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, 2008





 ̈           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.)1818
      Library StreetSuite
      500Reston,
      Virginia
              20190(Address
      of principal executive offices)
              (Zip
      Code)





(703)
956-3561


(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  ̈





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  ̈               Accelerated filer
 ̈





Non-accelerated
filer  ̈                 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  ̈No x





As of
December 5, 2008, there were 13,690,892 outstanding shares of the registrant’s
common stock, $.0001 par value.








InferX
Corporation


Quarterly
Report on Form 10-Q


for
the Quarterly Period Ended


September
30, 2008




-
INDEX -




PagePART
      I- FINANCIAL INFORMATION:Item
      1.  Financial Statements:Condensed
      Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and
      December 31, 2007 (Audited)
                    1Condensed
      Consolidated Statements of Operations for the nine and three months
      ended
                      September
      30, 2008 and 2007 (Unaudited)
                    2Condensed
      Consolidated Statements of Cash Flows for the nine months
      ended
                      September
      30, 2008 and 2007 (Unaudited)
                    3Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                    4Item
      2.  Management’s Discussion and Analysis or Plan of
      Operation
                    23Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
                    30Item
      4T. Controls and Procedures
                    30PART
      II – OTHER INFORMATION:Item
      1.  Legal Proceedings
                    31Item
      1A.  Risk Factors
                    31Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                    31Item
      3.  Defaults Upon Senior Securities
                    31Item
      4.  Submission of Matters to a Vote of Security
      Holders
                    31Item
      5.  Other Information
                    31Item
      6.  Exhibits
                    31


i





PART
I — FINANCIAL INFORMATION




Item
1.    Financial Statements.




INFERX
CORPORATION
 (FORMERLY
BLACK NICKEL ACQUISITION CORP. I)
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 SEPTEMBER
30, 2008 (UNAUDITED) AND DECEMBER 31. 2007 (AUDITED)
 
 SEPTEMBER 30,
                            
                            
                            DECEMBER 31,2008
                            
                            
                            2007ASSETSCURRENT
      ASSETSCash
                            
                            $
                            24,739
                            
                            
                            $
                            1,670Prepaid
      expenses and other current assets
                            
                            
                            7,505
                            
                            
                            
                            7,505Total
      current assets
                            
                            
                            32,244
                            
                            
                            
                            9,175Fixed
      assets, net of depreciation
                            
                            
                            33,728
                            
                            
                            
                            31,047Other
      AssetComputer
      software development costs, net of amortization
                            
                            
                            160,972
                            
                            
                            
                            350,246Total
      other asset
                            
                            
                            160,972
                            
                            
                            
                            350,246TOTAL
      ASSETS
                            
                            $
                            226,944
                            
                            
                            $
                            390,468LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                            
                            $
                            1,275,050
                            
                            
                            
                            803,731Liability
      for stock to be issued
                            
                            
                            -
                            
                            
                            
                            15,000Current
      portion of notes payable, net of debt discount of $15,343
                            
                            
                            42,633
                            
                            
                            
                            15,703Total
      current liabilities
                            
                            
                            1,317,684
                            
                            
                            
                            834,434Long-term
      LiabilitiesNotes
      payable, net of current portion, net of debt discount of
      $187,793
                            
                            
                            484,717
                            
                            
                            
                            350,307TOTAL
      LIABILITIES
                            
                            
                            1,802,400
                            
                            
                            
                            1,184,741STOCKHOLDERS'
      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, 75,000,000 shares authorized and
      13,690,892 and 11,472,188 issued and outstanding
                            
                            
                            1,369
                            
                            
                            
                            1,147Additional
      paid-in capital
                            
                            
                            4,926,502
                            
                            
                            
                            3,278,517Retained
      earnings (deficit)
                            
                            
                            (6,503,327
                            )
                            
                            
                            (4,073,937
                            )Total
      stockholders' equity (deficit)
                            
                            
                            (1,575,456
                            )
                            
                            
                            (794,273
                            )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                            
                            $
                            226,944
                            
                            
                            $
                            390,468
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
 
 1
  INFERX
CORPORATION
 (FORMERLY
BLACK NICKEL ACQUISITION CORP. I)
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 FOR
THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 
 NINE MONTHS ENDED
                    
                    
                    THREE MONTHS ENDEDSEPTEMBER 30,
                    
                    
                    SEPTEMBER 30,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007REVENUE
                    
                    $
                    80,934
                    
                    
                    $
                    300,000
                    
                    
                    $
                    -
                    
                    
                    $
                    100,000COST
      OF REVENUESDirect
      labor and other fringes
                    
                    
                    43,261
                    
                    
                    
                    54,087
                    
                    
                    
                    -
                    
                    
                    
                    10,657Subcontractor
                    
                    
                    19,710
                    
                    
                    
                    88,811
                    
                    
                    
                    -
                    
                    
                    
                    30,775Other
      direct costs
                    
                    
                    416
                    
                    
                    
                    11,556
                    
                    
                    
                    -
                    
                    
                    
                    306Amortization
      of computer software development costs
                    
                    
                    189,273
                    
                    
                    
                    132,752
                    
                    
                    
                    63,091
                    
                    
                    
                    44,250Total
      costs of revenues
                    
                    
                    252,659
                    
                    
                    
                    287,206
                    
                    
                    
                    63,091
                    
                    
                    
                    85,988GROSS
      PROFIT (LOSS)
                    
                    
                    (171,726
                    )
                    
                    
                    12,794
                    
                    
                    
                    (63,091
                    )
                    
                    
                    14,012OPERATING
      EXPENSESIndirect
      and overhead labor and fringes
                    
                    
                    547,354
                    
                    
                    
                    485,855
                    
                    
                    
                    190,600
                    
                    
                    
                    151,826Professional
      fees
                    
                    
                    171,175
                    
                    
                    
                    314,864
                    
                    
                    
                    13,732
                    
                    
                    
                    121,395Travel
      related costs
                    
                    
                    21,465
                    
                    
                    
                    22,090
                    
                    
                    
                    3,299
                    
                    
                    
                    5,651Rent
                    
                    
                    112,601
                    
                    
                    
                    79,828
                    
                    
                    
                    43,949
                    
                    
                    
                    26,609General
      and administrative
                    
                    
                    106,724
                    
                    
                    
                    45,221
                    
                    
                    
                    65,674
                    
                    
                    
                    8,608Registration
      penalty
                    
                    
                    -
                    
                    
                    
                    134,202
                    
                    
                    
                    -
                    
                    
                    
                    44,734Stock
      issued for services
                    
                    
                    116,625
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Stock
      based compensation
                    
                    
                    33,232
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Depreciation
      and impairment
                    
                    
                    12,298
                    
                    
                    
                    24,955
                    
                    
                    
                    2,150
                    
                    
                    
                    4,611Total
      operating expenses
                    
                    
                    1,121,475
                    
                    
                    
                    1,107,016
                    
                    
                    
                    319,404
                    
                    
                    
                    363,434NET LOSS FROM OPERATIONS BEFORE
      OTHER EXPENSE ANDPROVISION FOR INCOME
      TAXES
                    
                    
                    (1,293,201
                    )
                    
                    
                    (1,094,222
                    )
                    
                    
                    (382,495
                    )
                    
                    
                    (349,422
                    )OTHER
      EXPENSELoss
      on debt conversion
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Loss
      on fair value of derivative liabilityImpairment
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Interest
      expense, net of interest income
                    
                    
                    1,136,189
                    
                    
                    
                    17,036
                    
                    
                    
                    1,038,889
                    
                    
                    
                    9,968NET
      LOSS FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES
                    
                    
                    (2,429,390
                    )
                    
                    
                    (1,111,257
                    )
                    
                    
                    (1,421,384
                    )
                    
                    
                    (359,390
                    )Provision
      for income taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -NET (LOSS) APPLICABLE TO SHARES
                    
                    $
                    (2,429,390
                    )
                    
                    $
                    (1,111,257
                    )
                    
                    $
                    (1,421,384
                    )
                    
                    $
                    (359,390
                    )NET
      (LOSS) PER BASIC AND DILUTED SHARES
                    
                    $
                    (0.19
                    )
                    
                    $
                    (0.11
                    )
                    
                    $
                    (0.10
                    )
                    
                    $
                    (0.03
                    )WEIGHTED AVERAGE NUMBER OFSHARES
      OUTSTANDING
                    
                    
                    12,703,393
                    
                    
                    
                    10,102,325
                    
                    
                    
                    13,572,631
                    
                    
                    
                    10,758,905
 
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
 
 2
 
 INFERX
CORPORATION
 (FORMERLY
BLACK NICKEL ACQUISITION CORP. I)
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 
 2008
                                  
                                  
                                  2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss)
                                  
                                  $
                                  (2,429,390
                                  )
                                  
                                  $
                                  (1,111,257
                                  )Adjustments
      to reconcile net (loss)to
      net cash (used in) operating activities:Stock
      issued for services
                                  
                                  
                                  116,625
                                  
                                  
                                  
                                  -Beneficial
      conversion feature
                                  
                                  
                                  1,091,253
                                  
                                  
                                  
                                  -Stock
      based compensation
                                  
                                  
                                  33,231
                                  
                                  
                                  
                                  -Amortization
      of debt discount
                                  
                                  
                                  24,462
                                  
                                  
                                  
                                  -Impairment
      loss
                                  
                                  
                                  -
                                  
                                  
                                  
                                  10,473Amortization
      of computer software development costs
                                  
                                  
                                  189,273
                                  
                                  
                                  
                                  132,752Depreciation
                                  
                                  
                                  12,298
                                  
                                  
                                  
                                  14,482Change
      in assets and liabilitiesDecrease
      in accounts receivable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  50,000Increase
      in accounts payable and accrued expenses
                                  
                                  
                                  473,319
                                  
                                  
                                  
                                  599,093Total
      adjustments
                                  
                                  
                                  1,940,461
                                  
                                  
                                  
                                  806,800Net
      cash (used in) operating activities
                                  
                                  
                                  (488,929
                                  )
                                  
                                  
                                  (304,457
                                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                                  
                                  
                                  (14,978
                                  )
                                  
                                  
                                  (18,323
                                  )Computer
      software development costs
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (148,716
                                  )Net
      cash (used in) investing activities
                                  
                                  
                                  (14,978
                                  )
                                  
                                  
                                  (167,039
                                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Increase
      (decrease) in cash overdraft
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Issuance
      of stock for cash
                                  
                                  
                                  -
                                  
                                  
                                  
                                  406,378Contributions
      of capital
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Borrowings
      of promissory notes
                                  
                                  
                                  537,500
                                  
                                  
                                  
                                  -(Repayment)
      of notes payable
                                  
                                  
                                  (10,524
                                  )
                                  
                                  
                                  (12,665
                                  )Net
      cash provided by financing activities
                                  
                                  
                                  526,976
                                  
                                  
                                  
                                  393,713NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                  
                                  
                                  23,069
                                  
                                  
                                  
                                  (77,783
                                  )CASH
      AND CASH EQUIVALENTS - BEGINNING OF PERIOD
                                  
                                  
                                  1,670
                                  
                                  
                                  
                                  79,554CASH
      AND CASH EQUIVALENTS - END OF PERIOD
                                  
                                  $
                                  24,739
                                  
                                  
                                  $
                                  1,771SUPPLEMENTAL
      INFORMATION OF CASH FLOW ACTIVITYCash
      paid during the period for interest
                                  
                                  $
                                  10,284
                                  
                                  
                                  $
                                  9,028SUPPLEMENTAL
      INFORMATION ON NONCASH ACTIVITYIssuance
      of warrants with convertible notes
                                  
                                  $
                                  227,598
                                  
                                  
                                  $
                                  -Conversion
      of notes payable to stock
                                  
                                  $
                                  162,500
                                  
                                  
                                  $
                                  -Stock
      issued for compensation
                                  
                                  $
                                  15,000Stock
      issued for services
                                  
                                  $
                                  116,625
                                  
                                  
                                  $
                                  -Derivative
      liability converted to additional paid in capital and retained
      earnings
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  1,031,703
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.


3





INFERX
CORPORATION


(FORMERLY
BLACK NICKL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30,
2008 AND 2007 (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, 2007 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.


4




INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)





NOTE
      1-
            ORGANIZATION AND BASIS
      OF PRESENTATION (CONTINUED)




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.




Going
Concern




As shown
in the accompanying condensed consolidated financial statements the Company has
incurred a loss of $2,429,390 and $1,111,257 for the nine months ended September
30, 2008 and 2007, respectively, and has a working capital deficiency of
$1,285,440 as of September 30, 2008.  The principal reasons for the
recurring losses is due to the Company’s changed focus on developing its
products for the commercial markets as it transitions away from the less
profitable government services market, as well as the fair value adjustment in
the Company’s derivative liability. The Company expects the negative cash flow
from operations to continue its trend through the next twelve months. 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.




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.


5





INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)





NOTE
      1-
            ORGANIZATION AND BASIS
      OF PRESENTATION (CONTINUED)




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 up to
$100,000.


6




INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)





NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




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,
2008, 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.




Computer Software
Development Costs




During
2008 and 2007, 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, 2008 and 2007, the Company recognized $189,273
and $132,752 of amortization expense on its capitalized software costs,
respectively.


7




INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)





NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




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 in accordance with the provisions of Staff Accounting
Bulletin 104. 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.


8




INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)





NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




Stock-Based
Compensation




On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) published
Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
123R”).  SFAS 123R requires that compensation cost related to
share-based payment transactions be recognized in the financial statements.
Share-based payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee share purchase plans.  The provisions of SFAS
123R, as amended, are effective for small business issuers beginning as of the
next interim period after December 15, 2005.  The Company has adopted
these provisions as of January 1, 2006 and this adoption did not have a material
effect on the Company’s operations.




On
January 1, 2006, the Company adopted the provisions of FAS No. 123R “Share-Based
Payment” (“FAS 123R”) which 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 prescribed by Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) and related interpretations. The Company has provided pro
forma disclosure amounts in accordance with FAS No. 148, “Accounting for
Stock-Based Compensation – Transition and Disclosure – an amendment of FASB
Statement No. 123” (“FAS 148”), as if the fair value method defined by FAS No.
123, “Accounting for Stock Based Compensation” (“FAS 123”) had been applied to
its stock-based compensation.





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 estimated in accordance with the
original provisions of FAS 123. Stock-based compensation expense for all awards
granted after January 1, 2006 is based on the grant-date fair values estimated
in accordance with the provisions of FAS 123R. 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’s options issued in January 2008 were considered stock based
compensation (see Note 7).


9




INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)





NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




Concentrations




The
Company has derived all of its revenue for the nine months ended September 30,
2008 and September 30, 2007 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 SFAS 131, “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
believes that there is only one operating segment.





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. For
the warrants that are classified as derivatives, fair values were calculated at
net present value using the Company’s weighted average borrowing rate for debt
instruments without conversion features applied to total future cash flows of
the instruments.




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.


10




INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)





NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




Income
Taxes




Under
Financial Accounting Standards Board Statement No. 109, “Accounting for Income
Taxes,” 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




In July
2006, the FASB issued Interpretation No. 48 (FIN No. 48), “Accounting for
Uncertainty in Income Taxes.” This interpretation requires recognition and
measurement of uncertain income tax positions using a “more-likely-than-not”
approach. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. Management has adopted FIN 48 for 2007, and they evaluate their tax
positions on an annual basis, and have determined that as of September 30, 2008,
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.


11




INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)





NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




The
following is a reconciliation of the computation for basic and diluted
EPS:




Nine
      Months EndedSeptember 30,
                        
                        
                        September 30,2008
                        
                        
                        2007Net
      (loss)
                        
                        $
                        (2,429,390
                        )
                        
                        $
                        (1,111,257
                        )Weighted-average
      common shares outstanding:Basic
                        
                        
                        12,703,393
                        
                        
                        
                        10,102,325Convertible
      Notes
                        
                        
                        28,500,000
                        
                        
                        
                        -Warrants
                        
                        
                        15,324,392
                        
                        
                        
                        3,029,271Options
                        
                        
                        140,000
                        
                        
                        
                        290,000Diluted
                        
                        
                        56,667,785
                        
                        
                        
                        13,421,596Basic
      net (loss) per share
                        
                        $
                        (0.19
                        )
                        
                        $
                        (0.11
                        )Diluted
      net (loss) per share
                        
                        $
                        (0.19
                        )
                        
                        $
                        (0.11
                        )




Research and
Development




Research
and development costs are expensed as incurred. In addition, research and
development costs of $56,736 and $32,033 have been included in indirect labor
and $0 and $142,898 have been included in direct labor and subcontractor costs
for the nine months ended September 30, 2008 and 2007,
respectively.




Recent Issued Accounting
Standards




In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.”
This standard 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 SFAS 157 is not expected to have a material impact
on the condensed consolidated financial statements.


12




INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)





NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




Recent Issued Accounting
Standards (Continued)




In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No.
115”, (“FAS 159”) 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. FAS 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.




In
December 2006, the FASB Staff issued FSP EITF - 00-19-2, “Accounting for Registration Payment
Arrangements” (“EITF
00-19-2”). EITF 00-19-2 addresses an issuer’s accounting for registration
payment arrangements. EITF 00-19-2 specifies that the contingent obligation to
make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately
recognized and measured in accordance with SFAS No. 5, Accounting for
Contingencies. EITF 00-19-2 is effective for financial statements issued for
fiscal years beginning after December 15, 2006, and interim periods within those
fiscal years. Application of EITF 00-19-02 resulted in an adjustment in January
2007 reclassifying the derivative liability to additional paid-in capital and
retained earnings. The adjustment reduced the derivative liability by $1,031,703
and increased additional paid-in capital by $547,086 and increased retained
earnings by $484,617 which was the cumulative-effect adjustment resulting from
the adoption of this standard.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (SFAS 160). SFAS 160 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. SFAS 160 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 SFAS
No. 160 will have on the Company’s condensed consolidated financial position,
results of operations or cash flows.





In
December 2007, the FASB issued SFAS 141R,Business Combinations (“SFAS 141R”), which replaces
FASB SFAS 141,Business
Combinations. This Statement retains the fundamental requirements in SFAS
141 that the acquisition method of accounting be used for all business
combinations and for an acquirer to be identified for each business combination.
SFAS 141R 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.  SFAS 141R 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.  SFAS 141R 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.  This
compares to the cost allocation method previously required by SFAS No.
141.


13





INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)





NOTE
      2-
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(CONTINUED)




Recent Issued Accounting
Standards (Continued)




SFAS 141R
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, SFAS 141R will require an entity to
recognize contingent consideration at the date of acquisition, based on the fair
value at that date.  This Statement 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 the
Company’s results of operations and financial condition for acquisitions
previously completed.  The adoption of SFAS No. 141R is not expected
to have a material effect on the Company’s condensed consolidated financial
position, results of operations or cash flows.





In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expenses
the current view of the staff that it will accept a company’s election to use
the simplified method discussed in Staff Accounting Bulletin No. 107, “Share Based Payment”, (“SAB 107”), for estimating
the expected term of “plain
vanilla” share options regardless of whether the company has sufficient
information to make more refined estimates. SAB 110 became effective for the
Company on January 1, 2008. The adoption of SAB 110 is not expected to have a
material impact on the Company’s financial position.





In March
2008, the FASB Task Force approved confirming changes for Issue No. 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios” to reflect more clearly the consensus
on EITH 00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments”, and the issuance of FASB Statement No. 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity”. In addition, the Task Force decided to provide transition guidance for
those conforming changes as outlined in EITF 08-4, “Transition Guidance for
Conforming Changes to Issue 98-5”. Management used the EITF 00-27 and EITF 98-5
guidance to determine beneficial conversion options and accounting for
convertible debt instruments and convertible stock (collectively, convertible
instruments) with nondetachable conversion options that are
in-the-money.





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




NOTE
      3-
            FIXED
      ASSETS




Fixed
assets consist of the following as of September 30, 2008 and December 31, 2007,
respectively:




Estimated Useful
                                
                                
                                September 30,
                                
                                
                                December 31,Lives (Years)
                                
                                
                                2008
                                
                                
                                2007Computer
      equipment
                                
                                
                                5
                                
                                
                                $
                                107,065
                                
                                
                                $
                                92,087Office
      machinery and equipment
                                
                                
                                3
                                
                                
                                
                                15,638
                                
                                
                                
                                15,638Furniture
      and fixtures
                                
                                
                                5
                                
                                
                                
                                538
                                
                                
                                
                                538Automobile
                                
                                
                                5
                                
                                
                                
                                58,476
                                
                                
                                
                                58,476181,717
                                
                                
                                
                                166,739Less:
      Accumulated depreciation
                                
                                
                                
                                
                                
                                
                                (147,989
                                )
                                
                                
                                (135,692
                                )Total,
      net
                                
                                
                                
                                
                                
                                $
                                33,728
                                
                                
                                $
                                31,047




Depreciation
expense was $12,298 and $14,482 for the nine months ended September 30, 2008 and
2007, respectively.


14




INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)




NOTE
      4-
            COMPUTER SOFTWARE
      DEVELOPMENT COSTS




Computer
software development costs consist of the following as of September 30, 2008 and
December 31, 2007, respectively:




Estimated Useful
                            
                            
                            September 30,
                            
                            
                            December 31,Lives (Years)
                            
                            
                            2008
                            
                            
                            2007Computer
      software development costs
                            
                            
                            5
                            
                            
                            $
                            986,724
                            
                            
                            $
                            986,724Less:
      Accumulated amortization
                            
                            
                            
                            
                            
                            
                            (825,752
                            )
                            
                            
                            (636,478
                            )Total,
      net
                            
                            
                            
                            
                            
                            $
                            160,972
                            
                            
                            $
                            350,246




Amortization
expense was $189,273 and $132,752 for the nine months ended September 30, 2008
and 2007, respectively.  At March 31, 2007, the Company wrote off net
software development costs of $10,473 relating to their Inferview
product.




Amortization
expense anticipated through September 30, 2010 is as follows:




Period
      ended September 30:2009
                        
                        $
                        121,4952010
                        
                        
                        39,477$
                        160,972




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
2033.


15


INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)




NOTE
      5-
            NOTES PAYABLE
      (CONTINUED)




SBA
Loan (Continued)




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.




As of
September 30, 2008, the Company has an outstanding principal balance of
$354,736. Interest expense on the SBA loan for the nine months ended September
30, 2008 and 2007 were $9,704 and $9,028, 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
September 30, 2008, the outstanding principal balance of the Auto Note was
$750.




Convertible
Notes





The
Company has entered into six 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 for the period ended September 30, 2008
      in the amount of $2,252. In accordance with EITF 98-5 and EITF 00-27, the
      Company recorded a beneficial conversion feature of $75,000 based on the
      difference in the intrinsic value of the conversion option. In September
      2008, $2,000 was converted for 160,000 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 462,963 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 $.135 or 740,741 shares. This note was converted
      immediately and shares were issued in April 2008 and there was no
      beneficial conversion feature associated to this
  note.




16


INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)




NOTE
      5-
            NOTE PAYABLE
      (CONTINUED)




Convertible Notes(continued)





·
            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 $0.10 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 $0.05 per share for 250,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest for the period ended September 30, 2008 in
      the amount of $827;





·
            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 $0.10 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 $0.05 per share for 100,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted..
      The Company has accrued interest for the period ended September 30, 2008
      in the amount of $277;





·
            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 $0.10 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 $0.05 per share for 100,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest for the period ended September 30, 2008 in
      the amount of $277;




·
            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 $.10 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 $.05 per share for 50,000 warrants. There will also be
      warrants issued for accrued interest should the interest be converted. The
      Company has accrued interest for the period ended September 30, 2008 in
      the amount of $123; and





·
            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 $.02 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 $.02 per share for
      12,500,000 warrants. There will also be warrants issued for accrued
      interest should the interest be converted. The Company has accrued
      interest for the period ended September 30, 2008 in the amount of
      $4,434.





The
convertible notes issued in June, July and August 2008, were issued with
warrants and each instrument was valued according to the provisions of APB 14.
The value of the warrants are reflected as additional paid in capital with a
value of $227,598, 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, 2008
is $24,462, with a remaining debt discount as of September 30, 2008 of $203,136.
In addition, the Company calculated a beneficial conversion feature of
$1,091,253 on the $300,000 in convertible notes in accordance with the
provisions of EITF 98-5 and EITF 00-27.


17
  INFERX
CORPORATION
 (FORMERLY
BLACK NICKEL ACQUISITION CORP. I)
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)


As of
September 30, 2008, the repayment schedule of the Notes Payable for the next
five years and in the aggregate is:





2009
      (net of discount of $15,343)
                              
                              $
                              42,6332010
      (net of discount of $187,793)
                              
                              
                              146,2072011
                              
                              
                              9,6002012
                              
                              
                              10,2002013
                              
                              
                              10,800Thereafter
                              
                              
                              307,910527,350Less
      : current portion
                              
                              
                              (42,633
                              )Long-term
      portion
                              
                              $
                              484,717




18


INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (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, 2008 has 13,690,892 shares of common stock issued
and outstanding.





During
the nine months ending September 30, 2008 the Company issued 462,963 and 740,741
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, 160,000 shares of common stock were issued to convert $2,000
of accrued interest on a convertible note payable.





The
Company issued 475,000 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 350,000 shares of common stock
for services rendered in the six months ended June 30, 2008 valued at $52,500.
The combined $116,625 is reflected as stock issued for services in the condensed
consolidated statements of operations for the six months ended June 30,
2008.  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
30,000 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 2,329,392 Class A and 2,329,392 Class B
warrants. In April 2007, 1,629,513 of the Class A warrants were exercised into
common shares. In November 2007, an additional 444,879 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 2,074,392 were issued in November 2007 and
are reflected herein. The Company also issued 250,000 warrants in September 2007
for investor relation services and 450,000 warrants in connection with the
convertible notes issued in June 2008, 50,000 warrants in connection with the
notes issued in July 2008, and 12,500,000 warrants in connection with the notes
issued in July and August 2008.. The following is a breakdown of the
warrants:





Exercise
                                  
                                  DateWarrants
                                  
                                  
                                  Price
                                  
                                  Issued
                                  
                                  Term250,000
                                  
                                  
                                  $
                                  0.50
                                  
                                  9/1/2007
                                  
                                  5
      years2,074,392
                                  
                                  
                                  $
                                  0.50
                                  
                                  11/30/2007
                                  
                                  3.9
      years250,000
                                  
                                  
                                  $
                                  0.05
                                  
                                  6/1/2008
                                  
                                  5
      years200,000
                                  
                                  
                                  $
                                  0.05
                                  
                                  6/21/2008
                                  
                                  5
      years50,000
                                  
                                  
                                  $
                                  0.05
                                  
                                  7/2/2008
                                  
                                  5
      years12,500,000
                                  
                                  
                                  $
                                  0.02
                                  
                                  7/31/08-8/6/08
                                  
                                  5
      years15,324,392




19





INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER 30,
2008 AND 2007 (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
                                                              
                                                              
                                                              $.05/$.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 2,200,000 shares and issued 440,000 options in
October 2007 and January 2008 that vest over a three-year period of time with a
strike price of $0.50 per share, with 140,834 of these options vesting in 2007
and an additional 155,000 shares that vested during the nine months ended
September 30, 2008. During this period, options for 300,000 shares were
terminated under the terms of the option plan, of which 1,622,917 were already
vested. The Company has 140,000 options remaining at September 30,
2008.




These
options were valued as follows for the nine months ending:




September 2008Stock Price
                                    
                                    $
                                    0.03/$0.55Strike
      Price
                                    
                                    $
                                    .50Expected
      Life of Option
                                    
                                    1
      yr.Annualized
      Volatility
                                    
                                    
                                    100
                                    %Discount
      Rate
                                    
                                    
                                    3.00
                                    %Annual
      Rate of Quarterly Dividends
                                    
                                    NoneCall
      Option Value
                                    
                                    $
                                    .124/$.217




The value
attributable to these options for the nine months ended September 30, 2008 and
2007 is $33,231 and $0 respectively and is reflected in the condensed
consolidated statements of operations as stock based compensation.





NOTE
      7-
            COMMITMENTS




Rental




The
Company leases office space under an operating lease that has initial or
remaining non-cancelable lease terms and expires in November 2008. The lease
agreement provides for an annual 4% escalation of the base rent. As of September
30, 2008, the following presents the approximate future minimum lease payments
required under this lease:





For the Periods Ended
                      September 30,2009
                    
                    $
                    18,262




Rent
expense for the nine months ended September 30, 2008 and 2007 was $112,601 and
$79,828, respectively.


20


INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)




NOTE
      7-
            COMMITMENTS
      (CONTINUED)




Consulting
Agreements




During
the nine months ended September 30, 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 and
2007.





Registration Rights
Agreement




The
Registration Rights Agreement dated October 23, 2006 between the Company and
certain investors provided that the Company would accrue a penalty of 1% of the
total shares of the Company’s common stock registered on Form SB-2 (the “Total
Shares”), per month for each month beyond April 23, 2007 that Company’s
registration statement on Form SB-2 failed to be effective up to a maximum of
10% of the Total Shares or 447,340 shares of common stock. The Company has
incurred a penalty of 268,404 shares of its common stock through September 10,
2007, the effective date of the Company’s registration statement. This liability
had been accrued at a value of $.50 per share or $134,202 at September 30,
2007.  The penalty shares noted above were issued in October
2007.




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.


21


INFERX
CORPORATION


(FORMERLY
BLACK NICKEL ACQUISITION CORP. I)


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SEPTEMBER
30, 2008 AND 2007 (UNAUDITED)




NOTE
      8-
            PROVISION FOR INCOME
      TAXES (CONTINUED)




At
September 30, 2008, deferred tax assets consist of the
following:





Net
      operating losses
                      
                      $
                      2,193,539Valuation
      allowance
                      
                      
                      (2,193,539
                      )$
                      -





At
September 30, 2008, the Company had net operating loss carryforward in the
approximate amount of $6,451,584, available to offset future taxable income
through 2028.  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,
2008 and 2007 is summarized below.




2008
                          
                          
                          2007Federal
      statutory rate
                          
                          
                          (34.0
                          )%
                          
                          
                          (34.0
                          )%State
      income taxes, net of federal benefits
                          
                          
                          6.0
                          
                          
                          
                          6.0Valuation
      allowance
                          
                          
                          28.0
                          
                          
                          
                          28.00
                          %
                          
                          
                          0
                          %




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, 2008 and 2007, 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, 2008 and 2007, respectively.


22


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, 2007.





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.


23




Cash
and Cash Equivalents




We
consider all highly liquid debt instruments and other short-term investments
with a maturity of three 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
2007 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.




24


Fixed-Price
Contracts




Revenue
from firm-fixed-price contracts is recognized upon achievement of the milestones
contained in the contracts in accordance with the provisions of Staff Accounting
Bulletin 104. 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.




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




On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) published
Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
123R”).  SFAS 123R requires that compensation cost related to
share-based payment transactions be recognized in the financial statements.
Share-based payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee share purchase plans.  The provisions of SFAS
123R, as amended, are effective for small business issuers beginning as of the
next interim period after December 15, 2005.  We have adopted these
provisions as of January 1, 2006, and this adoption did not have a material
effect on our operations.




On
January 1, 2006, we adopted the provisions of FAS No. 123R “Share-Based Payment”
(“FAS 123R”) which requires recognition of stock-based compensation expense for
all share-based payments based on fair value. Prior to January 1, 2006, we
measured compensation expense for all of our share-based compensation using the
intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related
interpretations. We have provided pro forma disclosure amounts in accordance
with FAS No. 148, “Accounting for Stock-Based Compensation – Transition and
Disclosure – an amendment of FASB Statement No. 123” (“FAS 148”), as if the fair
value method defined by FAS No. 123, “Accounting for Stock Based Compensation”
(“FAS 123”) had been applied to our stock-based compensation.




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 estimated in accordance with the original provisions
of FAS 123. Stock-based compensation expense for all awards granted after
January 1, 2006 is based on the grant-date fair values estimated in accordance
with the provisions of FAS 123R. 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.




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.




25


Segment
Reporting




We follow
the provisions of SFAS 131, “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
Financial Accounting Standards Board Statement No. 109, “Accounting for Income
Taxes,” 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




In July
2006, the FASB issued Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in
Income Taxes.” This interpretation requires recognition and measurement
of uncertain income tax positions using a “more-likely-than-not”
approach. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. Management has adopted FIN 48 for 2007, and they evaluate their tax
positions on an annual basis, and has determined that as of June 30, 2008, 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.




26


Recent
Issued Accounting Standards




In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” This
standard 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 SFAS 157 is not expected to have a material impact
on the consolidated financial statements.




In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115”, (“FAS 159”) 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. FAS 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.




In
December 2006, the FASB Staff issued FSP EITF 00-19-2, “Accounting for Registration Payment
Arrangements” (“EITF
00-19-2”). EITF 00-19-2 addresses an issuer’s accounting for registration
payment arrangements. EITF 00-19-2 specifies that the contingent obligation to
make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately
recognized and measured in accordance with SFAS No. 5, Accounting for
Contingencies. EITF 00-19-2 is effective for financial statements issued for
fiscal years beginning after December 15, 2006, and interim periods within those
fiscal years. Application of EITF 00-19-02 resulted in an adjustment in January
2007 reclassifying the derivative liability to additional paid-in capital and
retained earnings. The adjustment reduced the derivative liability by $1,031,703
and increased additional paid-in capital by $547,086 and increased retained
earnings by $484,617 which was the cumulative-effect adjustment resulting from
the adoption of this standard.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (SFAS 160). SFAS 160 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.




SFAS 160
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 SFAS
No. 160 will have on our consolidated financial position, results of operations
or cash flows.




In
December 2007, the FASB issued SFAS 141R, Business Combinations (“SFAS 141R”), which replaces
FASB SFAS 141, Business Combinations. This Statement retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting be used for
all business combinations and for an acquirer to be identified for each business
combination. SFAS 141R 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. SFAS 141R 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. SFAS 141R 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. This compares to
the cost allocation method previously required by SFAS No. 141.




SFAS 141R
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, SFAS 141R will require an entity to recognize
contingent consideration at the date of acquisition, based on the fair value at
that date. This Statement 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 SFAS No. 141R is not expected to have a
material effect on our consolidated financial position, results of operations or
cash flows.




27


In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options” (“SAB 110”). SAB 110 expresses
the current view of the staff that it will accept a company's election to use
the simplified method discussed in Staff Accounting Bulletin No. 107, “Share Based Payment", (“SAB107”), for estimating the
expected term of “plain
vanilla” share options regardless of whether the company has sufficient
information to make more refined estimates. SAB 110 became effective for us on
January 1, 2008. The adoption of SAB 110 is not expected to have a material
impact on our final position.




In March
2008, the FASB Task Force approved confirming changes for Issue No. 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios” to reflect more clearly the consensus
on EITH 00-27, “Application of Issue No. 98-5 to Certain Convertible
Instruments”, and the issuance of FASB Statement No. 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity”. In addition, the Task Force decided to provide transition guidance for
those conforming changes as outlined in EITF 08-4, “Transition Guidance for
Conforming Changes to Issue 98-5”. Management used the EITF 00-27 and EITF 98-5
guidance to determine beneficial conversion options and accounting for
convertible debt instruments and convertible stock (collectively, convertible
instruments) with nondetachable conversion options that are
in-the-money.





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




Nine
Months Ended September 30, 2008 and 2007




Revenue
for the nine months ended September 30, 2008 was $80,934, a decrease of
$219,066, or 73%, from $300,000 for the same period in 2007.  This was
a result of a decrease in government contracts.




Direct
costs were $252,659 and $287,206 for the nine months ended September 30, 2008
and 2007 respectively.  This represents a decrease of $34,547 or
12%.  The decrease in direct costs resulted primarily from decreased
subcontractor costs of $69,101 resulting from a reduction of government
contracts and an increase of $56,521 in amortization costs from newly
capitalized software.




Operating
expenses which include indirect labor, professional fees, advertising,
consulting and general and administrative, increased from $1,107,016 for the
nine months ended September 30, 2007 to $1,121,475 for the same period in
2008.  The increase of $14,459 or 2% is the result of the following:
an increase in indirect and overhead labor and fringes of $61,499 during the
nine months ended September 30, 2008; a decrease in registration penalty of
$134,202 resulting from a prior year transaction which did not occur again in
the current year, a decrease in professional services of $143,689, consisting
primarily of decreased legal costs; an increase in share based compensation of
$149,857 as a result of awards issued under the Company’s option plan and stock
issued for services; an increase in general and administrative costs of $61,503;
and a decrease in depreciation and impairment of $12,657 due primarily to the
2007 impairment charge on the Company’s InferView product.




Interest
expense increased $1,119,153 in the nine months ended September 30, 2008 due to
the recognition of a beneficial conversion feature in the amount of $1,091,253
and the recognition of the amortization of debt discount associated with the
convertible notes in the amount of $24,462. These costs did not occur in the
same period for 2007.




28


Three
Months Ended September 30, 2008 and 2007




Revenue
for the three months ended September 30, 2008 was $0, a decrease of $100,000, or
100%, from $100,000 for the same period in 2007. This was a result of a decrease
in government contracts.




Direct
costs for the three months ended September 30, 2008 were $63,091 compared to
$85,988 for the same period in 2007, a decrease of $22,897, or 27%. This
resulted primarily from $10,657 in decreased direct labor and fringes and
$30,775 of decreased subcontractor costs resulting from a reduction of
government contracts and an increase of $18,841 in other amortization costs from
newly capitalized software.




Operating
expenses for the three months ended September 30, 2008, which include indirect
labor, professional fees, advertising, consulting and general and
administrative, decreased $44,030 to $319,404 for the period ended September 30,
2008 from $363,434 for the same period in 2007. This represents a decrease of
13% and is primarily a result of increased indirect and overhead labor and
fringes of $38,774 resulting from costs related to a staffing in 2008 and a
decrease in professional services of $107,663, consisting primarily of decreased
legal costs.




Interest
expense increased $1,028,921 in the three months ended September 30, 2008 due to
the recognition of a beneficial conversion feature in the amount of $1,005,000
and the recognition of the amortization of debt discount associated with the
convertible notes in the amount of $22,757. These costs did not occur in the
same period for 2007.




Liquidity
and Capital Resources




We had
cash of $24,739 at September 30, 2008 and a working capital deficit of
$1,285,440. During the nine months ended September 30, 2008, we used
approximately $489,000 from our operations. Operations were funded primarily
from the borrowings of promissory notes of $537,500.




In
October 2006, we completed a private placement in which the investors paid $.50
per share of common stock, and also received one five-year warrant with an
exercise price of $.50 and one five-year warrant with an exercise price of $.62.
We sold 2,329,392 units in the private placement (including $362,196 in
cancellation of indebtedness and accrued interest under outstanding bridge
loans), resulting in gross cash proceeds of approximately $802,500. In April
2007, we and holders of our Class A warrants agreed to reduce the exercise price
of 80% of the Class A warrants to $.25 per share for a period of two weeks. We
received approximately $407,000 from the exercise of 1,629,513 warrants. In
November 2007, the holders of our Class A warrants exercised an additional
444,879 warrants resulting in gross cash proceeds of approximately
$222,000.





In March
2008, we sold three convertible notes in the aggregate principal amount of
$237,500. These convertible notes accrue interest at the rate of 9.9% per annum
and are convertible into our common stock at 50% of the closing bid price of the
common stock on the date of conversion.





In June
and July 2008, we sold convertible notes in the aggregate principal amount of
$50,000. These convertible notes accrue interest at the rate of 9.9% per annum
and are convertible into our common stock at a fixed price of $0.10 per share of
common stock on the outstanding principal and accrued interest on the date of
conversion.





In July
and August 2008, we sold convertible notes in the aggregate principal amount of
$250,000. These convertible notes accrue interest at the rate of 10% per annum
and are convertible into our common stock at a fixed price of $0.02 per share of
common stock on the outstanding principal and accrued interest on the date of
conversion.




29


We will
need to generate significant additional revenue to support our projected
increases in staffing and other operating expenses, which we cannot give any
assurance we will be able to accomplish. We are currently expending
approximately $200,000 per month to support our operations, and under our
current business plan, we would be expending approximately $250,000 per month by
the end of fiscal 2008. Along with revenues from our existing contracts and
funding raised from convertible notes in June and July 2008, we believe our
existing capital is sufficient to fund our operations only through the third
quarter of 2008. The financing raised in June consisted of three convertible
notes for $45,000 along with a fourth convertible note for $5,000 issued in
early July 2008.  An additional round of funding was completed in
August 2008 for $250,000 in convertible notes.  These financings are
crucial to advance the Company’s efforts towards a significantly larger
financing to execute the Company’s business plan. Management’s goal is to
achieve higher valuations in subsequent financings.  If we are unable
to generate increased revenue, raise additional capital or find a merger partner
with sufficient revenues to support our operations,u 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 either through the exercise
of warrants, debt and/or increased revenue, we cannot assure you that the
warrants will be exercised, that we can obtain debt at acceptable terms or that
we can generate sufficient revenue to maintain projected operating levels.
Accordingly, we may need to secure additional equity or debt financing which we
cannot assure you will be available to us 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, 2008. 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, 2007 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.




30


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.  The
current lease is for a three month period at a cost of $1,500 per
month.




Item
1A.    Risk Factors.




Not
Applicable.




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




During
the three months ended September 30, 2008 we made unregistered sales of
convertible notes in the aggregate principal amount of $255,000 to several
investors from July 2, 2008 through August 6, 2008.  These convertible
notes accrue interest at the rate of 9.9% to 10% per annum and are convertible
into our common stock at a fixed price of $0.02 to $0.05 per share of common
stock on the outstanding principal and accrued interest on the date of
conversion.  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.




31


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:
      December 10, 2008
                      
                      InferX
      CorporationBy:
                      /s/B.K. GogiaB.K.
      GogiaChairman
      of the Board(Principal
      Executive, Financial andAccounting
      Officer)





InferX
Corporation


Quarterly
Report on Form 10-Q


for the
Quarterly Period Ended


September
30, 2008





-
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.