
      of computer software development costs
                  
                  
                  56,521
                  
                  
                  
                  189,273
                  
                  
                  
                  18,840
                  
                  
                  
                  63,091Total
      costs of revenues
                  
                  
                  56,521
                  
                  
                  
                  252,660
                  
                  
                  
                  18,840
                  
                  
                  
                  63,091GROSS
      (LOSS)
                  
                  
                  (56,521
                  )
                  
                  
                  (171,726
                  )
                  
                  
                  (18,840
                  )
                  
                  
                  (63,091
                  )OPERATING
      EXPENSESIndirect
      and overhead labor and fringes
                  
                  
                  199,254
                  
                  
                  
                  547,354
                  
                  
                  
                  60,269
                  
                  
                  
                  190,600Professional
      fees
                  
                  
                  65,979
                  
                  
                  
                  171,175
                  
                  
                  
                  7,338
                  
                  
                  
                  13,732Travel
      related costs
                  
                  
                  5,481
                  
                  
                  
                  21,465
                  
                  
                  
                  2,439
                  
                  
                  
                  3,299Rent
                  
                  
                  500
                  
                  
                  
                  112,601
                  
                  
                  
                  -
                  
                  
                  
                  43,949General
      and administrative
                  
                  
                  95,780
                  
                  
                  
                  106,725
                  
                  
                  
                  14,528
                  
                  
                  
                  65,674Stock
      issued for services
                  
                  
                  -
                  
                  
                  
                  116,625
                  
                  
                  
                  -
                  
                  
                  
                  -Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  33,232
                  
                  
                  
                  -
                  
                  
                  
                  -Depreciation
                  
                  
                  7,180
                  
                  
                  
                  12,298
                  
                  
                  
                  2,230
                  
                  
                  
                  2,150Total
      operating expenses
                  
                  
                  374,174
                  
                  
                  
                  1,121,475
                  
                  
                  
                  86,804
                  
                  
                  
                  319,404NET LOSS FROM OPERATIONS BEFORE
      OTHER EXPENSE AND PROVISION FOR INCOME
      TAXES
                  
                  
                  (430,695
                  )
                  
                  
                  (1,293,201
                  )
                  
                  
                  (105,644
                  )
                  
                  
                  (382,495
                  )OTHER
      EXPENSEInterest
      expense, net of interest income
                  
                  
                  117,181
                  
                  
                  
                  1,136,189
                  
                  
                  
                  27,143
                  
                  
                  
                  1,038,889NET
      LOSS FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES
                  
                  
                  (547,876
                  )
                  
                  
                  (2,429,390
                  )
                  
                  
                  (132,787
                  )
                  
                  
                  (1,421,384
                  )Provision
      for income taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -NET
      (LOSS) APPLICABLE TO SHARES
                  
                  $
                  (547,876
                  )
                  
                  $
                  (2,429,390
                  )
                  
                  $
                  (132,787
                  )
                  
                  $
                  (1,421,384
                  )NET
      (LOSS) PER BASIC AND DILUTED SHARES
                  
                  $
                  (0.62
                  )
                  
                  $
                  (3.82
                  )
                  
                  $
                  (0.15
                  )
                  
                  $
                  (2.09
                  )WEIGHTED AVERAGE NUMBER
      OF SHARES
      OUTSTANDING
                  
                  
                  886,926
                  
                  
                  
                  635,170
                  
                  
                  
                  886,926
                  
                  
                  
                  678,632
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  F-3
 
 INFERX
CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 
 2009
                          
                          
                          2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss)
                          
                          $
                          (547,876
                          )
                          
                          $
                          (2,429,390
                          )Adjustments to reconcile net
      (loss) to net cash
      (used in) operating activities:Stock
      issued for services or liability for stock to be issued
                          
                          
                          4,000
                          
                          
                          
                          116,625Stock
      based compensation
                          
                          
                          -
                          
                          
                          
                          33,231Beneficial
      conversion feature
                          
                          
                          -
                          
                          
                          
                          1,091,253Amortization
      of computer software development costs
                          
                          
                          56,521
                          
                          
                          
                          189,273Depreciation
                          
                          
                          7,180
                          
                          
                          
                          12,298Amortization
      of debt discount
                          
                          
                          87,131
                          
                          
                          
                          24,462Change
      in assets and liabilitiesIncrease
      in accounts payable and accrued expenses
                          
                          
                          271,539
                          
                          
                          
                          473,319Total
      adjustments
                          
                          
                          426,371
                          
                          
                          
                          1,940,461Net
      cash (used in) operating activities
                          
                          
                          (121,505
                          )
                          
                          
                          (488,929
                          )CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                          
                          
                          -
                          
                          
                          
                          (14,978
                          )Computer
      software development costs
                          
                          
                          -
                          
                          
                          
                          -Net
      cash (used in) investing activities
                          
                          
                          -
                          
                          
                          
                          (14,978
                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      received for shares of common stock to be issued
                          
                          
                          123,000
                          
                          
                          
                          -(Decrease)
      in cash overdraft
                          
                          
                          (1,495
                          )
                          
                          
                          -Borrowings
      of promissory notes
                          
                          
                          -
                          
                          
                          
                          537,500(Repayment)
      of notes payable
                          
                          
                          -
                          
                          
                          
                          (10,524
                          )Net
      cash provided by financing activities
                          
                          
                          121,505
                          
                          
                          
                          526,976NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                          
                          
                          -
                          
                          
                          
                          23,069CASH
      AND CASH EQUIVALENTS - BEGINNING OF PERIOD
                          
                          
                          -
                          
                          
                          
                          1,670CASH
      AND CASH EQUIVALENTS - END OF PERIOD
                          
                          $
                          -
                          
                          
                          $
                          24,739SUPPLEMENTAL
      INFORMATION OF CASH FLOW ACTIVITYCash
      paid during the year for interest
                          
                          $
                          1,851
                          
                          
                          $
                          10,284Cash
      paid during the year for income taxes
                          
                          $
                          -
                          
                          
                          $
                          -SUPPLEMENTAL
      INFORMATION OF NONCASH ACTIVITYConversion
      of notes payable to liability for stock to be issued/ stock
      issued
                          
                          $
                          -
                          
                          
                          $
                          162,500Issuance
      of warrants with convertible notes
                          
                          $
                          -
                          
                          
                          $
                          227,598Stock
      issued for compensation
                          
                          $
                          -
                          
                          
                          $
                          15,000Stock
      issued for services or liability for stock to be issued
                          
                          $
                          4,000
                          
                          
                          $
                          116,625
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
 F-4
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      1-
                ORGANIZATION AND BASIS
      OF PRESENTATION
  The
unaudited condensed consolidated financial statements included herein have been
prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”).  The condensed consolidated financial
statements and notes are presented as permitted on Form 10-Q and do not contain
information included in the Company’s annual statements and notes.  Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are adequate
to make the information presented not misleading.  It is suggested that
these condensed consolidated financial statements be read in conjunction with
the December 31, 2008 audited financial statements and the accompanying notes
thereto.  While management believes the procedures followed in preparing
these condensed consolidated financial statements are reasonable, the accuracy
of the amounts are in some respects dependent upon the facts that will exist,
and procedures that will be accomplished by the Company later in the
year.
  These
unaudited condensed consolidated financial statements reflect all adjustments,
including normal recurring adjustments which, in the opinion of management, are
necessary to present fairly the consolidated operations and cash flows for the
periods presented.
  Black
Nickel Acquisition Corp. I was incorporated in Delaware on May 26, 2005, and was
formed as a vehicle to pursue a business combination. From inception through
October 24, 2006, Black Nickel Acquisition Corp. I, was engaged in
organizational efforts and obtaining initial financing.
  On May
17, 2006, Black Nickel Acquisition Corp. I entered into a letter of intent with
InferX Corporation, a privately-held Virginia corporation (“InferX Virginia”),
with respect to entering into a merger transaction relating to bridge financing
for InferX Virginia and the acquisition of and merger with InferX Virginia. The
transaction closed on October 24, 2006. Following the merger, Black Nickel
Acquisition Corp. I effected a short-form merger of InferX Virginia with and
into Black Nickel Acquisition Corp. I, pursuant to which the separate existence
of InferX Virginia terminated and Black Nickel Acquisition Corp. I changed its
name to InferX Corporation (“InferX” or the “Company”).
  The
transaction was recorded as a recapitalization under the purchase method of
accounting, as InferX became the accounting acquirer. The reported amounts and
disclosures contained in the consolidated financial statements are those of
InferX Corporation, the operating company.
  InferX
was incorporated under the laws of Delaware in 1999. On December 31, 2005,
InferX and Datamat Systems Research, Inc. (“Datamat”), a company incorporated in
1992 under the corporate laws of the Commonwealth of Virginia executed an
Agreement and Plan of Merger (the “Merger”). InferX and Datamat had common
majority directors. The financial statements herein reflect the combined entity,
and all intercompany transactions and accounts have been eliminated. As a result
of the Merger, InferX merged with and into Datamat, the surviving entity. Upon
completion, Datamat changed its name to InferX Corporation.
  InferX
was formed to develop and commercially market computer applications software
systems that were initially developed by Datamat with grants from the Missile
Defense Agency.  Datamat was formed as a professional services research and
development firm, specializing in the Department of Defense. The Company
currently provides services and software to the United States government, and is
in process of formalizing business plans that will enable them to provide
software and services to commercial entities as well.
  On March
16, 2009, the Company entered into an agreement and plan of reorganization (the
“Merger Agreement”) with the Irus Group, Inc. under which it intends to effect a
reverse triangular merger between The Irus Group, Inc. and the Company’s
wholly-owned subsidiary, Irus Acquisition Corp. (formed for the purse of
completing this transaction). The Merger Agreement was then amended on June 15,
2009 (the “First Amended and Restated Agreement”) to reflect the change in the
amount of the issued shares to Irus in the transaction.
  Under the
terms of the First Amended and Restated Agreement, the issued and outstanding
shares of The Irus Group common stock will be automatically converted into the
right to receive 56% of the issued and outstanding shares of the Company’s
common stock.
  F-5
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      1-
                ORGANIZATION AND BASIS
      OF PRESENTATION (COINTINUED)
  The
Merger Agreement also provides that, at the effective time of the Merger, the
Company’s Board of Directors agrees to appoint Vijay Suri, President and CEO of
the Company and have Vijay Suri fill a vacancy on its Board of Directors. In
addition, effectiveness of the Merger Agreement is conditional upon (i) the
Company restructuring existing debt by converting the existing debt and warrants
to common stock with the intention of having no more than 57-60 million shares
of its common stock outstanding prior to a reverse split of not less than 1:10;
(ii) the Company using its best efforts to reduce its accounts payable by 70%,
(iii) Vijay Suri, President and CEO of The Irus Group, Inc. executing an
employment agreement with the Company, and (iv) additional customary closing
conditions relating to delivery of financial statements, closing certificates as
to representations and warranties, and the delivery of any required consents or
government approvals. In accordance with the merger, the Company on July 27,
2009 filed a Schedule 14C with the Securities and Exchange Commission. The
Schedule 14C, contained 2 proposals; to increase the authorized common shares
from 75,000,000 to 400,000,000 and to reverse split the common stock on a 1:20
basis. All share and per share amounts have been presented on a post-split
basis.
  Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted
Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB
Accounting Standards Codification (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. All guidance contained in the Codification carries an equal
level of authority. The Codification superseded all existing non-SEC accounting
and reporting standards. All other non-grandfathered, non-SEC accounting
literature not included in the Codification is non-authoritative. The FASB will
not issue new standards in the form of Statements, FASB Positions or Emerging
Issue Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASUs”).
  The FASB
will not consider ASUs as authoritative in their own right. ASUs will serve only
to update the Codification, provide background information about the guidance
and provide the bases for conclusions on the change(s) in the Codification.
References made to FASB guidance throughout this document have been updated for
the Codification.
  Going
Concern
  As shown
in the accompanying condensed consolidated financial statements the Company has
incurred a loss of $547,876 and $2,429,390 for the nine months ended September
30, 2009 and 2008, respectively, and has a working capital deficiency of
$2,165,710 as of September 30, 2009.  The principal reasons for the
recurring losses and working capital deficiency relates to the Company’s
continued focus on refining its products and search for profitable government
contracts. The Company expects the negative cash flow from operations to
continue its trend through the next twelve months, however continues to expand
their pipeline of contracts. These factors raise significant doubt about the
ability of the Company to continue as a going concern.
  Management’s
plans to address these conditions include continued efforts to obtain government
contracts as well as commercial contracts through expanding sources and new
technology, and the raising of additional capital through the sale of the
Company’s stock. Additionally, the Company has commenced plan’s to reduce their
liabilities by conversion of the notes payable and underlying warrants into
shares of common stock. The Company has only had discussions up to this point
other than the $169,500 they have converted in 2008.
  The
Company’s long-term success is dependent upon the obtaining of sufficient
capital to fund its operations; development of its products; and launching its
products to the worldwide market. These factors will contribute to the Company’s
obtaining sufficient sales volume to be profitable. To achieve these objectives,
the Company may be required to raise additional capital through public or
private financings or other arrangements.
  It cannot
be assured that such financings will be available on terms attractive to the
Company, if at all. Such financings may be dilutive to existing stockholders and
may contain restrictive covenants.
  F-6
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      1-
                ORGANIZATION AND BASIS
      OF PRESENTATION (COINTINUED)
  Going Concern
(Continued)
  The
Company is subject to certain risks common to technology-based companies in
similar stages of development. Principal risks to the Company include
uncertainty of growth in market acceptance for its products; history of losses
in recent years; ability to remain competitive in response to new technologies;
costs to defend, as well as risks of losing patent and intellectual property
rights; reliance on limited number of suppliers; reliance on outsourced
manufacture of its products for quality control and product availability;
uncertainty of demand for its products in certain markets; ability to manage
growth effectively; dependence on key members of its management; and its ability
to obtain adequate capital to fund future operations.
  The
condensed consolidated financial statements do not include any adjustments
relating to the carrying amounts of recorded assets or the carrying amounts and
classification of recorded liabilities that may be required should the Company
be unable to continue as a going concern.
  NOTE
      2-
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
  Principles of
Consolidation
  The
condensed consolidated financial statements include those of the Company and its
wholly-owned subsidiary. All intercompany accounts and transactions have been
eliminated in consolidation.
  Use of
Estimates
  The
preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
  Cash and Cash
Equivalents
  The
Company considers all highly liquid debt instruments and other short-term
investments with a maturity of three months or less, when purchased, to be cash
equivalents.
  The
Company maintains cash and cash equivalent balances at one financial institution
that is insured by the Federal Deposit Insurance Corporation.
  Allowance for Doubtful
Accounts
  The
Company provides an allowance for doubtful accounts, which is based upon a
review of outstanding receivables as well as historical collection information.
Credit is granted to substantially all customers on an unsecured basis. In
determining the amount of the allowance, management is required to make certain
estimates and assumptions. Management has determined that as of September 30,
2009, an allowance of $2,364 is required.
  Fixed
Assets
  Fixed
assets are stated at cost, less accumulated depreciation. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets (primarily three to five years). Costs of maintenance and repairs
are charged to expense as incurred.
  F-7
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      2-
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)
  Computer Software
Development Costs
  During
2008, the Company capitalized certain software development costs. The Company
capitalizes the cost of software in accordance with SFAS 86 once technological
feasibility has been demonstrated, as the Company has in the past sold, leased
or otherwise marketed their software, and plans on doing so in the future. The
Company capitalizes costs incurred to develop and market their privacy
preserving software during the development process, including payroll costs for
employees who are directly associated with the development process and services
performed by consultants. Amortization of such costs is based on the greater of
(1) the ratio of current gross revenues to the sum of current and anticipated
gross revenues, or (2) the straight-line method over the remaining economic life
of the software, typically five years. It is possible that those anticipated
gross revenues, the remaining economic life of the products, or both, may be
reduced as a result of future events. The Company has not developed any software
for internal use. The Company commencing January 1, 2008, placed an additional
$226,084 of software development from prior years into service, which is being
amortized over a three year period.
  For the
nine months ended September 30, 2009 and 2008, the Company recognized $56,521
and $189.273 of amortization expense on its capitalized software costs,
respectively.
  Recoverability of Long-Lived
Assets
  The
Company reviews the recoverability of its long-lived assets on a periodic basis
whenever events and changes in circumstances have occurred which may indicate a
possible impairment. The assessment for potential impairment is based primarily
on the Company’s ability to recover the carrying value of its long-lived assets
from expected future cash flows from its operations on an undiscounted basis. If
such assets are determined to be impaired, the impairment recognized is the
amount by which the carrying value of the assets exceeds the fair value of the
assets. Fixed assets to be disposed of by sale are carried at the lower of the
then current carrying value or fair value less estimated costs to
sell.
  Revenue
Recognition
  The
Company generates revenue from professional services rendered to customers as
well as from application management support contracts with governmental units.
The Company’s revenue is generated under time-and-material contracts and
fixed-price contracts.
  Time-and-Material
Contracts
  Time-and-material
contracts revenue is generated whereby costs are generally incurred in
proportion with contracted billing schedules and revenue is recognized as
services are performed, with the corresponding cost of providing those services
reflected as direct costs. The customers are billed in accordance with the
contracts entered into. Such method is expected to result in reasonably
consistent profit margins over the contract term.
  Fixed-Price
Contracts
  Revenue
from firm-fixed-price contracts is recognized upon achievement of the milestones
contained in the contracts. Revenue is not recognized until collectibility is
assured, which does not take place until completion of the particular milestone.
Costs are recognized as services are performed.
  The
Company does not derive revenue from projects involving multiple
revenue-generating activities. If a contract would involve the provision of
multiple service elements, total estimated contract revenue would be allocated
to each element based on the fair value of each element. The amount of revenue
allocated to each element would then be limited to the amount that is not
contingent upon the delivery of another element in the future. Revenue for each
element would then be recognized depending upon whether the contract is a
time-and-materials contract or a fixed-price, fixed-time
contract.
  F-8
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      2-
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)
  Stock-Based
Compensation
  In 2006,
the Company adopted the provisions of ASC 718-10 “Share Based Payments”. The
adoption of this principle had no effect on the Company’s
operations.
 
 ASC
718-10 requires recognition of stock-based compensation expense for all
share-based payments based on fair value.  Prior to January 1, 2006, the
Company measured compensation expense for all of its share-based compensation
using the intrinsic value method.
 
 The
Company has elected to use the modified-prospective approach method.  Under
that transition method, the calculated expense in 2006 is equivalent to
compensation expense for all awards granted prior to, but not yet vested as of
January 1, 2006, based on the grant-date fair values.  Stock-based
compensation expense for all awards granted after January 1, 2006 is based on
the grant-date fair values.  The Company recognizes these compensation
costs, net of an estimated forfeiture rate, on a pro rata basis over the
requisite service period of each vesting tranche of each award.  The
Company considers voluntary termination behavior as well as trends of actual
option forfeitures when estimating the forfeiture rate.
 
 The
Company measures compensation expense for its non-employee stock-based
compensation under ASC 505-50, “Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services".The fair value of the option issued is
used to measure the transaction, as this is more reliable than the fair value of
the services received.  The fair value is measured at the value of the
Company’s common stock on the date that the commitment for performance by the
counterparty has been reached or the counterparty’s performance is
complete.  The fair value of the equity instrument is charged directly to
compensation expense and additional paid-in capital.  For common stock
issuances to non-employees that are fully vested and are for future periods, the
Company classifies these issuances as prepaid expenses and expenses the prepaid
expenses over the service period.  At no time has the Company issued common
stock for a period that exceeds one year.
  Concentrations
  The
Company has derived all of its revenue for the nine months ended September 30,
2008 from one customer.
  Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of accounts receivable. To date, accounts
receivable have been derived from contracts with agencies of the federal
government. Accounts receivable are generally due within 30 days and no
collateral is required.
  Segment
Reporting
  The
Company follows the provisions of ASC 280-10, "Disclosures about Segments of an
Enterprise and Related Information”.This standard requires that
companies disclose operating segments based on the manner in which management
disaggregates the Company in making internal operating decisions.  The
Company only operates in one reporting segment as of September 30, 2009 and for
the nine months ended September 30, 2009 and 2008.
  F-9
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      2-
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)
  Fair Value of Financial
Instruments (other than Derivative Financial Instruments)
 
 The
carrying amounts reported in the condensed consolidated balance sheet for cash
and cash equivalents, and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments.  For the
notes payable, the carrying amount reported is based upon the incremental
borrowing rates otherwise available to the Company for similar
borrowings.
  Convertible
Instruments
  The
Company reviews the terms of convertible debt and equity securities for
indications requiring bifurcation, and separate accounting, for the embedded
conversion feature. Generally, embedded conversion features, where the ability
to physical or net-share settle the conversion option is not within the control
of the Company, are bifurcated and accounted for as a derivative financial
instrument. Bifurcation of the embedded derivative instrument requires
allocation of the proceeds first to the fair value of the embedded derivative
instrument with the residual allocated to the debt instrument. The resulting
discount to the face value of the debt instrument is amortized through periodic
charges to interest expense using the Effective Interest Method.
  Income
Taxes
  Under ASC
740 the liability method is used in accounting for income taxes.  Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
  Uncertainty in Income
Taxes
  Under ASC
740-10-25 recognition and measurement of uncertain income tax positions is
required using a “more-likely-than-not” approach.  Management evaluates
their tax positions on an annual basis and has determined that as of September
30, 2009 no additional accrual for income taxes is necessary.
  (Loss) Per Share of Common
Stock
  Basic net
(loss) per common share (“EPS”) is computed using the weighted average number of
common shares outstanding for the period. Diluted earnings per share includes
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants. Common stock equivalents
are not included in the computation of diluted earnings per share when the
Company reports a loss because to do so would be anti-dilutive for the periods
presented.
  F-10
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      2-
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)
  (Loss) Per Share of Common
Stock (Continued)
  The
following is a reconciliation of the computation for basic and diluted
EPS:
  Nine
      Months EndedSeptember
      30,
                        
                        
                        September
      30,2009
                        
                        
                        2008Net
      (loss)
                        
                        $
                        (547,876
                        )
                        
                        $
                        (2,429,390
                        )Weighted-average
      common shares outstanding :Basic
                        
                        
                        886,926
                        
                        
                        
                        635,170Convertible
      Notes
                        
                        
                        945,000
                        
                        
                        
                        1,425,000Warrants
                        
                        
                        1,020,439
                        
                        
                        
                        766,220Options
                        
                        
                        100,750
                        
                        
                        
                        7,000Diluted
                        
                        
                        2,953,115
                        
                        
                        
                        2,833,389Basic
      net (loss) per share
                        
                        $
                        (0.62
                        )
                        
                        $
                        (3.82
                        )Diluted
      net (loss) per share
                        
                        $
                        (0.62
                        )
                        
                        $
                        (3.82
                        )
  Research and
Development
  Research
and development costs are expensed as incurred. In addition, research and
development costs have been included in the condensed consolidated statements of
operations for the nine months ended September 30, 2009 and 2008,
respectively.
  Recent Issued Accounting
Standards
  In
September 2006, ASC issued 820, Fair Value Measurements. ASC
820 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Early adoption is
encouraged. The adoption of ASC 820 is not expected to have a material impact on
the financial statements.
 
 In
February 2007, ASC issued 825-10, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of ASC 320-10,
(“ASC 825-10”) which permits entities to choose to measure many financial
instruments and certain other items at fair value at specified election dates. A
business entity is required to report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. This statement is expected to expand the use of fair value
measurement. ASC 825-10 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.
 
 In
December 2007, the ASC issued ASC 810-10-65, Noncontrolling Interests in
Consolidated Financial Statements. ASC 810-10-65 establishes accounting
and reporting standards for ownership interests in subsidiaries held by parties
other than the parent, changes in a parent’s ownership of a noncontrolling
interest, calculation and disclosure of the consolidated net income attributable
to the parent and the noncontrolling interest, changes in a parent’s ownership
interest while the parent retains its controlling financial interest and fair
value measurement of any retained noncontrolling equity
investment.
  F-11
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)
  Recent Issued Accounting
Standards (Continued)
 
 ASC
810-10-65 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. Management is determining the impact that
the adoption of ASC 810-10-65 will have on the Company’s financial position,
results of operations or cash flows.
 
 In
December 2007, the Company adopted ASC 805,Business Combinations (“ASC
805”). ASC 805 retains the fundamental requirements that the acquisition method
of accounting be used for all business combinations and for an acquirer to be
identified for each business combination. ASC 805 defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control.  ASC 805 will require an entity to record separately from
the business combination the direct costs, where previously these costs were
included in the total allocated cost of the acquisition.  ASC 805 will
require an entity to recognize the assets acquired, liabilities assumed, and any
non-controlling interest in the acquired at the acquisition date, at their fair
values as of that date.
 
 ASC 805
will require an entity to recognize as an asset or liability at fair value for
certain contingencies, either contractual or non-contractual, if certain
criteria are met.  Finally, ASC 805 will require an entity to recognize
contingent consideration at the date of acquisition, based on the fair value at
that date.  This will be effective for business combinations completed on
or after the first annual reporting period beginning on or after December 15,
2008.  Early adoption is not permitted and the ASC is to be applied
prospectively only.  Upon adoption of this ASC, there would be no impact to
the Company’s results of operations and financial condition for acquisitions
previously completed.  The adoption of ASC 805 is not expected to have a
material effect on the Company’s financial position, results of operations or
cash flows.
  In March
2008, ASC issued ASC 815, Disclosures about Derivative
Instruments and Hedging Activities”, (“ASC 815”). ASC 815 requires
enhanced disclosures about an entity’s derivative and hedging activities. These
enhanced disclosures will discuss: how and why an entity uses derivative
instruments; how derivative instruments and related hedged items are accounted
for and its related interpretations; and how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. ASC 815 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. The Company does
not believe that ASC 815 will have an impact on their results of operations or
financial position.
  In April
2008, ASC issued ASC 350, “Determination of the Useful Life of Intangible
Assets”. This 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 ASC 350. The guidance is used for determining the useful
life of a recognized intangible asset shall be applied prospectively to
intangible assets acquired after adoption, and the disclosure requirements shall
be applied prospectively to all intangible assets recognized as of, and
subsequent to, adoption. The Company does not believe ASC 350 will materially
impact their financial position, results of operations or cash
flows.
 
 ASC
470-20, “Accounting for Convertible Debt Instruments That May Be Settled in Cash
upon Conversion (Including Partial Cash Settlement)” (“ASC 470-20”) requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer’s non-convertible debt borrowing rate. ASC 470-20 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company does not believe that the adoption of ASC 470-20 will have a
material effect on its financial position, results of operations or cash
flows.
  F-12
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)
  Recent Issued Accounting
Standards (Continued)
  ASC
815-40, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to
an Entity’s Own Stock” (“ASC 815-40”), provides guidance for determining whether
an equity-linked financial instrument (or embedded feature) is indexed to an
entity’s own stock and it applies to any freestanding financial instrument or
embedded feature that has all the characteristics of a derivative., ASC 815-40
also applies to any freestanding financial instrument that is potentially
settled in an entity’s own stock. The Company is determining what impact, if
any, ASC 815-40 will have on its financial position, results of operations and
cash flows.
 
 ASC
470-20-65, “Transition Guidance for Conforming Changes to, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios” (“ASC 470-20-65”). ASC 470-20-65 is effective for
years ending after December 15, 2008. The overall objective of ASC 470-20-65 is
to provide for consistency in application of the standard. The Company has
computed and recorded a beneficial conversion feature in connection with certain
of their prior financing arrangements and does not believe that ASC 470-20-65
will have a material effect on that accounting.
  In
accordance with ASC 855 “Subsequent Events”, the Company is required to disclose
the date through which subsequent events have been evaluated and whether that
date is the date the financial statements were issued or the date the financial
statements were available to be issued.  ASC 855 is effective for financial
periods ending after June 15, 2009.  Management has evaluated subsequent
events through November 18, 2009, the date the condensed consolidated financial
statements were issued.
 
 Effective
July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurement and
Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments
to ASC 820-10, Fair Value
Measurements and Disclosures – Overall, for the fair value measurement of
liabilities. ASU 2009-05 provides clarification that in circumstances in which a
quoted market price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using certain
techniques. ASU 2009-05 also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of a liability. ASU 2009-05 also clarifies that both a
quoted price in an active market for the identical liability at the measurement
date and the quoted price for the identical liability when traded as an asset in
an active market when no adjustments to the quoted price of the asset are
required for Level 1 fair value measurements. Adoption of ASU 2009-05 did not
have a material impact on the Company’s results of operations or financial
condition.
 
 Other
ASU’s that have been issued or proposed by the FASB ASC that do not require
adoption until a future date and are not expected to have a material impact on
the financial statements upon adoption.
 
 NOTE
      3-
                FIXED
      ASSETS
  Fixed
assets consist of the following as of September 30, 2009 (unaudited) and
December 31, 2008, respectively:
  Estimated
      Useful
                            
                            
                            September
      30,
                            
                            
                            December
      31,Lives (Years)
                            
                            
                            2009
                            
                            
                            2008Computer
      equipment
                            
                            5
                            
                            
                            $
                            107,065
                            
                            
                            $
                            107,065Office
      machinery and equipment
                            
                            3
                            
                            
                            
                            15,638
                            
                            
                            
                            15,638Furniture 
      and fixtures
                            
                            5
                            
                            
                            
                            538
                            
                            
                            
                            538Automobile
                            
                            5
                            
                            
                            
                            58,476
                            
                            
                            
                            58,476181,717
                            
                            
                            
                            181,717Less:
      Accumulated depreciation
                            
                            
                            
                            
                            
                            (157,319
                            )
                            
                            
                            (150,138
                            )Total,
      net
                            
                            
                            
                            
                            $
                            24,398
                            
                            
                            $
                            31,579
  Depreciation
expense was $7,180 and $12,298 for the nine months ended September 30, 2009 and
2008, respectively.
  F-13
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      4-
                COMPUTER SOFTWARE
      DEVELOPMENT COSTS
  Computer
software development costs consist of the following as of September 30, 2009
(unaudited) and December 31, 2008, respectively:
  Estimated
      Useful
                          
                          
                          September
      30,
                          
                          
                          December
      31,Lives (Years)
                          
                          
                          2009
                          
                          
                          2008Computer
      software development costs
                          
                          5
                          
                          
                          $
                          986,724
                          
                          
                          $
                          986,724Less:
      Accumulated amortization
                          
                          
                          
                          
                          
                          (902,996
                          )
                          
                          
                          (846,475
                          )Total,
      net
                          
                          
                          
                          
                          $
                          83,728
                          
                          
                          $
                          140,249
  Amortization
expense was $56,521 and $189,273 for the nine months ended September 30, 2009
and 2008, respectively.
  Amortization
expense anticipated through December 31, 2010 is as follows:
  Period
      ended December 31:2009
                        
                        $
                        51,2842010
                        
                        
                        32,444$
                        83,728
  NOTE
      5-
                NOTES
      PAYABLE
  SBA
Loan
  On July
22, 2003, the Company and the U.S. Small Business Administration (“SBA”) entered
into a Note (the “Note”) under the SBA’s Secured Disaster Loan program in the
amount of $377,100.
  Under the
Note, the Company agreed to pay principal and interest at an annual rate of 4%
per annum, of $1,868 every month commencing twenty-five (25) months from the
date of the Note (commencing August 2005). The Note matures July
2034.
  The
Company must comply with the default provisions contained in the Note. The
Company is in default under the Note if it does not make a payment under the
Note, or if it: a) fails to comply with any provision of the Note, the Loan
Authorization and Agreement, or other Loan documents; b) defaults on any other
SBA loan; c) sells or otherwise transfers, or does not preserve or account to
SBA’s satisfaction for, any of the collateral (as defined therein) or its
proceeds; d) does not disclose, or anyone acting on their behalf does not
disclose, any material fact to the SBA; e) makes, or anyone acting on their
behalf makes, a materially false or misleading representation to the SBA; f)
defaults on any loan or agreement with another creditor, if the SBA believes the
default may materially affect the Company’s ability to pay this Note; g) fails
to pay any taxes when due; h) becomes the subject of a proceeding under any
bankruptcy or insolvency law; i) has a receiver or liquidator appointed for any
part of their business or property; j) makes an assignment for the benefit of
creditors; k) has any adverse change in financial condition or business
operation that the SBA believes may materially affect the Company’s ability to
pay this Note; l) dies; m) reorganizes, merges, consolidates, or otherwise
changes ownership or business structure without the SBA’s prior written consent;
or n) becomes the subject of a civil or criminal action that the SBA believes
may materially affect the Company’s ability to pay this Note. The SBA has
granted the Company an extension until September 22, 2009 on their payments. The
Company is not in default. The Company has accrued interest at a rate of $38.90
per day.
  F-14
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      5-
                NOTES PAYABLE
      (CONTINUED)
  SBA
Loan (Continued)
  As of
September 30, 2009, the Company has an outstanding principal balance of
$354,936. Interest expense on the SBA loan for the nine months ended September
30, 2009 and 2008 were $1,866 and $9,704, respectively.
  Automobile
Loan
  The
Company has a note payable with an automotive finance company in the original
amount of $44,990 (the “Auto Note”). The Auto Note commenced in November 2003,
and requires payments of $750 per month for a period of 60 months. The Auto Note
is secured by the automobile.
  As of
March 31, 2009, the note has matured.
  Convertible
Notes
 
 The
Company has entered into the following convertible notes:
 
 ·
                Convertible
      note dated March 6, 2008 in the amount of $75,000, with a term of 2 years,
      with interest calculated at 9.9% per annum. The note is convertible at 50%
      of the closing bid price of the common stock on the date of conversion.
      The Company has accrued interest as of September 30, 2009 in the amount of
      $11,009. The Company recorded a beneficial conversion feature of $75,000
      based on the difference in the intrinsic value of the conversion option.
      As of September 30, 2009, $7,000 was converted for 210,381 shares of
      common stock;
 
 ·
                Convertible
      note dated March 7, 2008 in the amount of $62,500, with a term of 2 years,
      with interest calculated at 9.9% per annum. The note was convertible at
      50% of the closing bid price of the common stock on the date of
      conversion, and was converted the same day the note was executed for a
      conversion price of $.135 or 23,148 shares. This note was converted
      immediately and the shares were issued in April 2008, and there was no
      beneficial conversion feature associated with this
  note;
  ·
                Convertible
      note dated March 10, 2008 in the amount of $100,000, with a term of 2
      years, with interest calculated at 9.9% per annum. The note was
      convertible at 50% of the closing bid price of the common stock on the
      date of conversion, and was converted the same day the note was executed
      for a conversion price of $2.70 or 37,037 shares. This note was converted
      immediately and shares were issued in April 2008 and there was no
      beneficial conversion feature associated to this
  note.
 
 ·
                Convertible
      note dated June 1, 2008 in the amount of $25,000, with a term of 1 year,
      with interest calculated at 9.9% per annum. The note is convertible into a
      fixed price of $0.40 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $0.40 per share for 62,500 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest as of September 30, 2009 in the amount of
      $1,451;
 
 ·
                Convertible
      note dated June 21, 2008 in the amount of $10,000, with a term of 1 year,
      with interest calculated at 9.9% per annum. The note is convertible into a
      fixed price of $0.40 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $0.40 per share for 25,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest as of September 30, 2009 in the amount of
      $1,267;
  F-15
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      5-
                NOTE PAYABLE
      (CONTINUED)
  Convertible Notes(continued)
 
 ·
                Convertible
      note dated June 21, 2008 in the amount of $10,000, with a term of 1 year,
      with interest calculated at 9.9% per annum. The note is convertible into a
      fixed price of $0.40 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $0.40 per share for 25,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest as of September 30, 2009 in the amount of
      $1,267;
  ·
                Convertible
      note dated July 2, 2008 in the amount of $5,000, with a term of 1 year,
      with interest calculated at 9.9% per annum. The note is convertible into a
      fixed price of $.40 per share of common stock on the outstanding principal
      and accrued interest on the date of conversion. The note holder also
      received a warrant agreement exercisable over five years to purchase
      common stock at $.40 per share for 12,500 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest as of September 30, 2009 in the amount of
      $618;
 
 ·
                Convertible
      notes dated between July 23, 2008 and August 6, 2008 in the amount of
      $250,000, with a term of 2 years, with interest calculated at 10% per
      annum. The notes are convertible into a fixed price of $.40 per share of
      common stock on the outstanding principal and accrued interest on the date
      of conversion. The note holder also received a warrant agreement
      exercisable over five years to purchase common stock at $.40 per share for
      625,000 warrants. There will also be warrants issued for accrued interest
      should the interest be converted. The Company has accrued interest as of
      September 30, 2009 in the amount of $29,434;
and
 
 ·
                Convertible
      note dated November 16, 2008 in the amount of $10,000, with a term of 2
      years, with interest calculated at 10% per annum. The note is convertible
      into a fixed price of $.40 per share of common stock on the outstanding
      principal and accrued interest on the date of conversion. The note holder
      also received a warrant agreement exercisable over five years to purchase
      common stock at $.40 per share for 25,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest as of September 30, 2009 in the amount of
      $868.
  The
convertible notes issued in June, July, August and November 2008, were issued
with warrants. The value of the warrants are reflected as additional paid in
capital with a value of $230,079, with a corresponding debt discount in the same
amount. The discount is being amortized over the life of the convertible notes
of 1 to 2 years. Amortization of the discount for the nine months ended
September 30, 2009 and 2008 is $87,131 and $24,462, respectively, with a
remaining debt discount as of September 30, 2009 of $86,987. In addition, the
Company calculated a beneficial conversion feature of $1,091,253 on the $385,000
in convertible notes.
  As of
September 30, 2009, the repayment schedule of the Notes Payable for the next two
years and in the aggregate is:
  2010
      (net of discount of $85,928)
                        
                        $
                        304,4882011
      (net of discount of $1,059)
                        
                        
                        31,3572012
                        
                        
                        22,4162013
                        
                        
                        22,4162014
                        
                        
                        22,416Thereafter
                        
                        
                        242,856645,949Less:
      current portion
                        
                        
                        (304,488
                        )Long-term
      portion
                        
                        $
                        341,461
  F-16
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      6-
                STOCKHOLDERS’ EQUITY
      (DEFICIT)
  Preferred
Stock
  The
Company was incorporated on May 26, 2005, and the Board of Directors authorized
10,000,000 shares of preferred stock with a par value of $0.0001. The Company
has not issued any shares of preferred stock since inception.
  Common
Stock
  The
Company was incorporated on May 26, 2005, and the Board of Directors authorized
75,000,000 shares of common stock with a par value of $0.0001.
  The
Company as of September 30, 2009 has 886,926 shares of common stock issued and
outstanding.
 
 During
the nine months ended September 30, 2009 the Company issued no shares of common
stock. The Company also raised $123,000 and incurred $4,000 for services
rendered during the nine months ended September 30, 2009, for shares of common
stock, but these shares have not been issued as of September 30, 2009. During
the year ended December 31, 2008 the Company issued 23,148 and 37,037 shares of
common stock in convertible note transactions of $62,500 and $100,000,
respectively (see Note 5).  These shares of stock were issued in April
2008. Additionally, 210,381 shares of common stock were issued to convert $7,000
of a convertible note payable.
 
 The
Company issued 23,750 shares of common stock to three convertible note holders
valued at $64,125 for entering into the March 6, 7 and 10 convertible note
agreements.  The Company also issued 17,500 shares of common stock for
services rendered valued at $52,500. The combined $116,625 is reflected as stock
issued for services in the consolidated statements of operations for the year
ended December 31, 2007.  These shares of stock were issued in April
2008.
  The
Company has also recorded a $15,000 consulting fee in 2007 for the issuance of
1,500 shares of stock. The fees were earned in 2007 and the shares of stock were
issued in April 2008.
 
 Warrants
  The
Company in the private placement granted 116,470 Class A and 116,470 Class B
warrants. In April 2007, 81,476 of the Class A warrants were exercised into
common shares. In November 2007, an additional 22,244 of the Class A warrants
were exercised into common shares. The Company granted additional Class A
warrants to the warrant holders that exercised during April and November 2007.
The additional Class A warrants of 103,720 were issued in November 2007 and are
reflected herein. The Company also issued 12,500 warrants in September 2007 for
investor relation services and 112,500 warrants in connection with the
convertible notes issued in June 2008, 12,500 warrants in connection with the
notes issued in July 2008, 625,000 warrants in connection with the notes issued
in July and August 2008, and 25,000 warrants in connection with the note issued
in November 2008. The following is a breakdown of the warrants:
 
 Exercise
                            
                            DateWarrants
                            
                            Price
                            
                            Issued
                            
                            Term12,750
                            
                            $
                            10.00
                            
                            4/1/2007
                            
                            5
      years116,470
                            
                            $
                            10.00
                            
                            4/1/2007
                            
                            5
      years12,500
                            
                            $
                            10.00
                            
                            9/1/2007
                            
                            5
      years103,720
                            
                            $
                            10.00
                            
                            11/30/2007
                            
                            3.9
      years112,500
                            
                            $
                            0.40
                            
                            6/1/2008
                            
                            5
      years12,500
                            
                            $
                            0.40
                            
                            7/2/2008
                            
                            5
      years625,000
                            
                            $
                            0.40
                            
                            7/31/08-8/6/08
                            
                            5
      years25,000
                            
                            $
                            0.40
                            
                            11/16/2008
                            
                            5
      years1,020,439
 
 The
warrants have a weighted average price of $2.40.
  F-17
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      6-
                STOCKHOLDERS’ EQUITY
      (DEFICIT) (CONTINUED)
  The Class
A Warrants and Class B Warrants in the private placement as well as the
consultant warrants were valued utilizing the Black – Scholes method as
follows:
 
 Class A
                      
                      
                      Class B
                      
                      
                      Consultant
                      
                      
                      Conv NotesStock
      Price
                      
                      $
                      .50
                      
                      
                      $
                      .50
                      
                      
                      $
                      .50
                      
                      
                      $
                      .10Strike
      Price
                      
                      $
                      .50
                      
                      
                      $
                      .62
                      
                      
                      $
                      .50
                      
                      
                      $
                      .02Expected
      Life of Warrant
                      
                      5
      yrs.
                      
                      
                      5
      yrs.
                      
                      
                      5
      yrs.
                      
                      
                      5
      yrs.Annualized
      Volatility
                      
                      
                      50
                      %
                      
                      
                      50
                      %
                      
                      
                      50
                      %
                      
                      
                      100
                      %Discount
      Rate
                      
                      
                      3.50
                      %
                      
                      
                      3.50
                      %
                      
                      
                      3.50
                      %
                      
                      
                      3.00
                      %Annual
      Rate of Quarterly Dividends
                      
                      None
                      
                      
                      None
                      
                      
                      None
                      
                      
                      NoneCall
      Option Value
                      
                      $
                      .237
                      
                      
                      $
                      .206
                      
                      
                      $
                      .378
                      
                      
                      $
                      .0834/$.0908
  Options
  Prior to
October 2007, there were no options outstanding, or granted. In October 2007,
the Company’s Board of Directors and Shareholders approved the adoption of an
option plan for a total of 110,000 shares and issued 22,000 options in October
2007 and 100,000 in December 2008 that vest over a three-year period of time
with a strike price of $10.00 per share (October 2007/January 2008) and $.20
(December 2008). 21,250 of these options were forfeited during 2008. The Company
has 100,750 options remaining at September 30, 2009, all of which are fully
vested.
  These
options were valued as follows:
  January 2008Stock
      Price
                        
                        $
                        0.60/$11.00Strike
      Price
                        
                        $
                        10.00Expected
      Life of Option
                        
                        1
      yr.Annualized
      Volatility
                        
                        
                        100
                        %Discount
      Rate
                        
                        
                        3.00
                        %Annual
      Rate of Quarterly Dividends
                        
                        NoneCall
      Option Value
                        
                        $
                        2.48/$4.34
  December 2008Stock
      Price
                        
                        $
                        0.20Strike
      Price
                        
                        $
                        0.20Expected
      Life of Option
                        
                        5
      yr.Annualized
      Volatility
                        
                        
                        100
                        %Discount
      Rate
                        
                        
                        3.00
                        %Annual
      Rate of Quarterly Dividends
                        
                        NoneCall
      Option Value
                        
                        $
                        .16
 
 The value
attributable to these options for the nine months ended September 30, 2009 and
2008 is $0 and $33,231 respectively and is reflected in the condensed
consolidated statements of operations as stock based
compensation.
  F-18
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      7-
                COMMITMENTS
  Rental
  The
Company leased office space under an operating lease that expired in November
2008. The Company currently leases space on a month-to-month basis.
  Rent
expense for the nine months ended September 30, 2009 and 2008 was $500 and
$112,601, respectively.
  Consulting
Agreements
  During
the nine months ended September 30, 2009 and 2008, the Company did not enter
into any consulting agreements. In 2007, the Company entered into consulting
agreements with marketing and strategic consulting groups with terms that do not
exceed one year. These companies are to be paid fees for the services they
perform. The Company has included these fees in their condensed consolidated
statements of operations for the nine months ended September 30,
2008.
 
 NOTE
      8-
                PROVISION FOR INCOME
      TAXES
  Deferred
income taxes will be determined using the liability method for the temporary
differences between the financial reporting basis and income tax basis of the
Company’s assets and liabilities.  Deferred income taxes are measured based
on the tax rates expected to be in effect when the temporary differences are
included in the Company’s tax return.  Deferred tax assets and liabilities
are recognized based on anticipated future tax consequences attributable to
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases.
 
 At
September 30, 2009, deferred tax assets consist of the following:
 
 Net
      operating losses
                      
                      $
                      2,054,400Valuation
      allowance
                      
                      
                      (2,054,400
                      )$
                      -
 
 At
September 30, 2009, the Company had net operating loss carryforward in the
approximate amount of $6,042,354, available to offset future taxable income
through 2029.  The Company established valuation allowances equal to the
full amount of the deferred tax assets due to the uncertainty of the utilization
of the operating losses in future periods.
  A
reconciliation of the Company’s effective tax rate as a percentage of income
before taxes and federal statutory rate for the nine months ended September 30,
2009 and 2008 is summarized below.
  2009
                      
                      
                      2008Federal
      statutory rate
                      
                      
                      (34.0
                      )%
                      
                      
                      (34.0
                      )%State
      income taxes, net of federal benefits
                      
                      
                      6.0
                      
                      
                      
                      6.0Valuation
      allowance
                      
                      
                      28.0
                      
                      
                      
                      28.00
                      %
                      
                      
                      0
                      %
  F-19
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      9-
                DEFINED CONTRIBUTION
      PLAN
  The
Company has a retirement plan which satisfies the requirements of Section 401(k)
of the Internal Revenue Code. This defined contribution retirement plan covers
substantially all employees. Participants can elect to have up to the maximum
percentage allowable of their salaries reduced and contributed to the plan. The
Company may make matching contributions equal to a discretionary percentage of
the participants’ elective deferrals. The Company made no such contributions for
the nine months ended September 30, 2009 and 2008, respectively.
  NOTE
      10-
                MAJOR
      CUSTOMER
  The
Company’s contracts with agencies of the federal government accounted for 100%
of its revenue and accounts receivable as of and for the nine months ended
September 30, 2009 and 2008, respectively.
  NOTE
      11-
                FAIR VALUE
      MEASUREMENTS
  The
Company adopted certain provisions of ASC Topic 820. ASC 820 defines fair value,
provides a consistent framework for measuring fair value under generally
accepted accounting principles and expands fair value financial statement
disclosure requirements. ASC 820’s valuation techniques are based on observable
and unobservable inputs. Observable inputs reflect readily obtainable data from
independent sources, while unobservable inputs reflect our market assumptions.
ASC 820 classifies these inputs into the following hierarchy:
  Level 1
inputs: Quoted prices for identical instruments in active markets.
  Level 2
inputs: Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.
  Level 3
inputs: Instruments with primarily unobservable value drivers.
  The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring basis as of September 30,
2009:
  Level 1
                      
                      
                      Level 2
                      
                      
                      Level 3
                      
                      
                      TotalCash
                      
                      
                      13,829
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      13,829Total
      assets
                      
                      
                      13,829
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      13,829Notes
      payable, net of discount
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      291,013
                      
                      
                      
                      291,013Total
      liabilities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      291,013
                      
                      
                      
                      291,013
  F-20
  INFERX
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2009 AND 2008 (UNAUDITED)
  NOTE
      12-
                PENDING
      ACQUISITION
  On March
16, 2009, the Company entered into an agreement and plan of reorganization (the
“Merger Agreement”) with the Irus Group, Inc. under which it intends to effect a
reverse triangular merger between The Irus Group, Inc. and the Company’s
wholly-owned subsidiary, Irus Acquisition Corp. (formed for the purse of
completing this transaction). The Merger Agreement was then amended on June 15,
2009 (the “First Amended and Restated Agreement”) to reflect the change in the
amount of the issued shares to Irus in the transaction.
  Under the
terms of the First Amended and Restated Agreement, the issued and outstanding
shares of The Irus Group common stock will be automatically converted into the
right to receive 56% of the issued and outstanding shares of the Company’s
common stock.
  The
Merger Agreement also provides that, at the effective time of the Merger, the
Company’s Board of Directors agrees to appoint Vijay Suri, President and CEO of
the Company and have Vijay Suri fill a vacancy on its Board of Directors. In
addition, effectiveness of the Merger Agreement is conditional upon (i) the
Company restructuring existing debt by converting the existing debt and warrants
to common stock with the intention of having no more than 57-60 million shares
of its common stock outstanding prior to a reverse split of not less than 1:10;
(ii) the Company using its best efforts to reduce its accounts payable by 70%,
(iii) Vijay Suri, President and CEO of The Irus Group, Inc. executing an
employment agreement with the Company, and (iv) additional customary closing
conditions relating to delivery of financial statements, closing certificates as
to representations and warranties, and the delivery of any required consents or
government approvals. The Merger was completed in the fourth quarter of
2009.
  F-21




Item
2.    Management’s Discussion and Analysis or Plan of
Operation.




The
information set forth and discussed in this Management’s Discussion and Analysis
or Plan of Operation is derived from our financial statements and the
related notes, which are included. The following information and discussion
should be read in conjunction with those financial statements and notes, as
well as the information provided in our Annual Report on Form 10-K for our
fiscal year ended December 31, 2008.





Overview





Our
company was formed in May 2005 to pursue a business combination. On October 24,
2006, we acquired InferX Corporation, a Virginia corporation (“InferX
Virginia”), and on October 27, 2006 we merged InferX Virginia into our company
and changed our name to “InferX Corporation.” After the acquisition of InferX
Virginia, we succeeded to its business as our sole line of business. InferX
Virginia was formed in August 2006 by the merger of the former InferX
Corporation, a Delaware corporation (“InferX Delaware”), with and into Datamat
Systems Research, Inc., a Virginia corporation and an affiliate of InferX
Delaware (“Datamat”), pursuant to which Datamat was the surviving corporation
and changed its name to “InferX Corporation.”




Datamat
was formed in 1992 as a professional services research and development firm,
specializing in technology for distributed analysis of sensory data relating to
airborne missile threats under contracts with the Missile Defense Agency and
other DoD contracts.  InferX Delaware was formed in 1999 to
commercialize Datamat’s missile defense technology to build applications of real
time predictive analytics. The original technology was developed in part with
grants by the Missile Defense Agency.




Historically,
we have derived nearly all of our sales revenues under federal government
contracts. Under these contracts, we performed research and development that
enabled us to retain ownership of the intellectual property, which led to the
creation of our current products. Due to the relatively small and uncertain
margins associated with fixed price government contracts and the inherent limit
of the market size, in fiscal 2002 we began to develop our software as a
commercial product, concentrating on building specific applications that we
believed would meet the needs of potential new customers. In fiscal 2003, we
sold two commercial licenses. However, since fiscal 2004, all of our revenues
have derived from government contracts. Currently, we have one contract with the
Missile Defense Agency to develop a prototype application of our
software.




Critical
Accounting Policies




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. We rely on historical experience and on other assumptions
we believe to be reasonable under the circumstances in making our judgments and
estimates. Actual results could differ from those estimates. We consider our
critical accounting policies to be those that are complex and those that require
significant judgments and estimates, including the following: recognition of
revenue, capitalization of software development costs and income
taxes.




Principles
of Consolidation




The
consolidated financial statements include those of InferX and our wholly-owned
subsidiary. All intercompany accounts and transactions have been eliminated in
consolidation.




Use
of Estimates




The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.








Cash
and Cash Equivalents




We
consider all highly liquid debt instruments and other short-term investments
with a maturity of six months or less, when purchased, to be cash
equivalents.




We
maintain cash and cash equivalent balances at one financial institution that is
insured by the Federal Deposit Insurance Corporation up to
$100,000.




Allowance
for Doubtful Accounts




We
provide an allowance for doubtful accounts, which is based upon a review of
outstanding receivables as well as historical collection information. Credit is
granted to substantially all customers on an unsecured basis. In determining the
amount of the allowance, management is required to make certain estimates and
assumptions.




Fixed
Assets




Fixed
assets are stated at cost, less accumulated depreciation. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets (primarily three to five years). Costs of maintenance and repairs
are charged to expense as incurred.




Computer
Software Development Costs




During
2008 and 2006, we capitalized certain software development costs. We capitalize
the cost of software in accordance with SFAS 86 once technological feasibility
has been demonstrated, as we have in the past sold, leased or otherwise marketed
our software, and plans on doing so in the future. We capitalize costs incurred
to develop and market our privacy preserving software during the development
process, including payroll costs for employees who are directly associated with
the development process and services performed by consultants. Amortization of
such costs is based on the greater of (1) the ratio of current gross revenues to
the sum of current and anticipated gross revenues, or (2) the straight-line
method over the remaining economic life of the software, typically five years.
It is possible that those anticipated gross revenues, the remaining economic
life of the products, or both, may be reduced as a result of future events. We
have not developed any software for internal use.





Recoverability
of Long-Lived Assets




We review
the recoverability of our long-lived assets on a periodic basis whenever events
and changes in circumstances have occurred which may indicate a possible
impairment. The assessment for potential impairment is based primarily on our
ability to recover the carrying value of long-lived assets from expected future
cash flows from operations on an undiscounted basis. If such assets are
determined to be impaired, the impairment recognized is the amount by which the
carrying value of the assets exceeds the fair value of the assets. Fixed assets
to be disposed of by sale are carried at the lower of the then current carrying
value or fair value less estimated costs to sell.




Revenue
Recognition




We
generate revenue from professional services rendered to customers as well as
from application management support contracts with governmental units. Our
revenue is generated under time-and-material contracts and fixed-price
contracts.





Time-and-Material
Contracts




Time-and-material
contracts revenue is generated as costs are generally incurred in proportion
with contracted billing schedules and revenue is recognized as services are
performed, with the corresponding cost of providing those services reflected as
direct costs. Such method is expected to result in reasonably consistent profit
margins over the contract term.







Fixed-Price
Contracts




Revenue
from firm-fixed-price contracts is recognized upon achievement of the milestones
contained in the contracts. Revenue is not recognized until collectability is
assured, which does not take place until completion of the particular milestone.
Costs are recognized as services are performed.




We do not
derive revenue from projects involving multiple revenue-generating activities.
If a contract would involve the provision of multiple service elements, total
estimated contract revenue would be allocated to each element based on the fair
value of each element.




The
amount of revenue allocated to each element would then be limited to the amount
that is not contingent upon the delivery of another element in the future.
Revenue for each element would then be recognized depending upon whether the
contract is a time and-materials contract or a fixed-price, fixed-time
contract.




Stock-Based
Compensation




In 2006,
we adopted the provisions of ASC 718-10 “Share-Based Payments” (“ASC
718-10”) which requires recognition of stock-based compensation expense for all
share-based payments based on fair value.  Share-based payment
transactions within the scope of ASC 718-10 include stock options, restricted
stock plans, performance-based awards, stock appreciation rights, and employee
share purchase plans. This adoption had no effect on the Company’s operations.
Prior to January 1, 2006, we measured compensation expense for all of our
share-based compensation using the intrinsic value method.




We have
elected to use the modified–prospective approach method. Under that transition
method, the calculated expense in 2006 is equivalent to compensation expense for
all awards granted prior to, but not yet vested as of January 1, 2006, based on
the grant-date fair values. Stock-based compensation expense for all awards
granted after January 1, 2006 is based on the grant-date fair values. We
recognize these compensation costs, net of an estimated forfeiture rate, on a
pro rata basis over the requisite service period of each vesting tranche of each
award. We consider voluntary termination behavior as well as trends of actual
option forfeitures when estimating the forfeiture rate.




We
measure compensation expense for non-employee stock-based compensation under ASC
505-50, “Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services".The fair value
of the option issued is used to measure the transaction, as this is more
reliable than the fair value of the services received.  The fair value
is measured at the value of the Company’s common stock on the date that the
commitment for performance by the counterparty has been reached or the
counterparty’s performance is complete.  The fair value of the equity
instrument is charged directly to compensation expense and additional paid-in
capital.  For common stock issuances to non-employees that are fully
vested and are for future periods, we classify these issuances as prepaid
expenses and expense the prepaid expenses over the service period.  At
no time have we issued common stock for a period that exceeds one
year.




Concentrations




We have
derived all of our revenue from agencies of the United States
Government.




Financial
instruments that potentially subject us to significant concentrations of credit
risk consist principally of accounts receivable and unbilled receivables. To
date, accounts receivable and unbilled receivables have been derived from
contracts with agencies of the federal government. Accounts receivable are
generally due within 30 days and no collateral is required.





Segment
Reporting




We follow
the provisions of ASC 280-10, “Disclosures about Segments of an
Enterprise and Related Information.” This standard requires that
companies disclose operating segments based on the manner in which management
disaggregates the company in making internal operating decisions. We believe
that there is only one operating segment.




Fair
Value of Financial Instruments (other than Derivative Financial
Instruments)




The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments. For the notes
payable, the carrying amount reported is based upon the incremental borrowing
rates otherwise available to us for similar borrowings. For the warrants that
are classified as derivatives, fair values were calculated at net present value
using our weighted average borrowing rate for debt instruments without
conversion features applied to total future cash flows of the
instruments.




Convertible
Instruments




We review
the terms of convertible debt and equity securities for indications requiring
bifurcation, and separate accounting, for the embedded conversion feature.
Generally, embedded conversion features, where the ability to physical or
net-share settle the conversion option is not within our control, are bifurcated
and accounted for as a derivative financial instrument. Bifurcation of the
embedded derivative instrument requires allocation of the proceeds first to the
fair value of the embedded derivative instrument with the residual allocated to
the debt instrument. The resulting discount to the face value of the debt
instrument is amortized through periodic charges to interest expense using the
Effective Interest Method.




Income
Taxes




Under ASC
740 the liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.




Uncertainty
in Income Taxes




Under ASC
740-10-25 recognition and measurement of uncertain income tax positions is
required using a “more-likely-than-not”
approach. We evaluate our tax positions on an annual basis, and have determined
that as of September 30, 2009 no additional accrual for income taxes is
necessary.




(Loss)
Per Share of Common Stock




Basic net
(loss) per common share (“EPS”) is computed using the
weighted average number of common shares outstanding for the period. Diluted
earnings per share includes additional dilution from common stock equivalents,
such as stock issuable pursuant to the exercise of stock options and warrants.
Common stock equivalents are not included in the computation of diluted earnings
per share when we report a loss because to do so would be anti-dilutive for the
periods presented.




Research
and Development




Research
and development costs are expensed as incurred.









Recent
Issued Accounting Standards


In
September 2006, ASC 820, “Fair
Value Measurements”(ASC 820)was issued. ASC 820
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Early adoption is
encouraged. The adoption of ASC 820 is not expected to have a material impact on
the consolidated financial statements.




In
February 2007, ASC 825-10,
“The Fair Value Option for Financial Assets and Financial Liabilities”(“ASC 825-10”), was issued. This included an amendment of ASC 320-10,
which permits entities to choose to measure many financial instruments and
certain other items at fair value at specified election dates. A business entity
is required to report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date.
This statement is expected to expand the use of fair value measurement. ASC
825-10 is effective for financial statements issued for fiscal years beginning
after November 15, 2008, and interim periods within those fiscal
years.




In
December 2007, ASC 810-10-65, “Noncontrolling Interests in
Consolidated Financial Statements,” (“ASC 810-10-65”), was issued. ASC
810-10-65 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, changes in a parent’s
ownership of a noncontrolling interest, calculation and disclosure of the
consolidated net income attributable to the parent and the noncontrolling
interest, changes in a parent’s ownership interest while the parent retains its
controlling financial interest and fair value measurement of any retained
noncontrolling equity investment.




ASC
810-10-65 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. Management is determining the impact that
the adoption of ASC 810-10-651 will have on our consolidated financial position,
results of operations or cash flows.




In
December 2007, the Company adopted ASC 805, “Business Combinations” (“ASC
805”). ASC 805 has the fundamental requirements that the acquisition method of
accounting be used for all business combinations and for an acquirer to be
identified for each business combination. ASC 805 defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. ASC 805 will require an entity to record separately from the
business combination the direct costs, where previously these costs were
included in the total allocated cost of the acquisition. ASC 805 will require an
entity to recognize the assets acquired, liabilities assumed, and any
non-controlling interest in the acquired at the acquisition date, at their fair
values as of that date.




ASC 805
will require an entity to recognize as an asset or liability at fair value for
certain contingencies, either contractual or non-contractual, if certain
criteria are met. Finally, ASC 805 will require an entity to recognize
contingent consideration at the date of acquisition, based on the fair value at
that date. This will be effective for business combinations completed on or
after the first annual reporting period beginning on or after December 15, 2008.
Early adoption of this standard is not permitted and the standards are to be
applied prospectively only. Upon adoption of this standard, there would be no
impact to our results of operations and financial condition for acquisitions
previously completed. The adoption of ASC 815 is not expected to have a material
effect on our consolidated financial position, results of operations or cash
flows.




In
March 2008, ASC 815, Disclosures about Derivative
Instruments and Hedging Activities” (“ASC 815”), was issued. ASC 815
requires enhanced disclosures about an entity’s derivative and hedging
activities. These enhanced disclosures will discuss: how and why an entity uses
derivative instruments; how derivative instruments and related hedged items are
accounted for and its related interpretations; and how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance, and cash flows. ASC 815 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008.
The Company does not believe that ASC 815 will have an impact on their results
of operations or financial position.





In April
2008, ASC 350, “Determination
of the Useful Life of Intangible Assets”, (“ASC 350”), was issued. ASC
350 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset. The guidance is used for determining the useful life of a
recognized intangible asset shall be applied prospectively to intangible assets
acquired after adoption, and the disclosure requirements shall be applied
prospectively to all intangible assets recognized as of, and subsequent to,
adoption. The Company does not believe ASC 350 will materially impact our
financial position, results of operations or cash flows.








In May
2008, ASC 470-20, “Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“ASC 470-20”), was issued. ASC
470-20 requires the issuer of certain convertible debt instruments that may be
settled in cash (or other assets) on conversion to separately account for the
liability (debt) and equity (conversion option) components of the instrument in
a manner that reflects the issuer’s non-convertible debt borrowing rate. ASC
470-20 is effective for fiscal years beginning after December 15, 2008 on a
retroactive basis. The Company does not believe that the adoption of ASC 470-20
will have a material effect on its financial position, results of operations or
cash flows.





In June
2008, ASC 815-40, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own
Stock” (“ASC 815-40”), was issued. ASC 815-40 provides guidance for
determining whether an equity-linked financial instrument (or embedded feature)
is indexed to an entity’s own stock and it applies to any freestanding financial
instrument or embedded feature that has all the characteristics of a derivative.
ASC 815-40 also applies to any freestanding financial instrument that is
potentially settled in an entity’s own stock. The Company is determining what
impact, if any, ASC 815-40 will have on its financial position, results of
operations and cash flows.





In June
2008, ASC 470-20-65, “Transition Guidance for Conforming
Changes to, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios”, (“ASC
470-20-65”), was issued. ASC 470-20-65 is effective for years ending after
December 15, 2008. The overall objective of ASC 470-20-65 is to provide for
consistency in application of the standard. The Company has computed and
recorded a beneficial conversion feature in connection with certain of their
prior financing arrangements and does not believe that ASC 470-20-65 will have a
material effect on that accounting.





In May
2009, ASC 855, “Subsequent
Events”, (“SFAS 165”), was published. ASC 855 requires the Company to
disclose the date through which subsequent events have been evaluated and
whether that date is the date the financial statements were issued or the date
the financial statements were available to be issued. ASC 855 is effective for
financial periods ending after June 15, 2009. Management has evaluated
subsequent events through November 18, 2009, the date the financial statements
were issued.





Effective
July 1, 2009, the Company adopted FASB ASU No. 2009-05, “Fair Value Measurement and
Disclosures (Topic 820)” (“ASU 2009-05”). ASU 2009-05 provided amendments
to ASC 820-10, “Fair Value
Measurements and Disclosures – Overall”, for the fair value measurement
of liabilities. ASU 2009-05 provides clarification that in circumstances in
which a quoted market price in an active market for the identical liability is
not available, a reporting entity is required to measure fair value using
certain techniques. ASU 2009-05 also clarifies that when estimating the fair
value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction
that prevents the transfer of a liability. ASU 2009-05 also clarifies that both
a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when traded as
an asset in an active market when no adjustments to the quoted price of the
asset are required for Level 1 fair value measurements. Adoption of ASU 2009-05
did not have a material impact on the Company’s results of operations or
financial condition.





Other
accounting standards that have been issued or proposed by the FASB ASC that do
not require adoption until a future date are not expected to have a material
impact on the consolidated financial statements upon adoption.




Nine Months Ended September 30, 2009
and 2008




Revenue
for the nine months ended September 30, 2009 was $0, a 100% decrease from
$80,934 for the same period in 2008. This was a result of having no contracts
during the nine months ended September 30, 2009. Revenue for the three months
ended September 30, 2009 and the three months ended September 30, 2008 was
$0.





Costs of
revenues for the nine months ended September 30, 2009 were $56,321 compared to
$252,660 for the same period in 2008. The decrease resulted primarily from a
result of the decreased amortization for computer software development costs and
the elimination of other direct costs as there were no contracts during the nine
months ended September 30, 2009. Costs of revenues for the three months ended
September 30, 2009 compared to the three months ended September 30, 2008
declined by $44,251 to $18,840 compared to $63,091 for the same period in
2008.




Operating
expenses for the nine months ended September 30, 2009, which include indirect
labor, professional fees, travel, rent, general and administrative, stock issued
for services, stock based compensation, and depreciation, decreased
$747,301 to $374,174 for the nine month period ended September 30,
2009 from $1,121,475 for the same period in 2008. This represents
a decrease of 67% and is primarily a result of a decrease in indirect and
overhead labor and fringes of $348,110 resulting from the terminations of two
former executives and departure of one other executive and additional staff
reductions in 2009, a decrease in professional fees of $105,196 resulting from
lower business activity, a decrease in rent of $112,101 resulting from a
relocation to rent free space, and a $116,625 reduction in stock issued for
services and a reduction of $33,232 in stock based compensation as a result of
decreased staff.  Depreciation also decreased by $5,118 as certain
fixed assets became fully depreciated and no fixed assets were acquired during
the nine months ended September 30, 2009. Operating expenses for the three
months ended September 30, 2009 compared to the three months ended September 30,
2008 declined by $232,600 to $86,804 compared to $319,404 for the same period in
2008.




Interest
expense decreased $1,019,008 for the nine months ended September 30, 2009 to
$117,181 compared to $1,136,189 for the nine months ended September 30, 2008
primarily due to the recognition of a beneficial conversion feature in the
amount of $1,091,253 in 2008 related to convertible notes. The debt discount
related to the convertible notes has been amortized since the initial recording
in the period ending September 30, 2008.  Interest expense decreased
for the three months ended September 30, 2009 by $1,011,746 to $27,143 compared
to $1,038,889 for the three months ended September 30, 2008.




Liquidity
and Capital Resources




We had
cash of $13,829 at September 30, 2009 and a working capital deficit of
$2,175,710 as of September 30, 2009.  During the nine months ended
September 30, 2009, we used approximately $121,505 of cash from our operations.
Operations were funded primarily from the sale of shares of our common stock in
the amount of $123,000.  Those shares of common stock have not yet
been issued.




We will
need to generate significant additional revenue to support our projected
increases in staffing and other operating expenses in light of the merger during
the fourth quarter of 2009 with The Irus Group. We are currently expending
approximately $45,000 per month to support our operations, and under our current
business plan that anticipates post-merger expenditures of approximately
$650,000 per month by the end of fiscal 2009. We expect to raise additional
financing through the sale of our common stock during the fourth quarter of 2009
to supplement the cash generated from the services that are provided through The
Irus Group that we believe will be sufficient to fund our operations through the
end of December 2009. If we are unable to generate sufficient cash through the
sale of our stock it will be necessary for us to significantly reduce expenses
to stay in business. Although we believe the additional capital we will require
will be provided through one of these sources, we cannot assure you that we will
be successful in these financing efforts or find financing at acceptable prices.
Our failure to generate such revenue, reduce expenses or obtain necessary
financing could impair our ability to stay in business and raises substantial
doubt about our ability to remain as a going concern.




Item
3.    Quantitative and Qualitative Disclosures About Market
Risk.




Not applicable









Item
4T.  Controls and Procedures.




Evaluation
of disclosure controls and procedures.




Our
management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of
September 30, 2009. Based on this evaluation, our principal executive officer
and principal financial officer concluded that our disclosure controls and
procedures are not effective due to the existence of material weaknesses in our
internal control over financial reporting discussed in our Annual Report on Form
10-K for the year ended December 31, 2008 and which remain
unremediated.




Changes
in internal control over financial reporting.




During
the last fiscal quarter, there was no change in our internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.





PART
II — OTHER INFORMATION




Item
1.    Legal Proceedings.




Arnold
Worldwide, Inc., the landlord of InferX at its former premises at 1600
International Drive, Suite 110, McLean, Virginia 22102, commenced an unlawful
detainer action against InferX in the General District Court of Fairfax County,
seeking (i) damages, including rent due under the sublease between InferX and
Arnold Worldwide, late fees due under the sublease, and attorney’s fees due
under the sublease for approximately $94,555; and (ii) an order for possession
of the Premises.  The case was dismissed without prejudice in May 2008
subject to a series of payments promised by InferX. InferX has paid
approximately $30,000 leaving a deficiency of approximately $65,000. We agreed
to the entry of a Consent Order of Possession that allowed Arnold Worldwide to
take possession of the premises since we wanted to reduce our expenses as much
as possible and find less expensive office space.  The lease for the
premises at 1600 International Drive terminated November 30, 2008.




Item
1A.    Risk Factors.




Not
Applicable.




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




During
the nine months ended September 30, 2009 we made unregistered sales of stock in
the aggregate principal amount of $127,000 to several investors from January 3,
2009 through September 30, 2009 under stock purchase agreement to meet some of
the operational expenses.  All of the unregistered sales were exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended, on the basis that all purchasers were accredited
investors.




Item
3.    Defaults Upon Senior Securities.




None.




Item
4.    Submission of Matters to a Vote of Security
Holders.




None.




Item
5.    Other Information.




None.




Item
6.    Exhibits.




31.1
                  
                  Certification
      of the Chairman of the Board required by Rule 13a-14(a) or Rule
      15d-14(a).31.2
                  
                  Certification
      of the Principal Executive, Financial and Accounting Officer required by
      Rule 13a-14(a) or Rule 15d-14(a).32.1
                  
                  Certification
      of the Chief Executive Officer and Chief Financial Officer required by
      Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C.
  1350.







SIGNATURES





In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.





Dated:
      November 23, 2009
              InferX
      CorporationBy:
              /s/ Vijay SuriVijay
      Suri, President and CEO(Principal
      Executive, Financial andAccounting
      Officer)





InferX
Corporation


Quarterly
Report on Form 10-Q


for the
Quarterly Period Ended


September
30, 2009





-
EXHIBIT INDEX -




Exhibit No.
              
              Description31.1
              
              Certification
      of the Chairman of the Board required by Rule 13a-14(a) or Rule
      15d-14(a).31.2
              
              Certification
      of the Principal Executive, Financial and Accounting Officer required by
      Rule 13a-14(a) or Rule 15d-14(a).32.1
              
              Certification
      of the Chairman of the Board and Principal Executive, Financial and
      Accounting Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18
      U.S.C. 1350.