UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549





Form 10-K/A


(Amendment
No. 1)





R
                ANNUAL REPORT PURSUANT TO
      SECTION 13 OR
      15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2008Or£
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





Commission
file number: 1-31949


INX
Inc.


(Exact
name of Registrant as specified in its charter)





Delaware
            76-0515249(State
      of Incorporation)
            (I.R.S.
      Employer
              Identification
      No.)6401
      Southwest Freeway
            77074Houston,
      TX
              (Address
      of principal executive offices)
            (Zip
      code)





Registrant’s
telephone number: (713) 795-2000





Securities
registered pursuant to section 12(b) of the Act:





Title of Each Class
              Name of Each Exchange on Which
      RegisteredCommon
      stock, par value $0.01
              Nasdaq
      Global MarketWarrants
      to purchase common stock
              Nasdaq
      Global Market





Securities
registered pursuant to Section 12(g) of the Act:


None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes £     No R





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes £     No R





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, and (2) has been subject to such
filing requirements for the past 90 days.  Yes R     No £





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  R
Yes  £
No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A.  £





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer £
                Accelerated
      filer £
                Non-accelerated
      filer £
                Smaller
      reporting company R(Do
      not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).  Yes £No R





The
aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the common stock on June 30,
2008 as reported on the Nasdaq Capital Market was approximately
$72,197,002.





The
number of shares of common stock, $0.01 par value, outstanding as of
February 28, 2009 was 8,747,507.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the definitive Proxy Statement for the registrant’s 2009 Annual Meeting of
Shareholders have been incorporated by reference into Part III of this
Annual Report on Form 10-K/A.


INX
Inc. and Subsidiaries





FORM 10-K/A


For
the Year Ended December 31, 2008





TABLE
OF CONTENTS





PageExplanatory
      Note
                            3PART I4Item
      1
                            Business
                            4Item
      1A
                            Risk
      Factors
                            14Item
      2
                            Properties
                            22Item
      3
                            Legal
      Proceedings
                            23Item
      4
                            Submission
      of Matters to a Vote of Security
      Holders
                            23PART IIItem
      5
                            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                            23Item
      6
                            Selected
      Financial
      Data
                            25Item
      7
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            25Item
      7A
                            Quantitative
      and Qualitative Disclosures About Market
      Risk
                            43Item
      8
                            Financial
      Statements and Supplementary
      Data
                            43Item
      9
                            Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
                            73Item
      9A(T)
                            Controls
      and
      Procedures
                            73Item
      9B
                            Other
      Information
                            75PART IIIItem
      10
                            Directors,
      Executive Officers, and Corporate
      Governance
                            75Item
      11
                            Executive
      Compensation
                            75Item
      12
                            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                            75Item
      13
                            Certain
      Relationships and Related Transactions, and Director
      Independence
                            75Item
      14
                            Principal
      Accountant Fees and
      Services
                            75PART IVItem
      15
                            Exhibits
      and Financial Statement
      Schedules
                            76SIGNATURES
                            77INDEX
      TO
      EXHIBITS
                            78





NOTE:  Amounts
are presented in thousands except share, per share, par value and percentages in
all parts of this Form 10-K/A except in the Exhibits, unless otherwise
stated.




2


EXPLANATORY
NOTE





INX Inc.
(the “Company”) is filing this Amendment No. 1 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008 initially filed with the
Securities and Exchange Commission on March 10, 2009 (the “Original Filing”).
This Amendment No. 1 reflects restatement of the consolidated financial
statements as of December 31, 2008 and 2007 and for the years ended December 31,
2008, 2007 and 2006.  The restatement corrects the following
errors:





·
            The
      Company previously presented its floor plan financing balances as trade
      accounts payable because it believed that its principal vendor had a
      substantial investment in the floor plan financing
      company.  During the preparation of the Quarterly Report on Form
      10-Q for the quarter ended June 30, 2009, the Company became aware that
      the principal vendor had no ownership interest in its floor plan financing
      company.  Consequently, the Company is correcting its
      presentation of the floor plan balances in its Balance Sheets from trade
      accounts payable to floor plan financing and the related amounts in its
      Statements of Cash Flows from operating activities to financing
      activities.  The correction of the error has no effect on the
      previously reported Statements of Operations.  There is no
      impact to the Company's current liabilities or total liabilities as a
      result of this reclassification for each of the three years ended December
      31, 2008.





·
            In
      addition to the aforementioned correction, the Company is recording
      certain immaterial adjustments that increase pre-tax expense by $76 for
      the year ended December 31, 2008, of which $26 was previously recorded in
      the three months ended March 31, 2009.  The adjustments
      consisted of a pre-tax expense of $50 related to stock option
      modifications and pre-tax expense of $26 related to the accrual of outside
      contractor costs.





For a
more detailed description of this restatement, see Note 16, Restatement of
Previously Issued Financial Statements to the accompanying consolidated
financial statements in Part II, Item 8 and Part II, Item 9A(T), Controls
and Procedures, contained in this Form 10-K/A.





This Form
10-K/A sets forth the Original Filing in its entirety. However, this Form 10-K/A
only amends and restates Items 6, 7, 8 and 9A(T) of Part II and Item 15 of Part
IV of the original filing, in each case, solely as a result of, and to reflect,
the restatement, and no other information in the original filing is amended
hereby. The foregoing items have not been updated to reflect other events
occurring after the original filing or to modify or update those disclosures
affected by subsequent events. In addition, pursuant to the rules of the SEC,
Item 15 of Part IV of the original filing has been amended to contain currently
dated certifications from the Company’s Chief Executive Officer and Chief
Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act
of 2002. The certifications of the Company’s Chief Executive Officer and Chief
Financial Officer are attached to this Form 10-K/A as Exhibits 31.1, 31.2, 32.1
and 32.2, respectively.





3


PART I





Item 1.Business





Special
Notice Regarding Forward-Looking Statements





This
report contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 relating to future events or our future
financial performance including, but not limited to, statements contained in
“Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” Readers are cautioned that any statement that is not a
statement of historical fact, including but not limited to, statements which may
be identified by words including, but not limited to, “anticipate”, “appear”,
“believe”, “could”, “estimate”, “expect”, “hope”, “indicate”, “intend”,
“likely”, “may”, “might”, “plan”, “potential”, “seek”, “should”, “will”,
“would”, and other variations or negative expressions thereof, are predictions
or estimations and are subject to known and unknown risks and uncertainties.
These forward-looking statements speak only as of the date hereof. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.





Important
factors that may affect these projections or expectations include, but are not
limited to: the behavior of financial markets including fluctuations in interest
or exchange rates; continued volatility and further deterioration of the capital
markets; the impact of regulation and regulatory, investigative, and legal
actions; strategic actions, including acquisitions and dispositions; future
integration of acquired businesses; future financial performance of major
industries which we serve; the loss of a significant client or significant
business from a client; difficulties in completing a contract or implementing
its provisions; and numerous other matters of national, regional, and global
scale including those of the political, economic, business, and competitive
nature. These uncertainties may cause our actual future results to be materially
different than those expressed in our forward-looking statements. The “Risk
Factors” set forth in Part I, Item 1A of this report could also cause
actual results to differ materially from the forward-looking
statements.





General





We are a
provider of technology infrastructure solutions for enterprise-class
organizations such as corporations, schools and federal, state and local
governmental agencies. Our solutions consist of three broad categories of
technology infrastructure: network infrastructure, unified communications and
data center. Network infrastructure solutions consist of network routing and
switching, wireless networking and network security solutions. Unified
communications solutions consist of Internet Protocol (“IP”) network-based voice
or telephone solutions as well as IP network-based video communications
solutions. Data center solutions consist of network storage solutions and data
center server virtualization solutions.





Our
network infrastructure and IP voice and video communications solutions are based
primarily on Cisco Systems, Inc. (“Cisco”) technology. Our network storage
solutions are primarily based on NetApp, Inc. (“NetApp”) and EMC Inc. (“EMC”)
technology. Our virtualization solutions are based primarily on VMware, Inc.
(“VMware”) technology. While our solutions also include products from other
manufacturers or software vendors, products from these three manufacturers make
up over 90% of our total product revenue.





We
provide our customers with planning, design and implementation professional
services as well as managed support services and technology hosting services. We
believe that our focus and expertise enables us to better compete in the markets
that we serve. Because we have significant experience planning, designing,
implementing and supporting these enterprise technology solutions for
enterprises, we believe we are well positioned to deliver superior solutions to
our customers and well positioned to provide our customers with the best
possible support for the solutions we provide.





IP is the
network data communications protocol deployed in the substantial majority of
enterprise organization networks worldwide. Implementing voice over the IP
network (“VoIP) is gaining widespread acceptance within enterprise
organizations. In addition to voice communications, video communications are
increasingly being deployed on the IP network. The convergence of data, voice,
and video into a single seamless IP communications infrastructure is
increasingly responsible for driving business benefits through improved
productivity and cost savings. The foundation of a converged communications
platform is a robust, secure, high-performance, high-availability IP network
infrastructure. The call processing (telephone call set-up and tear-down) for a
VoIP system is a software product commonly referred to as a “soft switch”. Prior
to Cisco entering the market for business telephone systems in approximately
1999, Avaya and Nortel were the market share leaders in the enterprise market
for business telephone systems. Today, Cisco is the worldwide market share
leader for telephony systems for enterprise-class organizations according to
third party research. Microsoft announced in early 2007 that they were
developing a soft switch technology, and it is widely anticipated that Microsoft
will also become a major industry participant. We offer both Cisco and Microsoft
solutions.





Increasingly,
network attached storage (“NAS”) and storage area networks (“SAN”) are being “IP
connected” and communicated with by computing resources through IP network
technology rather than through Fibre Channel network technology. This is due in
part to the cost advantages of using existing, standard IP network technology
rather than a dedicated Fibre Channel network.





Fibre
Channel over Ethernet (“FCoE”) is a new technology for mapping Fibre Channel
frames over full duplex IP networks, which preserves the popular Fibre Channel
protocol while leveraging lower cost, popular 10 gigabit Ethernet network
technology for SAN and data center server communications. FCoE allows IP network
and SAN data traffic to be consolidated using a single high throughput, low
latency network switch optimized for data center network use rather than general
enterprise-wide network use, such as a network switch in Cisco’s Nexus family of
data center switch products. This can reduce the number of required network
interface cards, cables and switches required for a given data center, as well
as reduce power and cooling costs. The use of iSCSI and FCoE technology to
consolidate data center networks onto a single IP network, together with server
virtualization technology, is expected to drive substantial change in the way
enterprise data centers are designed and operated, resulting in a lower cost of
operating data centers among other benefits.





4


VMware
and other similar products allow servers to be “virtualized” to improve
utilization of the investment an organization has made in server processing
power resources by creating software based virtual servers that are independent
of physical servers so that multiple operating systems and multiple applications
can reside on a single physical server. Virtualization of the data center is
contributing to substantially increased network data loads due to the
requirement to send data across the network between the physical servers that
are processing data in a virtualized server environment and the shared network
storage devices where data is stored in a virtualized data center.





The trend
towards the use of voice and video on the network and the use of IP
network-connected data storage devices and servers is driving the need for
increased network bandwidth as well as a requirement that organizations’ network
architecture be optimized for the manner in which the network is being used by
the organization. For instance, the segments of an enterprise organization’s
network that are used for voice communications must be optimized so that high
quality voice conversations can be conducted over a sometimes busy network.
Conversely, data center network infrastructure, which is not used for voice
communications, must be optimized to provide very high throughput, low latency
communications between servers and network storage devices.





Data and
network security is becoming increasingly complex. Increasing use of wireless
connectivity to organization’s networks, increasing numbers and types of devices
connecting to the network, and the use of server and data center virtualization
technology are all contributors to an increasingly complex network security
environment.





While the
IP network technology itself is changing, the purpose and manner in which the IP
network is being used by enterprise organizations is also changing and becoming
more complex, and enterprise organizations are becoming more and more reliant
upon the IP network. We believe this is creating an increasing desire by
enterprise organizations to work with a focused technology solutions provider
that possess expert skills in the increasingly complex areas of network
infrastructure, unified communications, network data storage, network security
and server virtualization. We also believe that enterprise organizations are
increasingly appreciative of a technology solutions provider that is willing to
take a proactive consultative approach, learning the customer’s environment and
goals, and their strategic and tactical needs, rather than simply attempting to
sell products and engineering resources.





The
solutions we offer include planning, design, implementation and support of
network infrastructure, unified communications and data center solutions. Our
solutions are designed with the complete life-cycle of our customer’s technology
infrastructure investment in mind. Within a finite set of practice areas, we
have standardized our planning, design, implementation, and support offerings to
drive a reliable and scalable set of solutions that can be tailored to meet the
business objectives of our clients.





We
currently have seventeen physical offices in sixteen markets, which are located
in Texas, California, Connecticut, Idaho, Massachusetts, New Mexico, Oklahoma,
Oregon, Washington and Washington DC. We primarily market to “mid-tier”
enterprise-class organizations with approximately 200 to 50,000 users of
technology that are headquartered in or making purchasing decisions from markets
that we serve with branch offices. We plan to continue to expand to additional
markets throughout the U.S. by establishing additional branch offices in
other markets, either by opening additional new offices or through
acquisition.





We derive
revenue from sales of both products and services. Our product sales consist
primarily of sales of Cisco brand products. NetApp storage products and VMware
virtualization software licenses are also meaningful material categories of
product sales. We also offer, certain unified communications products from
Microsoft, and various products that are “best-of-breed” in certain areas of the
solutions that we provide, including products from Left Hand Networks, Cistera
Networks, Converged Access, IPCelerate, Tandberg, and others.





Our
services revenues are derived from two principal types of services: professional
services, which include planning, design and implementation engineering
services, and post-sale support services, which consist of remote monitoring and
managed services for enterprise network infrastructure. In 2008, 2007 and 2006,
products made up 82.2%, 86.7% and 86.7% of total revenue and services made up
17.8%, 13.3% and 13.3% of total revenue.





Industry





Network
Infrastructure





The IP
network used by an enterprise organization encompasses and includes local area
network (“LAN”) or a wide area network (“WAN”) Ethernet network technology. The
IP network has evolved to become the platform for virtually all enterprise
communications, including data communications between computers within an
organization, between the organization and the Internet, for email
communications, and more recently for voice and video communications. Now, data
center server and storage connectivity is also moving towards the IP network,
first with the use of iSCSI technology, and now FCoE technology.





5


The way
the IP network is evolving to be used by enterprise organizations for virtually
all forms of communications is creating the need for the network to be designed
properly for the manner in which it is being used by the organization. The
increasingly complex manner in which the network is being used, as well as the
need for different network attribute requirements for varying uses within the
organization, is creating a need for expertise in the design and support of
network infrastructure for large, complex organizations.





Wireless
connectivity to the IP network, as it continues to proliferate within offices,
Wi-Fi hotspots in airports, coffee shops, and even on public transportation, is
now becoming common. Although wireless network connectivity is on the way to
becoming almost as readily available as electrical power and phone service,
deployment of these pervasive wireless networks through the enterprise presents
myriad challenges.





The ease
of access to a wireless network, while beneficial for public hotspots, becomes a
challenge in securing against unauthorized usage while still providing
appropriate levels of access for legitimate use. Likewise, the low-cost and
low-complexity of consumer wireless products increases the likelihood that
user’s will create unsecured wireless networks by simply connecting a wireless
access point to an open port on an enterprise organization’s network. A new
wireless network standard, 802.11n, improves wireless networking in many
respects and is expected to be a driver of wireless networking growth over the
next several years.





Power
over Ethernet (“PoE”) is a relatively new modification of network switching
equipment that allows electrical power to be delivered to network-connected
equipment that requires modest power through the network cable from the network
switch equipment. Using a single cable for both communications and electrical
power reduces cost. PoE is expected to be used by a growing number of
enterprises to power IP phones, wireless access points, and IP-enabled video
cameras for surveillance and other types. All of these devices require both
electrical power and a network connection. Using a single cable for both reduces
cost.





The trend
towards the use of voice and video on the network and the use of IP
network-connected data storage devices and servers is driving the need for
increased network bandwidth as well as a requirement that organizations’ network
architecture be optimized for the manner in which the network is being used by
the organization. Quality of service (“QoS”) is a term used to describe the
achievement of a previously determined and programmed priority on the network to
various network applications, users or data flows, or to guarantee a certain
level of performance to a data flow, and to optimize network performance for
various network applications in the increasingly complex manner in which the IP
network is being used by enterprise organizations.





Increased
availability of advanced IP network services that demand QoS, such as VoIP and
IP telephony on Wi-Fi capable devices, demand QoS on wireless networks. Roaming
throughout a building or campus must not only be secure, but seamless.
Management of large scale wireless deployments can quickly become unwieldy,
especially if access points are deployed as individually configured devices and
not as an integrated, centrally managed system. Many organizations have policies
driven by regulatory and compliance requirements (such as HIPPA, FIPS compliance
and Sarbanes-Oxley) that dictate advanced security requirements for wireless
networks. Effective wireless solutions meet the needs of the enterprise in
providing secure, ubiquitous network access by making the wireless network a
seamless extension of the entire network infrastructure.





The
network security market includes firewall, unified threat management, intrusion
detection and prevention, and virtual private network solutions. Network
security is progressively moving from a tertiary issue to a central component of
information and communications technology architecture. Traditionally, much of
the focus has been on securing the network edge through firewalls on Internet
and Extranet connections. But business and technology drivers are dictating that
security, like other services, be applied pervasively throughout the entire
network infrastructure. Among the security issues facing enterprise
organizations today are the following:





•
            The
      trend towards virtualization of the data center is creating new security
      complexities. While virtualization actually improves security in some
      respects, it also introduces new security risks and the complexity of
      security solutions.





•
            The
      ease with which attacks can be initiated through freely available tools.
      These attacks are as likely to come from inside the network as they are
      from the Internet.





•
            The
      increased number of users utilizing laptops and other mobile devices that
      may become infected while outside the controls of the network further
      complicates security issues once mobile users reconnect within the
      network, behind the firewall.





•
            In
      order to support mobile users, organizations are deploying more and more
      wireless solutions that create another network access point easily
      compromised by malicious users if not secured
  properly.





•
            While
      more difficult to exploit than wireless networks, unused network ports
      that are not properly secured are another potential network access point
      available to zealous hackers that are able to physically connect to such
      ports.





•
            Many
      organizations want to grant limited access to guests, consultants, and
      others while protecting their critical infrastructure from these “less
      trusted” users.





6


•
            There
      is an increasing trend towards criminal activity via network attacks; it
      is no longer an issue of only “industrial espionage” or
      vandalism.





•
            As
      security needs increase, the complexity of security solutions increases,
      requiring well designed solutions.





•
            Many
      organizations have policies driven by regulatory and compliance
      requirements (such as HIPPA and Sarbanes-Oxley) that dictate enhanced
      security stances.





Well
designed enterprise-class security solutions address the enterprise
organizations’ needs by weaving security throughout the information and
communications technology infrastructure going much farther than simply securing
the network edge.





Historically,
the networking industry has treated network operations as “a sum of individual
parts” that have not operated holistically. The approach was to create point
product solutions through the creation of individual products designed to solve
single problems, one at a time. These products demanded individual
administration, management, maintenance, sparing, and optimization that created
a challenging and expensive-to-maintain infrastructure.





IP
network infrastructure is moving toward a technology environment in which there
is a dependency between the component parts of the network that maintain
relationships through time and change; a more fully cooperating system that is
flexible, stable, predictable and more easily managed. This requires that the IP
network infrastructure evolve from route-specific performance to
endpoint-to-endpoint performance, from route-level resiliency to service-level
resiliency and from box-level management to system-wide management.





As the
network evolves to perform higher-level functions, the complexity of the IP
network infrastructure and its architecture, by necessity, is increasing. As the
network becomes more complex, the role of network architecture design, business
process-mapping, policy decision making, implementation and ongoing service and
support of the network play increasingly important roles.





While the
IP network technology itself is changing, the purpose and manner in which the IP
network is being used by enterprise organizations is also changing and becoming
more complex, and enterprise organizations are becoming more and more reliant
upon the IP network. We believe the only way to achieve 99.999% availability of
all services dependent upon on the increasingly complex network, and to ensure
desired levels of security, is to have all network devices remotely monitored
and managed such that issues can be identified and resolved before the issues
become problems, and problems in turn become network failures. Research firm IDC
expects monitoring technologies to continue advancing rapidly to address
security and interference disruptions. While enterprise organizations have not
historically remotely monitored and managed their networks, we believe this is
changing as organizations realize how much more their organization is dependent
upon the IP network than was the case even just a few years ago.





We
believe the increasing complexity of the IP network, and the increasingly
mission-critical nature of the network to most enterprise organizations is
creating a desire by enterprise organizations to work with a focused technology
solutions provider that possess expert skills in the increasingly complex areas
of network infrastructure, unified communications, network data storage, network
security and server virtualization. We also believe that enterprise
organizations are appreciative of a technology solutions provider that is
willing to take a proactive consultative approach, learning the customer’s
environment and goals, and their strategic and tactical needs, rather than
simply attempting to sell products and engineering resources.





Unified
Communications





“IP
telephony” and “Voice-over-IP” are general terms for an existing and expanding
technology that uses an organization’s IP network to perform voice
communications that have traditionally been conducted by conventional private
branch exchange (“PBX”) telephone systems used by enterprises and by the public
switched telephone network (the “PSTN”). IP telephony uses IP network
infrastructure and a software product that handles the call processing
(telephone call set-up and tear-down), commonly referred to as “soft switch” to
replace the telephony functions performed by an organization’s PBX telephone
system. The terms “Voice over IP” and “VoIP” are used to describe the process of
utilizing the IP network to perform voice communications. “Convergence” is a
term generally used to describe the manner in which voice and video
communications technology is converging with data communications onto the IP
network. The term “unified communications” is a term used to describe a unified
environment for e-mail, voicemail, instant messaging, voice and video
communications functionality on a single, unified platform or system. “IP
communications” is a term generally used to describe data, voice and video
communications using an IP network. In addition to offering potential long-term
cost savings, implementation of unified communications allows enterprises to
reap other benefits of participating in the growing trend of
convergence.





Historically,
different types of communications were conducted by different
means:





•
            data
      communication between computers and servers was performed using LAN/WAN IP
      network infrastructure, including the
Internet;





•
            telephone/voice
      communication was conducted using traditional circuit-switched PBX systems
      and the PSTN; and





•
            video
      communications have often been accomplished using stand-alone video
      conferencing systems using either multiple circuit-switched telephone
      lines over the PSTN or using data network
  communications.





7


In
contrast, the converged communications model enables data, voice and video to be
carried by a single IP network infrastructure. Unified communications using the
IP network infrastructures is already being used by many enterprises, and the
trend is building rapidly.





Implementation
of unified communications on the IP network can offer both significant long-term
cost savings and increased productivity to enterprises. Some of the potential
long-term savings that an enterprise might experience include:





•
            elimination
      of redundant traditional telephone line circuits and cabling systems as
      internal voice communications move to the enterprise’s IP-based network
      cabling system;





•
            reduced
      cost resulting from consolidation of PSTN circuits to a central location
      so that all external communications to and from the enterprise occur
      through fewer or only one point of interface to the PSTN, commonly
      referred to as “circuit
consolidation”;





•
            more
      efficient support of telephone and data functions by a single support
      organization rather than multiple service providers and in-house support
      departments;





•
            simplified
      administration and lower costs for moves, adds and changes of the
      telephone system because an IP telephony handset can be moved or changed
      within an enterprise without rewiring the PBX or re-programming the
      telephone number as is required in a conventional PBX
      system; and





•
            elimination
      or reduction of long distance toll charges as enterprises operating a
      converged solution move their internal voice communications to the
      fixed-cost data network that often already exists between the enterprise’s
      remote facilities.





Once an
organization’s voice communications is placed on the IP network its data network
becomes its voice communications network. The “IP telephony” systems, including
management systems, voice gateways, and messaging systems, are not only easier
to set up than traditional PBX telephone system features, they save time and
boost productivity. Implementation of IP telephony is commonly an enterprise
organization’s first move toward a converged solution.





Unified
messaging solutions allow a user to decide how and when they will receive
messages. Unified messaging allows for retrieval of any communication form by
any method, such as accessing voice messages from a computer or text e-mail,
converted to speech, over the phone. This provides a greater level of control
over communications, improving organizational productivity. Unified messaging is
typically an enterprise organization’s second move toward a more completely
converged solution.





Video
communications that are seamlessly integrated into voice communications recently
became available and are becoming more feasible, but are not yet popular, in
part because video communications require more expensive endpoints (telephone
handsets) and uses substantial network bandwidth. Over time, as network
bandwidth improves, video compression technology is further improved, and as
high quality touch screen video endpoints become less expensive, we believe that
integrated voice and video communications will become more popular.





IP
telephony as implemented by most enterprises often requires upgraded or new IP
network infrastructure. Older networks designed solely for data communications
are inadequate to accommodate IP telephony functions featuring the quality of
telephony service demanded by most enterprise customers. To meet the demands of
voice communications delivered across an IP network, the network infrastructure
must be able to distinguish between data communication packets and voice
communication packets. It must be set up to be capable of prioritizing and
allocating the use of system resources between voice and data to achieve the QoS
required for voice and video communications. As video becomes an increasingly
popular component of business communications, network load will increase
substantially due to the substantial network bandwidth required for video
communications, and this trend will contribute to an increasing need for network
routing and switching upgrades in the future.





Historically,
Avaya and Nortel were the market share leaders in telephone systems for
enterprise organizations; however, after entering the market in 1999 and
evangelizing the advantages of VoIP, Cisco is now the market share leader. Most
business telephone systems manufacturers are migrating their offerings to VoIP
technology, and a number of new manufacturers have entered the market over the
past several years. Early in 2007, Microsoft announced that they were in the
process of developing a soft switch platform that would integrate the popular
Microsoft Exchange contact and email management functionality with VoIP
telephone technology. It is widely anticipated that Microsoft, once they have a
viable product, will also become a major market share participant for IP
telephony soft switch technology.





No matter
which manufacturer wins or loses market share in the soft switch and desktop
telephone handset markets (which may be different vendors in the future), the
network must still be upgraded to accommodate the demands of voice over the IP
network when an organization initially moves its voice communications onto the
IP network. Because Cisco has a substantial market share lead over all other
network equipment manufacturers combined within the enterprise-class
organization space, and because upgrading of the network infrastructure is
essential to deploying unified communications, we believe that possessing a high
degree of Cisco focus and expertise is important as a provider of unified
communications solutions.





8


Data
Center





The data
center is undergoing a substantial transformation based on “virtualization” of
server resources. VMware is the primary software vendor in the virtualization
software market. Virtual server software made by VMware, the product that INX
uses for its virtualization solutions, provides a hardware emulation layer
between the physical server and the operating system and the related stacks of
applications. Each server “guest” operating environment believes that it
controls the entire machine, but using virtualization, computing resources are
actually allocated to each virtual server based upon rules established at the
time of configuration or dynamically using management software. Therefore,
operating system software and applications that were previously incompatible can
share the same physical server. Research firm IDC expects that by 2011 almost
18% of all physical servers will be deployed with virtualization capabilities,
up from 8% in 2006, and that the virtualization segment of the $50 billion
worldwide server market will grow by 43% in 2009 to
$2.7 billion.





Virtualization
of the “data center” can be described as virtualization of physical servers such
that these servers can each be used by any number of VMware “virtual” servers,
and the use of network storage devices that are “virtualized” such that any
number of physical storage devices can be used by the virtualized servers within
the data center. “Data center virtualization” creates demands on the IP network
due to virtualized physical servers and virtualized network storage devices
using the IP network for communications. The growing popularity of 10Gbps
Ethernet network technology, together with increasing popularity of iSCSI and
Fibre Channel over Ethernet (“FCoE”) for data center connectivity is also
expected to drive demand for upgrades of data center routing and switching
infrastructure.





Before
virtualization technology, a physical server in a data center environment
required a specific operating system, and enterprises often chose to run a
single application on a particular physical server in order to reduce the
possibility of one application causing an issue with the physical server than
then brings down multiple applications. Because of this
one-server-for-one-application environment, many enterprises have ended up with
many more servers than they originally expected would be required, and server
computing power is substantially underutilized. The term “server sprawl” has
become a widely used term to describe this issue. The power and cooling
requirements for data centers have become major cost factors for enterprise IT
budgets. Virtualization allows enterprises to significantly reduce the number of
physical servers that are needed in their data center. With management tools
that are provided to manage these virtualized data centers, enterprises can add,
change or remove physical servers without any application downtime since they
can move virtual servers from one physical server to another physical server
while an application is running. This enhances reliability and redundancy of the
data center while improving new application turn up time since a physical server
is no longer required to run a new application, it can be done using a virtual
server which can be created in minutes.





Virtualization
is contributing to increasing popularity of IP network-connected network storage
systems through the use of iSCSI technology, and more recently Fibre Channel
over Ethernet (“FCoE”), technologies that allow servers to connect to network
storage systems using standard IP network infrastructure rather than specialized
Fibre Channel cabling. This allows the various virtualized servers and data
storage devices used in a virtualized environment to communicate together and
with shared network storage resources no matter where they are physically
located using standard IP network connectivity. Virtualization is contributing
to substantially increased network loads due to the requirement to send data
across the network between the various physical servers that are processing data
in the virtualized server environment and the shared network storage devices
where data is stored in a virtualized data center.





Storage
in a virtualized data center is typically not part of any particular physical
server since the applications that need to access the data might be actually
running on any one of a number of different physical servers that are being
utilized by the virtual server upon which the application is running. Therefore,
it is much more efficient to have network-based storage that is accessed through
the network by all of the physical servers in a virtualized data center
environment. Increasingly, network attached storage (“NAS”) and storage area
networks (“SANs”) are being “IP network connected” and communicated with by
computing resources through IP network technology rather than through Fibre
Channel network technology. This is due in part to the cost advantages of using
existing, standard IP network technology rather than a dedicated Fibre Channel
network.





Fibre
Channel over Ethernet (“FCoE”) is a new technology for mapping Fibre Channel
frames over full duplex IP networks, which preserves the popular Fibre Channel
protocol while leveraging lower cost, popular 10 gigabit Ethernet network
technology for SAN and data center server communications. The FCoE specification
is supported by all of the major network and storage product manufacturers. Most
enterprise organizations that have data centers utilize an IP network for their
enterprise-wide network and use Fibre Channel for SANs. FCoE allows Fibre
Channel protocol to run on the IP network together with other IP network
traffic, and is expected to become increasingly popular in data center
applications because of the cabling and switch equipment reduction it makes
possible, as well as in server virtualization applications, which often require
many physical I/O connections per server. FCoE allows IP network and SAN data
traffic to be consolidated using a single high throughput, low latency network
switch optimized for data center network use rather than general enterprise-wide
network use, such as a network switch in Cisco’s Nexus family of data center
switch products. This can reduce the number of required network interface cards,
cables and switches required for a given data center, as well as reduce power
and cooling costs. FCoE is a new technology that is currently gaining popularity
that is, together with server virtualization technology, expected to drive
substantial change in the way enterprise data centers are designed and operated,
resulting in a lower cost of operating data centers among other
benefits.





Shared
network storage also allows enterprises to more efficiently consolidate data and
manage, replicate, and mirror information in order to eliminate points of
failure that occur during downtime or loss of information, and to provide
seamless failover capability. The need for improved productivity as well as
regulatory requirements have also accelerated the need for enterprise
organizations to protect data, rapidly recover applications, and maintain
uninterruptible access to information. Networked storage improves availability
and scalability, facilitates a tiered-storage approach, and reduces storage
management complexity and cost.





9


Information,
or data, can be classified by criticality, age, and the level of accessibility
required. Such a lifecycle-oriented management approach allows an organization
to prioritize and make intelligent decisions about the logistics and economics
of how to manage different data types. The use of remote data duplication and
replication for the purpose of data backup and automated and transparent
failover capability is made possible by a network that is capable of
transporting the huge volumes of data necessary to accomplish replication, and
is another source of rapidly increasing network load and demand for network
storage capacity.





Our
Business





We serve
enterprise-class organizations to intelligently design, deploy and support
network infrastructure, unified communications and data center solutions in a
way that maximizes their investments. We are a top provider of Cisco’s advanced
technology solutions, both in terms of the volume of these technologies deployed
and in terms of positive customer experiences as evidenced by Cisco’s customer
satisfaction surveys. Our network infrastructure solutions consist of network
routing and switching, wireless networking and network security. Our unified
communications solutions consist of IP-based voice communications systems, or
“IP PBX” systems, IP-based video communications systems and application
integration solutions for converged, collaborative communications. Our data
center solutions consist of server virtualization, network storage and data
center network connectivity solutions.





As one of
the earliest entrants to VoIP integration and support, we have successfully
deployed and supported unified communications solutions for a large and diverse
customer base. We offer a complete range of products and services for
Cisco-centric IP network and IP telephony solutions. As the market has matured,
the network has evolved to become the platform for virtually all enterprise
communications. As this occurred we came to believe that offering a
comprehensive range of products and services to our customers was critical in
differentiating us from our competitors. Today, we deliver a suite of advanced
technology solution sets, which we organize into “practice areas”, that address
enterprise customers’ needs in a comprehensive manner, using a consultative
approach. We derive revenue through the resale of technology products
manufactured by a limited number of best-in-class vendors and through providing
professional services and managed services.





Products





We
generate revenue from the sale of products. The products we sell consist
principally of Cisco brand products, but we also sell network storage products
manufactured by NetApp, and EMC, server virtualization software from VMware,
certain unified communications products from Microsoft, and various products
that are best-of-class in certain areas of the solutions that we provide,
including products from Left Hand Networks, Cistera Networks, Converged Access,
IPCelerate, Tandberg and others.





Gross
margin on product sales was 17.8%, 17.6% and 18.6% for 2008, 2007 and 2006,
respectively. Product sales revenue grew 18.2%, 33.3% and 43.1%, and made up
82.2%, 86.7% and 86.7% of total revenue in 2008, 2007 and 2006,
respectively.





Services





We
generate services revenue by providing services to our customers. We provide two
basic categories of service, implementation services and post-sale support
services. Gross margin on services revenue was 28.8%, 28.6% and 25.9% for 2008,
2007 and 2006, respectively. Services revenue grew 66.4%, 33.6% and 62.3%, and
made up 17.8%, 13.3% and 13.3% of total revenue in 2008, 2007 and 2006,
respectively.





Professional
Services





We
perform professional services related to the planning, design, implementation
and support of the solutions that we provide. To provide these services, we
employ highly trained and experienced engineering staff. We have developed not
only substantial expertise in the various areas of technology that we provide,
but also methodologies for designing and implementing the solutions that we
provide.





Gross
margin on our implementation services revenue was 24.7%, 29.0% and 25.8% for
2008, 2007 and 2006, respectively. Implementation services revenue grew 71.2%,
28.2% and 52.4%, and made up 86.0%, 83.7% and 87.2% of total services revenue in
2008, 2007 and 2006, respectively.





Managed
Services





We
provide managed services, including remote monitoring and management of
enterprise organizations’ network infrastructure, data center, wireless network
and security technology, as well as remote disaster recovery
hosting.





We have
created a specialized support model for supporting Cisco-centric IP-based
converged communications systems. Our managed services include remote
monitoring, diagnostics and management of the customer’s technology
infrastructure equipment and related applications. These managed services are
performed using specialized toolsets and a network support center with technical
staff that are specifically trained and experienced, both generally in terms of
the technology we support as well as the toolsets that we use to provide the
support. Customers are notified of system issues either real time or through
reporting, and we solve detected problems either remotely or
onsite.





10


As
customers continue to evolve their IP network to become the platform for
virtually all communications they become increasingly concerned about their
growing dependency upon the IP network. We believe that post-implementation
support of the type we offer with our managed services ensures high availability
of their converged IP communications infrastructure and critical IP
network-dependent systems, and that this type of service is becoming more
essential for enterprise organizations. Additionally, we believe that the
quality of support services is likely to become among the more significant
factors for enterprise-class customers when they are choosing a solutions
provider.





Our
hosted disaster recovery services provide customers with the ability to have
their data center replicated remotely in our hosting center using VMware
virtualization technology. This allows the user to be up and running virtually
instantly in the case of a disaster at their primary data center that prevents
their primary data center from being functional or accessible.





Through
our managed services offering we believe we are well positioned to provide
support services that enterprise-class organizations desire and
require.





Gross
margin on our managed support services revenue was 54.2%, 26.1% and 26.8% for
2008, 2007 and 2006, respectively. Managed support services revenue grew 42.2%,
70.3% and 192.8%, to make up 14.0%, 16.3% and 12.8% of total services revenue in
2008, 2007, and 2006, respectively.





Competition





Our
competition for the solutions we provide is highly fragmented, and we compete
with numerous large and small competitors.





For
network infrastructure solutions we compete with numerous small and large
“computer oriented” value added resellers, large systems integrators such as IBM
Global Services, and telephone and data circuit service providers such as
AT&T and Verizon.





For
unified communications solutions we compete with the same type of competitors
that we compete with for network infrastructure solutions, a limited number of
computer-oriented value added resellers, with large systems integrators and
telephone and data circuit service providers, as well as with traditional PBX
telephone system manufacturers such as Avaya Inc. and Nortel Networks
Corporation, among others, as well as traditional PBX telephone systems
“dealers” that sell and support such traditional PBX telephone system
manufacturers’ products.”.





For data
center solutions we compete primarily with computer-oriented value added
resellers and both large system integrators, as well as with a limited number of
and smaller data center oriented systems integrators.





We
believe that the principal competitive factor when marketing our solutions is
price. Other important factors include technical competence, the quality of our
support services, the perception of the customer regarding our financial and
operational ability to manage a project and to provide high quality service, and
the quality of our relationship with the manufacturer of the major products
being supplied as a part of the solution.





We
believe that customers appreciate technical focus and expertise when choosing a
key technology infrastructure solutions provider. We also believe that larger
enterprise organizations with a national presence also appreciate and desire a
solutions provider that is large enough to handle their needs, and which has a
geographic presence in order to serve their various locations. Having grown from
a regional Texas-focused organization several years ago, to a national-scope
organization today, and having acquired several smaller regional organizations,
we have witnessed first-hand the benefits of having a national presence.
National presence has been a factor in our ability to win relationships with a
number of larger, national-scope customers. We believe that smaller regional
competitors are at a disadvantage, not only because of their lack of a national
presence, but also because of typically smaller financial capacity and depth and
breadth of technical resources. At the same time, we believe we have an
advantage over many large national-scope solutions providers because of our
focus and expertise as compared to what is often times a generalist, unfocused
technology solutions provider, who while large, lacks the ability to deliver to
the customer a team of subject matter experts and methodologies for a project as
important as the design and upgrade of their advanced technology infrastructure
systems.





The
market for the solutions that we provide is evolving rapidly, is highly
competitive and is subject to rapid technological change. Many of our
competitors are larger than we are and have greater financial, sales, marketing,
technical and other resources. We expect to face increasing competitive
pressures from both current and future competitors in the markets we
serve.





11


The
Geographic Markets We Currently Serve





A
majority of our customers are located in, or make significant decisions
concerning their IP communications infrastructure in the markets in which we
maintain branch offices. We believe it is important to have local management,
sales and engineering staff in a metropolitan market in order to be a leading
competitor in the market. Our corporate administrative offices are located in
Houston, Texas and our corporate operations offices are located in Dallas,
Texas. As of February 28, 2009 we maintained seventeen branch offices in
the following sixteen markets:





•
            Los
      Angeles, California





•
            Sacramento,
      California





•
            Glastonbury,
      Connecticut





•
            Boise,
      Idaho





•
            Boston,
      Massachusetts





•
            Albuquerque,
      New Mexico





•
            Oklahoma
      City, Oklahoma





•
            Eugene,
      Oregon





•
            Portland
      Oregon





•
            Austin,
      Texas





•
            Dallas,
      Texas





•
            El Paso,
      Texas





•
            Houston,
      Texas





•
            San Antonio,
      Texas





•
            Seattle,
      Washington





•
            Washington,
      DC





Our
Washington, DC branch office markets primarily to the federal government. Four
of our seventeen branch offices have been opened or acquired during the past
twenty-four months.





Our
Plans for Geographic Expansion





By early
2005 we had grown to what we believe was the leading regional focused
Cisco-centric network infrastructure and IP telephony solutions provider for
Texas, with offices in Austin, Dallas, Houston and San Antonio, Texas.
Since mid-2005 we have made eight acquisitions that added ten additional branch
offices and we opened several new branch offices as new startup operations in
new markets. It is our goal and plan to continue opening new offices and making
additional acquisitions to further expand our geographic coverage throughout the
United States, although for the near-term we are focused more so on expanding
through acquisitions rather than opening new offices, which we believe offers a
faster path to profitability in new markets as compared to opening new
offices.





When we
open a new branch office we expect that the new branch office will produce
operating losses for a period of six months to eighteen months until revenue has
ramped up to a level sufficient that gross profit exceeds normalized levels of
operating expenses, and because during such start-up period sales and marketing
expenses are higher than normal levels, relative to revenue, as we market our
company in the new market. We believe it is sometimes advantageous to enter a
new market by acquiring the assets and operations of an existing solutions
provider in the market. This is because acquiring an existing organization in a
new market allows us to enter the market with an existing set of sales and
engineering staff, existing customers, a relationship with the local Cisco
branch office, and allows us to enter the market without the need to compete
with the acquired organization. Our ability to acquire organizations in a new
market is dependent upon an acceptable acquisition candidate organization
existing in such new market and our ability to structure a transaction that is
acceptable to both the seller and us.





We
believe that expanding to new markets creates a two-fold opportunity for us.
First, adding new geographic markets provides us with new customer opportunities
in those new markets. Second, we believe that with each new market served we
gain a better ability to win customer opportunities in many of our other markets
because of the increased national presence provided by the additional
market.





12




Customers





Our
customers include private enterprises in numerous industries including
healthcare, legal, energy, utilities, hospitality, transportation,
manufacturing, finance and entertainment, as well as federal, state and local
governmental agencies and private and public educational organizations. We
typically refer to this type of organization as an “enterprise organization” or
an “enterprise”. Today our customers are typically medium- to larger-sized
corporate organizations, schools and governmental agencies with approximately
200 to 50,000 users of telephone and/or networked computer technology, although
as we continue to expand to new markets throughout the United States we plan to
target selling to even larger customers. A majority of our customers are located
in, or make significant decisions concerning their network infrastructure and
voice communications systems in, the markets in which we maintain branch
offices. In addition to our direct sales model to enterprise customers, we also
provide technical consulting and project management services as a sub-contractor
for other large, national or international systems integrators. Although the
majority of our customers are based in the United States, we have performed work
at their locations internationally, and we have performed consulting and project
management services as a subcontractor internationally. No single customer
represented 10% or more of our revenue for the years ended December 31,
2008, 2007 and 2006.





Sales
and Marketing





We market
our products and services primarily through our sales personnel, including
account managers and customer service representatives. These sales personnel are
compensated in part based on productivity, specifically the profitability of
sales that they participate in developing. We also promote our services through
general and trade advertising, and participation in trade shows. Our sales
organization works closely with the Cisco sales organization to identify
opportunities.





Supply
and Distribution





We
purchase products for the technology solutions we provide to our customers. The
majority of our product purchases are Cisco products, and the majority of our
Cisco product purchases are made directly from Cisco. We also purchase some of
our products through various distribution channels when a product is not
available directly from Cisco or the other manufacturers’ whose products we
offer. We attempt to keep minimal inventory on hand and attempt to purchase
inventory only as needed to fulfill orders. We attempt to ship products directly
from our supplier to our customer when possible in order to shorten the business
cycle and avoid handling the product in our facility, and the substantial
majority of the product that we purchase is shipped directly from Cisco to our
customer.





Management
Information Systems





We use an
internally developed, highly customized management information system (“MIS”) to
manage most aspects of our business. We use our MIS to manage accounts payable,
accounts receivable and collections, general ledger, sales order processing,
purchasing, service contracts, service calls and work orders, engineer and
technician scheduling and time tracking, service parts acquisition and
manufacturer warranties. Reporting can be generated for project profitability,
contract and customer analysis, parts and inventory tracking, employee time
tracking, etc.





Employees





At
February 28, 2009 we employed approximately 433 people. Of these,
approximately 139 were employed in sales, marketing and customer service, 180
were employed in engineering and technical positions and 114 were employed in
administration, finance and management information systems. We believe our
ability to recruit and retain highly skilled and experienced technical, sales
and management personnel has been, and will continue to be, critical to our
ability to execute our business plans. None of our employees are represented by
a labor union nor are any subject to a collective bargaining agreement. We
believe our relations with our employees are good.





Seasonality





We do not
believe our business is substantially influenced by seasonality in the
traditional sense. In some years we have experienced stronger second and/or
third quarters when certain customers desire to implement large projects during
a slow summer period in order to reduce disruption to their business. This has
been the case in particular with education sector customers, who typically
desire to implement large projects during the summer period when school is not
in session. We sometimes experience a strong fourth quarter when we sometimes
have certain customers that spend budget funds at year end, but this does not
occur every year and there is no seasonal pattern to such customer behavior. The
first quarter is typically a somewhat soft quarter, which we believe is due to
many customers planning projects and budgets at the beginning of the year and
then moving forward with projects several months into the year.





Certain
Milestones in Our Corporate Development





We
started business as a technology systems integrator, computer reseller and
information technology service provider in 1983. We added a traditional PBX
telephone systems dealer business unit in 1994, and founded Stratasoft, Inc., a
computer-telephony software company, in 1995. We conducted an initial public
offering and became a public company in 1997. By 1999, we had grown to over
$200 million in revenue, operating from five offices in Texas, with over
500 employees.





13


In 1999,
we decided to sell both our computer products reselling business and our
traditional PBX telephone systems business, which together accounted for
approximately 90% of our total revenue at the time, and reposition our company
to take advantage of what we believed would become a significant opportunity in
the area of converged communications using IP network infrastructure. We closed
the sale of these two business units by mid-2000 and started the process of
building our current Cisco-centric IP communications solutions organization,
which we incorporated in July 2000 as InterNetwork Experts, Inc., a wholly-owned
subsidiary.





When we
sold our computer products and traditional PBX telephone systems business in
2000 we retained a small information technology (“IT”) services business. After
mid-2000 we operated this IT services business through Valerent, Inc., a
wholly-owned subsidiary. We also retained Stratasoft, Inc., the
computer-telephony software company we had established in 1995. Thus, from
mid-2000 until the end of 2005 we operated as a “holding company” with three
subsidiaries, Valerent, Inc., Stratasoft, Inc. and InterNetwork Experts,
Inc.





By 2005
our InterNetwork Experts subsidiary had grown to be over 90% of our total
revenue and in late 2005 we decided to sell both Valerent and Stratasoft,
eliminate our “holding company” structure, and concentrate all of our efforts
and resources on our IP communications solutions business. Effective
December 31, 2005 we merged our InterNetwork Experts, Inc. subsidiary,
which we, Cisco and our customers commonly referred to as “INX,” into the parent
publicly-traded company and changed the name of the parent publicly traded
company from I-Sector Corporation to INX Inc. We sold Stratasoft in January 2006
and Valerent in October 2006.





General
Information





Our
corporate administrative headquarters are located at 6401 Southwest Freeway,
Houston, Texas 77074, and our telephone number is (713) 795-2000. Our
annual report on Form 10-K/A, quarterly reports on Form 10-Q and Form
10-Q/A, current reports on Form 8-K and all amendments to those reports are
available without charge from us on our website at http://www.INXI.com, as soon
as reasonably practicable following the time they are filed with or furnished to
the SEC. Reports filed with the SEC may also be viewed at www.sec.gov or
obtained at the SEC Public Reference Room in Washington, D.C. Information
regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330.





Item 1A.Risk
Factors





Global market and economic
conditions, including those related to the credit markets, may adversely affect our business and
results of operations.





In the
United States (U.S.), recent market and economic conditions have been
unprecedented and have led to tighter credit conditions and slower growth.
Continued concerns about the systemic impact of inflation, volatility in energy
costs, geopolitical issues, the availability and cost of credit, the
U.S. mortgage market, a declining real estate market in the U.S. and
added concerns fueled by the federal government interventions in the
U.S. financial and credit markets have contributed to instability in both
U.S. and international capital and credit markets and diminished
expectations for the U.S. and global economy. These conditions, combined
with declining business and consumer confidence and increased unemployment, have
in the period subsequent to September 30, 2008, contributed to volatility
of unprecedented levels and an economic slowdown.





As a
result of these market conditions, the cost and availability of capital and
credit has been and may continue to be adversely affected by illiquid credit
markets and wider credit spreads. If these market conditions continue, they may
limit our ability, and the ability of our customers, to timely borrow and access
the capital and credit markets to meet liquidity needs, and result in an adverse
effect on our financial condition and results of operations. The economic
slowdown may lead to reduced customer spending for technology and reduced demand
for our products which would have a negative impact on revenue, gross profit and
results of operations. This may reduce product pricing, which would also have a
negative impact on revenue, gross profit and results of operations.





We
have a history of losses and may continue to incur losses.





We
incurred a net loss from continuing operations in 2000, 2001, 2002 and 2004.
During 2005, we incurred a net loss from continuing operations of $4,917
including a $5,729 noncash charge for remeasurement of stock options. During
2008, we incurred a net loss from continuing operations of $12,675 including a
$13,071 noncash charge for goodwill, intangible asset, and property and
equipment impairment. We cannot assure you that we will achieve profitability or
continue to remain profitable in upcoming quarters or years. In order to
maintain profitability, we will have to maintain or increase our operating
margin, and we cannot provide any assurance that we will be able to do so. If we
are unable to increase revenue, if our gross margins decrease, or if we are
unable to control our operating expenses, our business could produce losses. In
addition, our business depends upon winning new contracts with new customers,
the size of which may vary from contract to contract. When we open new branch
offices to expand our geographic presence, we expect the newly opened branch
offices to produce operating losses for a period of six to eighteen months or
more. Whether we are able to remain profitable in the future will depend on many
factors, but primarily upon the commercial acceptance of the technologies and
product lines that we promote the use of, including, importantly, the network
routing and switching products and IP telephony products developed and marketed
by Cisco.





14


Our
goodwill and intangible assets may become impaired.





At
December 31, 2008, we had $12,751 in goodwill and $1,852 in intangible
assets after recording an impairment charge of $13,071 in the fourth quarter of
2008. Generally accepted accounting principles in the United States of America
require that we review the value of goodwill on at least an annual basis or when
indicators of impairment arise to determine whether the recorded value has been
impaired and should be reduced. As required by SFAS 142, the goodwill
impairment test is accomplished using a two-step approach. The first step
screens for impairment by comparing the fair value of the Company to its
carrying amount, including goodwill. If under the first step an impairment is
indicated, a second step is employed to measure any impairment. This step
compares the implied fair value of the goodwill with the carrying amount of the
goodwill. As of December 31, 2008, after completing the first step of the
impairment test, there was indication of impairment because our carrying value
exceeded our market capitalization. This is also a triggering event to review
our long-lived assets for impairment as required by SFAS 144. Subsequent to
December 31, 2008, there have been continued adverse changes in the
business climate and in the markets in which we operate and as a result our
market capitalization has declined. In the event that our goodwill or long-lived
assets are further impaired in the future, any impairment charge could have a
material impact on our financial position and results of operations, and could
harm the trading price of our common stock.





Our success depends upon maintaining
our relationship with Cisco and other key vendors.





Substantially
all of our revenue for the years ended December 31, 2008, 2007, and 2006
was derived from or dependent upon the sale of Cisco products and related
services. We anticipate that these products and related services will continue
to account for a substantial portion of our revenue for the foreseeable future.
We have a contract with Cisco to purchase the products that we resell, and we
purchase substantially all of our Cisco products directly from Cisco. Cisco can
terminate this agreement on relatively short notice. Cisco has designated us an
authorized reseller and we receive certain benefits from this designation,
including special pricing and payment terms. We have in the past, and may in the
future, purchase Cisco-centric products from other sources. When we purchase
Cisco-centric products from sources other than Cisco, the prices are typically
higher and the payment terms are not as favorable. Accordingly, if we are unable
to purchase directly from Cisco and maintain our status as an authorized
reseller of Cisco network products, our business could be significantly harmed.
In addition, we also depend upon maintaining our relationship with a number of
other key vendors, including NetApp and VMware. If we are unable to purchase
products from any of our key vendors, including Cisco, NetApp and VMware, or
from other sources on terms that are comparable to the terms we currently
receive, our business would be harmed and our operating results and financial
condition would be materially and adversely affected.





Our
success depends upon broad market acceptance of IP telephony.





A
substantial portion of our revenue is derived directly from or dependent upon
our customers implementing IP telephony. The market for IP telephony products
and services is relatively new and is characterized by rapid technological
change, evolving industry standards and strong customer demand for new products,
applications and services. As is typical of a new and rapidly evolving industry,
the demand for, and market acceptance of, recently introduced IP telephony
products and services are highly uncertain. We cannot assure you that the use of
IP telephony will become widespread. The commercial acceptance of IP telephony
products, including Cisco-centric products, may be affected by a number of
factors including:





•
            quality
      of infrastructure;





•
            security
      concerns;





•
            equipment,
      software or other technology
failures;





•
            government
      regulation;





•
            inconsistent
      quality of service;





•
            poor
      voice quality over IP
networks; and





•
            lack
      of availability of cost-effective, high-speed network
      capacity.





If the
market for IP telephony fails to develop, develops more slowly than we
anticipate, or if IP telephony products fail to achieve market acceptance, our
business will be adversely affected.





Although our success is generally
dependent upon the market acceptance of IP telephony, our success also depends
upon a broad market acceptance of Cisco-centric IP telephony.





We cannot
assure you that the Cisco-centric IP telephony products we offer will obtain
broad market acceptance. Competition, technological advances and other factors
could reduce demand for, or market acceptance of, the Cisco-centric IP telephony
products and services we offer. In addition, new products, applications or
services may be developed that are better adapted to changing technology or
customer demands and thus could render our Cisco-centric products and services
unmarketable or obsolete. To compete successfully, the Cisco-centric IP
telephony products we offer must achieve broad market acceptance and we must
continually enhance our related software and customer services in a timely and
cost- effective manner. If the Cisco-centric IP telephony products we offer fail
to achieve broad market acceptance, or if we do not adapt our existing services
to customer demands or evolving industry standards, our business, financial
condition and results of operation could be significantly harmed.





15


Our success depends upon broad market
acceptance of virtualization technology, and in particular the virtualization
technology of VMware.





A key
part of our growth strategy is dependent upon broad market acceptance of
virtualization technology, and in particular the virtualization technology of
VMware. The market for virtualization software is relatively new and is
characterized by rapid technological change, evolving industry standards and
strong customer demand for new products, applications and services. As is
typical of a new and rapidly evolving industry, the demand for, and market
acceptance of virtualization technology is highly uncertain. We cannot assure
you that the use of virtualization technology will be widespread.





Our business depends on the level of
capital spending by enterprises for the technology infrastructure products
and services we offer.





As a
supplier of technology infrastructure solutions for enterprises, our business
depends on the level of capital spending for such solutions by enterprises in
our markets. We believe that an enterprise’s investment in technology
infrastructure and related services depends largely on general economic
conditions that can vary significantly as a result of changing conditions in the
economy as a whole. The market for the solutions we provide may continue to grow
at a modest rate or not at all, or may decrease. If our customers decrease their
level of spending, our revenue and operating results would likely be adversely
affected. In the latter part of 2007, and continuing into early 2008, we
witnessed a general trend towards decreased spending by customers due to what we
believe was uncertainty surrounding the status of the U.S. economy. The
same factors that drove slowing customer demand then returned later in 2008;
including worries over the economy, a possible additional federal government
economic stimulus package, and reduced availability of credit to fund projects.
To the extent that customers continue to delay moving forward with projects
because of actual or perceived economic uncertainty and reduced credit
availability, our revenue and profitability will be negatively
impacted.





Our
profitability depends on Cisco product pricing and incentive
programs.





Our
annual and quarterly gross profits and gross margins on product sales are
materially affected by Cisco product pricing and incentive programs. These
incentive programs currently enable us to qualify for cash rebates or product
pricing discounts and are generally earned based on sales volumes of particular
Cisco products and customer satisfaction levels. We recognized vendor incentives
as a reduction of cost of sales amounting to $10,118, $7,200 and $6,303 in 2008,
2007 and 2006, respectively, representing 3.9%, 3.5%, and 4.0% of total
revenues. From time to time Cisco changes the criteria upon which qualification
for these incentives is based, and there is no assurance that we will continue
to meet the program qualifications. Cisco is under no obligation to continue
these incentive programs. In addition, we expect our future profitability to be
impacted not only by pricing and incentive programs of Cisco, but also by the
pricing and incentive programs of NetApp, VMware and other key
vendors.





A
significant portion of our customers are based in Texas.





Until
mid-2005 we were primarily a Texas-based organization and the majority of our
customers were in Texas. While we are much less dependent upon Texas customers
now than we were two years ago, a significant portion of our customers are still
based in Texas. Therefore, our revenue and hence our profitability would be
materially affected by a downturn in economic conditions in Texas, in addition
to any general economic downturn in the United States. If demand for the
products and services we provide to customers in Texas decreases, our business,
financial condition and results of operations could be significantly
harmed.





Our strategy contemplates geographic
expansion, which we may be unable to achieve and which is subject to numerous
uncertainties.





A
component of our strategy is to become one of the leading national providers of
the technology infrastructure solutions we provide. To achieve this objective,
we must either acquire existing businesses or hire qualified personnel in
various locations throughout the country and fund a rapid increase in operations
and implement corporate governance and management systems that will enable us to
function efficiently on a national basis. Identifying and acquiring existing
businesses is a time-consuming process and is subject to numerous risks.
Qualified personnel are in demand, and we expect the demand to increase as the
market for the technology infrastructure solutions that we provide grows. We
will also likely face competition from our existing competitors and from local
and regional competitors in the markets we attempt to enter. A rapid expansion
in the size and geographical scope of our business is likely to introduce
management challenges that may be difficult to overcome. We cannot assure you
that we will be successful in expanding our operations or achieving our goal of
becoming a national provider of technology infrastructure solutions. An
unsuccessful expansion effort would consume capital and human resources without
achieving the desired benefit and would have an adverse affect on our business,
financial condition and results of operations.




16


We may require financing to achieve
expansion of our business operations, and failure to obtain financing may prevent us
from carrying out our business plan.





We may
need additional capital to grow our business. Our business plan calls for the
expansion of sales of our technology infrastructure solutions to enterprises in
geographical markets where we currently do not operate, including expansion
through acquisitions. If we do not have adequate capital or are not able to
raise the capital to fund our business objectives, we may have to delay the
implementation of our business plan. We can provide no assurance that we will be
able to obtain financing if required, or, if financing is available, there is no
assurance that the terms would be favorable to existing stockholders. Our
ability to obtain financing is subject to a number of factors, including general
market conditions, investor acceptance of our business plan, our operating
performance and financial condition, and investor sentiment. These factors may
affect the timing, amount, terms or conditions of additional financing available
to us.





We require access to significant
working capital and vendor credit to fund our day-to-day operations. Our failure to
comply with the financial and other covenants under our working capital facility
could lead to a termination of the agreement and an acceleration of our outstanding
debt.





We
require access to significant working capital and vendor credit to fund our
day-to-day operations. Our credit facility with Castle Pines contains a number
of financial and other covenants. A breach of these financial or other
covenants, unless waived, would be a default under the credit facility. Upon an
event of default, Castle Pines may terminate the credit facility and/or declare
all amounts outstanding under the credit facility immediately due and payable.
The acceleration of our debt could have a material adverse effect on our
financial condition and liquidity. Additionally, the amount of working capital
available to us under the credit facility is dependent upon the amount and
quality of our accounts receivable. A significant default or payment delays of
our accounts receivable could materially adversely affect our borrowing base and
our access to sufficient working capital, which would have an adverse affect on
our business, financial condition and results of operations. In addition, there
is a risk that Castle Pines Capital may be unable to continue the financing
relationship with us due to unforeseen future credit market
problems.





We
may be unable to manage our growth effectively, which may harm our
business.





The
ability to operate our business in a rapidly evolving market requires effective
planning and management. Our efforts to grow have placed, and are expected to
continue to place, a significant strain on our personnel, management systems,
infrastructure and other resources. Our ability to manage future growth
effectively will require us to successfully attract, train, motivate and manage
new employees, to integrate new employees into our operations and to continue to
improve our operational, financial and management controls and procedures. If we
are unable to implement adequate controls or integrate new employees into our
business in an efficient and timely manner, our operations could be adversely
affected and our growth could be impaired.





Our operating results have
historically been volatile, and may continue to be volatile, particularly from quarter
to quarter.





Our
quarter-to-quarter revenue, gross profit and operating profitability have
fluctuated significantly. During quarterly periods in which we realize lower
levels of revenue our profitability is generally negatively impacted. Our
quarterly operating results have historically depended on, and may fluctuate in
the future as a result of, many factors including:





•
            volume
      and timing of orders received during the
  quarter;





•
            amount
      and timing of supplier incentives received in any particular quarter,
      which can vary substantially;





•
            gross
      margin fluctuations associated with the mix of products
    sold;





•
            general
      economic conditions;





•
            patterns
      of capital spending by enterprises for communications
      products;





•
            the
      timing of new product announcements and
  releases;





•
            pricing
      pressures;





•
            the
      cost and effect of acquisitions;





•
            the
      amount and timing of sales incentives we may receive from our suppliers,
      particularly Cisco;





•
            the
      availability and cost of products and components from our
      suppliers; and





•
            credit
      availability.





As a
result of these and other factors, we have historically experienced, and may
continue to experience, fluctuations in sales and operating results. In
addition, it is possible that in the future our operating results may fall below
the expectations of analysts and investors, and as a result, the price of our
securities may fall.





17


We have many competitors and expect
new competitors to enter our market, which could increase price competition and may
affect the amount of business available to us and the prices that we can charge for our
products and services.





The
markets for all of the products and services we offer are extremely competitive
and subject to rapid change. Growth in demand for many of the technology
infrastructure products we provide has been predicted by various industry
analysts, and we therefore expect competition to increase as existing
competitors enhance and expand their products and services and as new
participants enter the market. A rapid increase in competition could negatively
affect the amount of business that we obtain and the prices that we are able to
charge.





Additionally,
many of our competitors and potential competitors have substantially greater
financial resources, customer support, technical and marketing resources, larger
customer bases, longer operating histories, greater name recognition and more
established relationships than we do. We cannot be sure that we will have the
resources or expertise to compete successfully. Compared to us, our competitors
may be able to:





•
            develop
      and expand their products and services more
  quickly;





•
            adapt
      faster to new or emerging technologies and changing customer
      needs;





•
            take
      advantage of acquisitions and other opportunities more
      readily;





•
            negotiate
      more favorable agreements with
vendors;





•
            devote
      greater resources to marketing and selling their
      products; and





•
            address
      customer service issues more
effectively.





Some of
our competitors may also be able to increase their market share by providing
customers with additional benefits or by reducing their prices. We cannot be
sure that we will be able to match price reductions by our competitors. In
addition, our competitors may form strategic relationships with each other to
better compete with us. These relationships may take the form of strategic
investments, joint-marketing agreements, licenses or other contractual
arrangements that could increase our competitors’ ability to serve customers. A
material and/or rapid increase in competition would likely have an adverse
affect on our business, financial condition and results of
operations.





Business acquisitions, dispositions
or joint ventures entail numerous risks and may disrupt our business, dilute
stockholder value or distract management attention.





As part
of our business strategy, we have completed acquisitions and plan to continue to
consider acquisitions of, or significant investments in, businesses that offer
products, services and technologies complementary to ours. Any acquisition could
materially adversely affect our operating results and/or the price of our
securities. Acquisitions involve numerous risks, some of which we have
experienced and may continue to experience, including:





•
            unanticipated
      costs and liabilities;





•
            difficulty
      of integrating the operations, products and personnel of the acquired
      business;





•
            difficulty
      retaining key personnel of the acquired
  business;





•
            difficulty
      retaining customers of the acquired
businesses;





•
            difficulties
      in managing the financial and strategic position of acquired or developed
      products, services and
technologies;





•
            difficulties
      in maintaining customer relationships, in particular where a substantial
      portion of the target’s sales were derived from products that compete with
      products that we currently offer;





•
            the
      diversion of management’s attention from the core
  business;





•
            inability
      to maintain uniform standards, controls, policies and
      procedures; and





•
            damage
      to relationships with acquired employees and customers as a result of
      integration of the acquired
business.





Finally,
to the extent that shares of our common stock or rights to purchase common stock
are issued in connection with any future acquisitions, dilution to our existing
stockholders will result and our earnings per share may suffer. Any future
acquisitions may not generate the anticipated level of revenue and earnings or
provide any benefit to our business, and we may not achieve a satisfactory
return on our investment in any acquired businesses.





18


Our international operations, which
we plan to expand, will subject us to additional risks that may adversely affect our
operating results due to increased costs.





Revenue
generated by products delivered and services provided outside the United States,
as a percentage of consolidated revenue, was approximately 3.5%, 3.7% and 4.9%
for 2008, 2007 and 2006, respectively. Substantially all of our international
revenue represents products delivered or services provided in foreign countries
for companies based in the United States or for the United States Armed Forces
under contracts entered into, administered and paid in the United States. We
intend to continue to pursue international opportunities. Pursuit of
international opportunities may require us to make significant investments for
an extended period before returns on such investments, if any, are realized.
International operations are subject to a number of risks and potential costs,
including:





•
            unexpected
      changes in regulatory requirements and telecommunication
      standards;





•
            tariffs
      and other trade barriers;





•
            risk
      of loss in currency exchange
transactions;





•
            exchange
      controls or other currency
restrictions;





•
            difficulty
      in collecting receivables;





•
            difficulty
      in staffing and managing foreign
operations;





•
            the
      need to customize marketing and
products;





•
            inadequate
      protection of intellectual property in countries outside the United
      States;





•
            adverse
      tax consequences; and





•
            political
      and economic instability.





Any of
these factors could prevent us from increasing our revenue and therefore
adversely affect our operating results. We may not be able to overcome some of
these barriers and may incur significant costs in addressing
others.





If
we lose key personnel we may not be able to achieve our objectives.





We are
dependent on the continued efforts of our senior management team, including our
Chairman and Chief Executive Officer, James Long, our President and Chief
Operating Officer, Mark Hilz, and our Vice President and Chief Financial
Officer, Brian Fontana. If for any reason, these or other senior executives or
other key members of management do not continue to be active in management, our
business, financial condition or results of operations could be adversely
affected. We cannot assure you that we will be able to continue to retain our
senior executives or other personnel necessary for the maintenance or
development of our business.





We may not be able to hire and retain
highly skilled technical employees, which could affect our ability to compete
effectively and could adversely affect our operating results.





We depend
on highly skilled technical personnel to research and develop and to market and
service our technology infrastructure solutions and to provide the services we
provide to our customers. To succeed, we must hire and retain employees who are
highly skilled in rapidly changing communications technologies. In particular,
as we implement our strategy of focusing on technology infrastructure solutions,
we will need to:





•
            hire
      more employees with experience developing and providing technology
      infrastructure products and
services;





•
            retrain
      our current personnel to sell and support the technology infrastructure
      solutions that we intend to market in the
  future; and





•
            retain
      personnel to service our products.





Individuals
who can perform the services we need to provide our products and services are
scarce. Because the competition for qualified employees in our industry is
intense, hiring and retaining qualified employees is both time-consuming and
expensive. We may not be able to hire enough qualified personnel to meet our
needs as our business grows or to retain the employees we currently have. Our
inability to hire and retain the individuals we need could hinder our ability to
sell our existing products, systems, software or services or to develop and sell
new ones. If we are not able to attract and retain qualified employees, we will
not be able to successfully implement our business plan and our business will be
harmed.





19





If we are unable to protect our
intellectual property rights, our business may be harmed.





Although
we attempt to protect our intellectual property through patents, trademarks,
trade secrets, copyrights, confidentiality and non-disclosure agreements and
other measures, intellectual property is difficult to protect and these measures
may not provide adequate protection. Patent filings by third parties, whether
made before or after the date of our patent filings, could render our
intellectual property less valuable. Competitors may misappropriate our
intellectual property, disputes as to ownership of intellectual property may
arise and our intellectual property may otherwise become known or independently
developed by competitors. The failure to protect our intellectual property could
seriously harm our business because we believe that developing new products and
technology that are unique to us is important to our success. If we do not
obtain sufficient international protection for our intellectual property, our
competitiveness in international markets could be significantly impaired, which
would limit our growth and future revenue.





We
may be found to infringe on third-party intellectual property
rights.





Third
parties may in the future assert claims or initiate litigation related to their
patent, copyright, trademark and other intellectual property rights in
technology that is important to us. The asserted claims and/or litigation could
include claims against us or our suppliers alleging infringement of intellectual
property rights with respect to our products or components of those products.
Regardless of the merit of the claims, they could be time consuming, result in
costly litigation and diversion of technical and management personnel, or
require us to develop a non-infringing technology or enter into license
agreements. There can be no assurance that licenses will be available on
acceptable terms, if at all. Furthermore, because of the potential for high
court awards, which are not necessarily predictable, it is not unusual to find
even arguably unmeritorious claims resulting in large settlements. If any
infringement or other intellectual property claim made against us by any third
party is successful, or if we fail to develop non-infringing technology or
license the proprietary rights on commercially reasonable terms and conditions,
our business, operating results and financial condition could be materially
adversely affected.





Costs of compliance with the
Sarbanes-Oxley Act of 2002 and the related SEC regulations may harm our results of
operations.





The
Sarbanes-Oxley Act of 2002 requires heightened financial disclosure and
corporate governance for all publicly traded companies. Although the costs of
compliance with the Sarbanes-Oxley Act are uncertain due to several factors, we
expect that our general and administrative expenses will increase. Failure to
comply with the Sarbanes-Oxley Act of 2002, SEC regulations or the listing
requirements of the Nasdaq Stock Market LLC (“Nasdaq”) may result in penalties,
fines or delisting of our securities from Nasdaq, which could limit our ability
to access the capital markets, having a negative impact on our financial
condition and results of operations.





Changes in accounting standards and
subjective assumptions, estimates and judgments by management related to complex
accounting matters could significantly affect our financial
results.





Generally
accepted accounting principles and related accounting pronouncements,
implementation guidelines and interpretations with regard to a wide range of
matters that are relevant to our business, including but not limited to, revenue
recognition, sales returns reserves, impairment of goodwill and long-lived
assets, income taxes, and litigation, are highly complex and involve many
subjective assumptions, estimates and judgments by our management. Changes in
these rules or their interpretation or changes in underlying assumptions,
estimates or judgments by our management could significantly change our reported
or expected financial performance.





Failure of our internal control over
financial reporting could limit our ability to report our financial results
accurately and timely.





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting for external purposes in accordance with U.S. generally accepted
accounting principles. Internal control over financial reporting includes:
maintaining records that in reasonable detail accurately and fairly reflect our
transactions; providing reasonable assurance that transactions are recorded as
necessary for preparation of the financial statements; providing reasonable
assurance that our receipts and expenditures of our assets are made in
accordance with management authorization; and providing reasonable assurance
that unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial statements would be prevented or detected on
a timely basis. Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance that a
misstatement of our financial statements would be prevented or detected. Any
failure to maintain an effective system of internal control over financial
reporting could limit our ability to report our financial results accurately and
timely or to detect and prevent fraud.





We rely extensively on computer
systems to process transactions, summarize results and manage our business. Disruptions
in both our primary and secondary (back-up) systems could harm our
ability to run our business.





Although
we have independent, redundant, and primary and secondary computer systems,
given the number of individual transactions we have each year, it is critical
that we maintain uninterrupted operation of our business-critical computer
systems. Our computer systems, including our back-up systems, are subject to
damage or interruption from power outages, computer and telecommunications
failures, computer viruses, internal or external security breaches, catastrophic
events such as fires, earthquakes, tornadoes and hurricanes, and/or errors by
our employees. If our computer systems and our back-up systems are damaged or
cease to function properly, we may have to make significant investment to fix or
replace them, and we may suffer interruptions in our operations in the interim.
Any material interruption in both of our computer systems and back-up systems
may have a material adverse effect on our business or results of
operations.





20


Natural
disasters could unfavorably affect our financial performance.





The
occurrence of natural disasters, such as hurricanes or earthquakes, particularly
in Texas where our centralized operating systems and administrative personnel
are located, could unfavorably affect our operations and financial performance.
Such events could result in physical damage to one or more of our properties,
the temporary closure of one or more properties, the temporary lack of an
adequate work force in a market, and the temporary or long-term disruption in
the supply of products from suppliers.





Over 20% of our stock is controlled
by our chairman and chief executive officer, who has the ability to substantially
influence the election of directors and other matters submitted to
stockholders.





James H.
Long beneficially owns 1,808,150 shares of our common stock, which
represent approximately 20.7% of our shares outstanding as of February 28,
2009. As a result, he has and is expected to continue to have the ability to
significantly influence the election of our board of directors and the outcome
of all other issues submitted to our stockholders. The interests of this
principal stockholder may not always coincide with our interests or the
interests of other stockholders, and he may act in a manner that advances his
best interests and not necessarily those of other stockholders. One consequence
to this substantial influence or control is that it may be difficult for
investors to remove management of the company. It could also deter unsolicited
takeovers, including transactions in which stockholders might otherwise receive
a premium for their shares over then current market prices.





Our stock price may be subject to
substantial volatility, and the value of your investment may
decline.





Our
common stock is traded on The Nasdaq Global Market, and trading volume may be
limited or sporadic. The market price of our common stock has experienced, and
may continue to experience, substantial volatility. During 2008, our common
stock traded between $4.20 and $13.25 per share, on volume ranging from
approximately 500 to 191,000 shares per day. As a result, the current price
for our common stock on The Nasdaq Global Market is not necessarily a reliable
indicator of our fair market value. The price at which our common stock will
trade may fluctuate as a result of a number of factors, including the number of
shares available for sale in the market, quarterly variations in our operating
results, new products or services by us or competitors, regulatory
investigations or determinations, acquisitions or strategic alliances by us or
our competitors, recruitment or departures of key personnel, the gain or loss of
significant customers, changes in the estimates of our operating performance,
actual or threatened litigation, market conditions in our industry and the
economy as a whole. Volatility in the price of our common stock on The Nasdaq
Global Market may depress the trading price of the common stock our common
stock. The risk of volatility and depressed prices of our common stock also
applies to warrant holders who receive shares of common stock upon
conversion.





Numerous
factors, including many over which we have no control, may have a significant
impact on the market price of our common stock, including:





•
            announcements
      of new products or services by us or our competitors; current events
      affecting the political, economic and social situation in the United
      States and other countries where we
operate;





•
            trends
      in our industry and the markets in which we
  operate;





•
            changes
      in financial estimates and recommendations by securities
      analysts;





•
            acquisitions
      and financings by us or our
competitors;





•
            the
      gain or loss of a significant
customer;





•
            quarterly
      variations in operating results;





•
            the
      operating and stock price performance of other companies that investors
      may consider to be
comparable; and





•
            purchases
      or sales of blocks of our
securities.





Furthermore,
stockholders may initiate securities class action lawsuits if the market price
of our stock drops significantly, which may cause us to incur substantial costs
and could divert the time and attention of our management.





Future issuances of common stock and
hedging activities may depress the trading price of our common
stock.





Any
future issuance of equity securities, including the issuance of shares upon
exercise of outstanding warrants, could dilute the interests of our existing
stockholders, and could substantially decrease the trading price of our common
stock. As of February 28, 2009, we had outstanding approximately
2.0 million warrants and options to acquire our common stock at prices
between $0.82 and $12.63 per share. We may issue equity securities in the future
for a number of reasons, including to finance our operations and business
strategy, in connection with acquisitions, to adjust our ratio of debt to
equity, to satisfy our obligations upon the exercise of outstanding warrants or
options or for other reasons. The market price of our common stock could decline
significantly if we or our existing stockholders sell a large number of shares,
if we issue a large number of shares of our common stock in connection with
future financing activities, acquisitions or otherwise, or due to the perception
that such sales could occur. These factors also could make it more difficult to
raise funds through future offerings of common stock.





21


Provisions in our certificate of
incorporation, bylaws, charter documents and Delaware law could discourage a
change in control, or an acquisition of us by a third party, even if the acquisition would
be favorable to you, thereby and adversely affect existing
stockholders





Our
certificate of incorporation and the Delaware General Corporation Law contain
provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of our company, even when these attempts
may be in the best interests of stockholders. For example, our certificate of
incorporation also authorizes our board of directors, without stockholder
approval, to issue one or more series of preferred stock, which could have
voting and conversion rights that adversely affect or dilute the voting power of
the holders of common stock. Delaware law also imposes conditions on certain
business combination transactions with “interested stockholders.”





These
provisions and others that could be adopted in the future could deter
unsolicited takeovers or delay or prevent changes in our control or management,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. These provisions may also
limit the ability of stockholders to approve transactions that they may deem to
be in their best interests.





We do not expect to pay dividends in
the foreseeable future, and accordingly you must rely on stock appreciation for any
return on your investment





We have
paid no cash dividends on our common stock to date, and we currently intend to
retain our future earnings, if any, to fund the continued development and growth
of our business. As a result, we do not expect to pay any cash dividends in the
foreseeable future. Further, any payment of cash dividends will also depend on
our financial condition, results of operations, capital requirements and other
factors, including contractual restrictions to which we may be subject, and will
be at the discretion of our board of directors.





Item 2.Properties





We
conduct operations at the following leased sites:





•
            Los
      Angeles, California





•
            Sacramento,
      California





•
            Glastonbury,
      Connecticut





•
            Boise,
      Idaho





•
            Boston,
      Massachusetts





•
            Canton,
      Massachusetts





•
            Albuquerque,
      New Mexico





•
            Oklahoma
      City, Oklahoma





•
            Eugene,
      Oregon





•
            Portland
      Oregon





•
            Austin,
      Texas





•
            Dallas,
      Texas





•
            El Paso,
      Texas





•
            Houston,
      Texas





•
            San Antonio,
      Texas





•
            Seattle,
      Washington





•
            Washington,
      DC





22


We lease
16,488 square feet in Houston, Texas for our Corporate offices and Houston
regional office as discussed further in Note 14 to the consolidated
financial statements in Part II, Item 8. The Dallas facility consists
of 28,479 square feet. The remainder of the locations range in size from
1,000 to 10,800 square feet. We believe our existing leased properties are
in good condition and suitable for the conduct of our business.





Item 3.Legal
Proceedings





See
discussion of legal proceedings in Note 15 to the consolidated financial
statements included in Part II, Item 8 of this Report.





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





No
matters were submitted to a vote of security holders during the fourth quarter
of 2008.





PART II





Item 5.Market
for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities





Market
Information





Beginning
September 21, 2007, our common stock and warrants began trading on the
Nasdaq Global Market. From April 24, 2006 to September 20, 2007, our
common stock and warrants traded on the Nasdaq Capital Market. Trading of our
common stock and warrants on the Nasdaq markets is under the symbols “INXI” and
“INXIW”, respectively. From December 29, 2003 until April 23, 2006,
our common stock has traded on the American Stock Exchange under the ticker
symbol “ISR”. From June 8, 2004 until April 23, 2006, our warrants
traded on the American Stock Exchange under the symbol “ISR.WS”.





Common
Stock





The
following table sets forth the per share price range of our common
stock.





High
                          
                          
                          Low2007First
      Quarter
                          
                          $
                          10.30
                          
                          
                          $
                          7.55Second
      Quarter
                          
                          $
                          12.39
                          
                          
                          $
                          8.97Third
      Quarter
                          
                          $
                          14.44
                          
                          
                          $
                          8.81Fourth
      Quarter
                          
                          $
                          15.28
                          
                          
                          $
                          9.752008First
      Quarter
                          
                          $
                          11.01
                          
                          
                          $
                          6.82Second
      Quarter
                          
                          $
                          13.25
                          
                          
                          $
                          6.92Third
      Quarter
                          
                          $
                          10.22
                          
                          
                          $
                          6.67Fourth
      Quarter
                          
                          $
                          7.09
                          
                          
                          $
                          4.20





Warrants





The
following table sets forth the per share price range of our
warrants.





High
                        
                        
                        Low2007First
      Quarter
                        
                        $
                        2.74
                        
                        
                        $
                        1.41Second
      Quarter
                        
                        $
                        3.40
                        
                        
                        $
                        2.37Third
      Quarter
                        
                        $
                        3.23
                        
                        
                        $
                        1.90Fourth
      Quarter
                        
                        $
                        3.99
                        
                        
                        $
                        0.952008First
      Quarter
                        
                        $
                        1.30
                        
                        
                        $
                        0.46Second
      Quarter
                        
                        $
                        2.78
                        
                        
                        $
                        0.45Third
      Quarter
                        
                        $
                        2.40
                        
                        
                        $
                        1.01Fourth
      Quarter
                        
                        $
                        1.04
                        
                        
                        $
                        0.02





As of
February 28, 2009, we had 183 stockholders of record of our common stock.
On February 28, 2009, the closing sales price of our common stock and
warrants as reported by the Nasdaq Global Market was $4.36 per share and $0.06
per warrant.





Dividend
Policy





Our
policy has been to reinvest earnings to fund future growth. Accordingly, we have
not declared or paid any cash dividends and do not anticipate declaring
dividends on our common stock in the foreseeable future.





23


Equity
Compensation Plan Information





The
following table sets forth, as of December 31, 2008:





•
            the
      number of shares of our common stock issuable upon exercise of outstanding
      options, warrants and rights, separately identified by those granted under
      equity incentive plans approved by our shareholders and those granted
      under plans, including individual compensation contracts, not approved by
      our shareholders (column A),





•
            the
      weighted average exercise price of such options, warrants and rights, also
      as separately identified (column B), and the number of shares remaining
      available for future issuance under such plans, other than those shares
      issuable upon exercise of outstanding options, warrants and rights (column
      C).





Column A
                                  
                                  Column B
                                  
                                  Column CNumber
      of SharesNumber
      of Shares
                                  
                                  
                                  
                                  Remaining
      Availableto be Issued
                                  
                                  Weighted
      Average
                                  
                                  for
      Future IssuanceUpon
      Exercise of
                                  
                                  Exercise
      Price of
                                  
                                  Under
      Equity CompensationOutstanding
      Options,
                                  
                                  Outstanding
      Options
                                  
                                  Plans
      (Excluding SharesWarrants and Rights
                                  
                                  Warrants and Rights
                                  
                                  Reflected in Column A)Equity
      incentive plans approved by shareholders
                                  1,722,576
                                  
                                  $4.61
                                  
                                  125,780Equity
      incentive plans not approved by shareholders
                                  —
                                  
                                  —
                                  
                                  —Totals
                                  1,722,576
                                  
                                  $4.61
                                  
                                  125,780





Equity
incentive plans are further discussed in Note 12 to consolidated financial
statements in Part II, Item 8.





Stock
Performance Graph





The
following graph compares the performance of the Common Stock with the Nasdaq
Stock Market (U.S. Companies) Index and with the Russell 2000 Index. The
graph assumes that $100 was invested on December 31, 2003, in the Common
Stock and in each index and that any cash dividends were reinvested. The Company
has not declared any dividends during the period covered by this
graph.





COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*


AMONG
INX INC.,


THE
NASDAQ COMPOSITE INDEX AND THE RUSSELL 2000 INDEX


(PERFORMANCE
GRAPH)




*
            $100
      invested on 12/31/03 in stock & index-including reinvestment of
      dividends.





Fiscal
year ending December 31.





ASSUMED
INVESTMENT WITH REINVESTMENT OF DIVIDENDS





12/03
                                                                      
                                                                      3/04
                                                                      
                                                                      6/04
                                                                      
                                                                      9/04
                                                                      
                                                                      12/04
                                                                      
                                                                      3/05
                                                                      
                                                                      6/05INX
      INC.
                                                                      100.00
                                                                      
                                                                      55.17
                                                                      
                                                                      51.98
                                                                      
                                                                      44.64
                                                                      
                                                                      48.79
                                                                      
                                                                      33.42
                                                                      
                                                                      51.02NASDAQ
      STOCK MARKET (U.S.)
                                                                      100.00
                                                                      
                                                                      100.18
                                                                      
                                                                      103.16
                                                                      
                                                                      96.49
                                                                      
                                                                      110.08
                                                                      
                                                                      101.53
                                                                      
                                                                      104.08RUSSELL
      2000
                                                                      100.00
                                                                      
                                                                      106.26
                                                                      
                                                                      106.76
                                                                      
                                                                      103.71
                                                                      
                                                                      118.33
                                                                      
                                                                      112.01
                                                                      
                                                                      116.85





9/05
                                                                    
                                                                    12/05
                                                                    
                                                                    3/06
                                                                    
                                                                    6/06
                                                                    
                                                                    9/06
                                                                    
                                                                    12/06
                                                                    
                                                                    3/07INX
      INC.
                                                                    30.61
                                                                    
                                                                    35.40
                                                                    
                                                                    39.54
                                                                    
                                                                    38.27
                                                                    
                                                                    41.77
                                                                    
                                                                    50.13
                                                                    
                                                                    64.99NASDAQ
      STOCK MARKET (U.S.)
                                                                    109.76
                                                                    
                                                                    112.88
                                                                    
                                                                    120.64
                                                                    
                                                                    112.68
                                                                    
                                                                    117.54
                                                                    
                                                                    126.51
                                                                    
                                                                    127.08RUSSELL
      2000
                                                                    122.33
                                                                    
                                                                    123.72
                                                                    
                                                                    140.96
                                                                    
                                                                    133.88
                                                                    
                                                                    134.47
                                                                    
                                                                    146.44
                                                                    
                                                                    149.29





6/07
                                                  
                                                  9/07
                                                  
                                                  12/07
                                                  
                                                  3/08
                                                  
                                                  6/08
                                                  
                                                  9/08
                                                  
                                                  12/08INX
      INC.
                                                  57.53
                                                  
                                                  92.09
                                                  
                                                  66.65
                                                  
                                                  50.06
                                                  
                                                  66.65
                                                  
                                                  43.37
                                                  
                                                  27.42NASDAQ
      STOCK MARKET (U.S.)
                                                  136.04
                                                  
                                                  141.77
                                                  
                                                  138.13
                                                  
                                                  118.70
                                                  
                                                  119.92
                                                  
                                                  106.41
                                                  
                                                  80.47RUSSELL
      2000
                                                  155.88
                                                  
                                                  151.06
                                                  
                                                  144.15
                                                  
                                                  129.88
                                                  
                                                  130.64
                                                  
                                                  129.18
                                                  
                                                  95.44





This
graph depicts the past performance of the Common Stock and in no way should be
used to predict future performance. The Company does not make or endorse any
predictions as to future share performance.





This
Stock Performance Graph and the information provided in this Stock Performance
Graph shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise
subject to the liabilities under that Section and shall not be deemed to be
incorporated by reference by any general statement incorporating by reference
this Report on Form 10-K into any filing under the Securities Act of 1933,
as amended, or the Exchange Act except to the extent INX specifically
incorporates by reference this Stock Performance Graph.





24


Issuer
Purchases of Equity Securities





The
following table provides information regarding repurchases by the Company of its
common stock during the fourth quarter ended December 31,
2008:





Period
                
                Total
      Number
                  of Shares
                  Purchased
                
                Average
                  Price
      Paid
                  per Share
                
                Total
      Number of
                  Shares
      Purchased
                  as
      Part of Publicly
                  Announced
      Plans
                  or Programs
                
                Approximate
      Dollar
                  Amount
      of Shares
                  That
      May yet be
                  Purchased
      Under the
                  Plans or ProgramsOctober
      1 to October 31, 2008
                
                86,739
                
                $
                6.32
                
                86,739
                
                $
                892November
      1 to November 30, 2008
                
                60,465
                
                
                5.26
                
                60,465
                
                
                572December
      1 to December 31, 2008
                
                54,729
                
                
                4.85
                
                54,729
                
                
                2,000Total
                
                201,933
                
                $
                5.61
                
                201,933





On
September 9, 2008, the Board of Directors authorized the repurchase of up
to $2,000 of the Company’s common stock on or before December 31, 2008.
These repurchases were required to be made in open market or privately
negotiated transactions in compliance with Rule 10b-18 under the Securities
Exchange Act of 1934, as amended, subject to market and business conditions,
applicable legal requirements and other factors. The plan also requires the
repurchased shares to be retired as soon as practicable following the
repurchase. The plan did not obligate the Company to purchase any particular
amount of common stock, and could be suspended at any time at the Company’s
discretion.





On
December 3, 2008, the Board of Directors modified the existing common stock
repurchase plan, authorizing the repurchase of $2,000 during the period
January 1, 2009 to March 31, 2009.





Item 6.Selected Financial
Data





The
following selected financial data are derived from our consolidated financial
statements. The data below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” “Risk
Factors,” and our consolidated financial statements and notes.





Year Ended
December 31,2008(1)
                      
                      
                      2007(1)
                      
                      
                      2006(1)
                      
                      
                      2005(1)
                      
                      
                      2004Operating
      Data:
                      
                      (As
      Restated)Revenue:
                      
                      (3)Products
                      
                      $
                      213,125
                      
                      
                      $
                      180,311
                      
                      
                      $
                      135,317
                      
                      
                      $
                      94,570
                      
                      
                      $
                      65,207Services
                      
                      
                      46,032
                      
                      
                      
                      27,656
                      
                      
                      
                      20,696
                      
                      
                      
                      12,749
                      
                      
                      
                      6,280Total
                      
                      $
                      259,157
                      
                      
                      $
                      207,967
                      
                      
                      $
                      156,013
                      
                      
                      $
                      107,319
                      
                      
                      $
                      71,487Net
      income (loss) from continuing operations
                      
                      $
                      (12,751
                      )
                      
                      $
                      3,652
                      
                      
                      $
                      1,511
                      
                      
                      $
                      (4,917
                      )
                      
                      $
                      1,110Net
      income (loss) per share from continuing operations:Basic
                      
                      $
                      (1.56
                      )
                      
                      $
                      0.52
                      
                      
                      $
                      0.24
                      
                      
                      $
                      (0.86
                      )
                      
                      $
                      0.24Diluted
                      
                      $
                      (1.56
                      )
                      
                      $
                      0.45
                      
                      
                      $
                      0.21
                      
                      
                      $
                      (0.86
                      )
                      
                      $
                      0.23Income
      (loss) from discontinued operations, net of tax(2)
                      
                      $
                      37
                      
                      
                      $
                      83
                      
                      
                      $
                      (316
                      )
                      
                      $
                      (2,967
                      )
                      
                      $
                      420Net
      income (loss)
                      
                      $
                      (12,714
                      )
                      
                      $
                      3,735
                      
                      
                      $
                      1,195
                      
                      
                      $
                      (7,884
                      )
                      
                      $
                      1,530Balance
      Sheet Data:Total
      assets
                      
                      $
                      87,294
                      
                      
                      $
                      84,241
                      
                      
                      $
                      62,520
                      
                      
                      $
                      41,645
                      
                      
                      $
                      41,139Interest
      bearing borrowings under Credit Facility
                      
                      
                      —
                      
                      
                      
                      6,000
                      
                      
                      
                      4,350
                      
                      
                      
                      2,464
                      
                      
                      
                      8,122Long-term
      debt (including current portion) from continuing
operations
                      
                      
                      331
                      
                      
                      
                      200
                      
                      
                      
                      259
                      
                      
                      
                      243
                      
                      
                      
                      36No
      cash dividends were declared or paid during the five years ended
      December 31, 2008


____________





(1)
            The
      Access Flow, Inc., NetTeks, and VocalMash acquisitions were completed and
      initially reported in 2008, the Select, Inc. acquisition was completed and
      initially reported in 2007, the Datatran Network Systems acquisition was
      initially reported in 2006, and the Network Architects and InfoGroup
      Northwest acquisitions were initially reported in 2005. The 2006, 2007 and
      2008 acquisitions are discussed further in Note 3 to consolidated
      financial statements in Part II, Item 8.(2)
            The
      Stratasoft and Valerent subsidiaries were discontinued in 2005 as
      discussed further in Note 5 to consolidated financial statements in
      Part II, Item 8.(3)
            For
      a detailed description of this restatement see Note 16, Restatement of
      Previously Issued Financial Statements to the accompanying consolidated
      financial statements in Part II, Item
8.





Item 7.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Please read the following discussion
of our financial condition and results of operations together with
“Item 6. Selected Financial Data” and our consolidated financial statements and the notes
to those statements included elsewhere in this report. The following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not limited to, those
set forth under “Item 1A. Risk Factors” and elsewhere in this
report.





25


General





We are a
provider of technology infrastructure solutions for enterprise-class
organizations such as corporations, schools and federal, state and local
governmental agencies. Our solutions consist of three broad categories of
technology infrastructure: network infrastructure, unified communications and
data center. Network infrastructure solutions consist of network routing and
switching, wireless networking and network security solutions. Unified
communications solutions consist of Internet Protocol (“IP”) network-based voice
or telephone solutions as well as IP network-based video communications
solutions. Data center solutions consist of network storage solutions and data
center server virtualization solutions. We provide our customers with planning,
design and implementation professional services as well as managed support
services. We believe that our focus and expertise enables us to better compete
in the markets that we serve. Because we have significant experience planning,
designing, implementing and supporting these types of technology infrastructure
for enterprises, we believe we are well positioned to deliver superior solutions
to our customers and well positioned to provide our customers with the best
possible support of the solutions we provide.





The
market for the technology infrastructure solutions we provide is characterized
by rapidly evolving and competing technologies. We compete with larger and
better financed entities. We currently have seventeen physical offices in
sixteen markets, which are located in Texas, California, Connecticut, Idaho,
Massachusetts, New Mexico, Oklahoma, Oregon, Utah, Washington and Washington DC.
We primarily market to enterprise-class organizations headquartered in, or
making purchasing decisions from markets that we serve with branch offices. We
plan to continue to expand throughout the U.S. by establishing additional
branch offices in other markets, either by opening additional new offices or
through acquisition.





We derive
revenue from sales of both products and services. In 2008, 2007 and 2006, sales
of products made up 82.2%, 86.7% and 86.7% of total revenue and services
revenues made up 17.8%, 13.3% and 13.3% of total revenue.





A key
component of our long-term operating strategies is to improve operating
profitability. Our gross profit margin on product sales is lower than our gross
margin on service revenues. Our gross margin on product sales was 17.8%, 17.6%
and 18.6% for 2008, 2007 and 2006, respectively, and our gross margin on service
revenue was 28.8%, 28.6% and 25.9% for those same periods. The market for the
products we sell is competitive, and we compete with other suppliers for our
customers’ business. The principal factors that determine gross margin on
product sales include:





•
            the
      mix of large, competitively bid sales transactions as compared to smaller,
      less competitive transactions;





•
            the
      mix of new customer transactions, which tend to be more competitively bid
      by us, as compared to transactions with existing customers, which tend to
      be somewhat less
competitive; and





•
            the
      mix of products sold, with certain newer, advanced product categories
      generating higher gross margin than other, more traditional
      products.





The
principal factors that influence gross margin on service revenue
include:





•
            the
      utilization of our technical engineering resources used to perform our
      professional services;





•
            the
      amount of managed support and hosting services as compared to the cost of
      operating our managed services support center and hosting operations,
      which costs are somewhat fixed;





•
            the
      mix between the different types of
service.





We expect
to be able to improve our gross margin on services revenues if our managed
support services revenue increases at a more rapid rate than our professional
services revenue. This is because our cost of providing managed services is
somewhat fixed and does not increase in direct proportion to
revenue.





If we are
able to maintain our gross margin on product sales, improve our gross margin on
services revenues and change our revenue mix to include a larger amount of
service revenue our gross margin on total revenue will improve, which is a key
component of our strategy to improve operating profitability.





Certain
of our selling, general and administrative expenses, such as sales commissions,
vary with revenue or gross profit. Certain other selling, general and
administrative expenses are somewhat fixed and do not vary directly with revenue
or gross profit. We hope to be able to achieve a degree of leverage on certain
categories of selling, general and administrative expenses as we continue to
grow, so that these expenses will become a lower percentage of revenue, which
combined with improvements in gross margin would increase operating profit
margin from our existing branch offices.





26


To the
extent we continue to open new branch offices our operating profitability will
be negatively impacted in the short term because we expect that opening a new
branch office will typically result in operating losses from the newly opened
branch office for a period of six to eighteen months or more. This is because
when we open a new branch office we must hire sales and engineering staff before
we generate sales and because we incur increased levels of sales and marketing
expense in order to establish our presence in the new market, and to attract new
customers. We believe it is important to expand rapidly to obtain a national
presence, and that the return on our investment from opening new offices will be
significant over an approximate three to five year period, relative to the
investment required and, therefore, we believe it is sometimes in our best
interest to open new offices even though doing so reduces near-term operating
profitability. However, during 2007 and 2008 we focused on organic growth of our
existing offices and acquisitions to produce growth in order to improve
operating profit margin, which we were successful in doing during 2007 and early
2008 prior to deteriorating economic conditions and customer demand caused
operating profit margin to decline. In 2009, due to expected weak economic
conditions, we anticipate that we will continue to favor acquisitions over new
office openings as the preferred method of geographic expansion, but we will
continue to look at opportunities to open new offices in new markets on a
case-by-case basis.





While we
have long-term goals of achieving both revenue growth and improved
profitability, economic conditions will play an important role in our ability to
achieve these goals. Our ability to improve operating profit margin is
contingent upon our achievement of revenue growth, and leveraging certain fixed
operating costs against a higher level of revenue. Economic conditions
deteriorated substantially in 2008. To the extent that economic conditions
improve our ability to achieve our goals of revenue growth and improved
profitability will be less difficult, and to the extent economic conditions
remain weak, or deteriorate further, achievement of our goals will be made more
difficult because of a decreased ability to increase revenue due to lower
relative levels of customer demand for the technology infrastructure solutions
we provide.





We begin
Management’s Discussion and Analysis of Financial Condition and Results of
Operations with an overview of our strategies for achieving our goals of revenue
growth and improved profitability. From a financial perspective, these operating
strategies have a number of important implications for our results of operations
and financial condition.





Strategy





Over the
course of the next several years we plan to improve profitability by
implementing the strategies discussed below. We believe that our strategies will
allow us to continue to increase total revenues as well as improve our gross
margins on our service revenue. At the same time, we will seek to limit the
growth of certain relatively fixed components of our selling, general and
administrative expenses relative to the growth of revenue so that those expenses
become a relatively smaller percentage of total revenues. Through a combination
of increased revenue, slightly increased gross margin and somewhat lesser growth
of selling, general and administrative expenses, relative to the growth of
revenue, we hope to be able to increase our operating margin and increase
profitability at a more rapid rate than revenue increases, particularly from our
existing branch offices. We expect that selling expenses can generally be
expected to increase in proportion to our revenue increases. For example, our
sales and sales management staff earn sales commissions that are typically
calculated as a percentage of gross profit produced and thus vary in correlation
with gross profit for any given period. Based on our sales commission plans, we
expect variable sales commissions to be approximately 20% to 23% of gross
profit, which percentage can vary from period to period depending on gross
profit production under our various sales commission plans, and due to
variations between gross profit on a financial statement and gross profit that
sales staff are paid on, which can vary due to engineering resource utilization
and other factors. However, other than sales commissions, our other categories
of operating expenses do not vary in direct proportion to either sales or gross
profit, and we believe that if we are successful in implementing our strategies,
many categories of general and administrative expenses (such as management
salaries, administrative wages and professional expenses) will decrease as a
percentage of our total revenues over the long term because we believe we can
achieve some levels of leverage on certain of these operating
expenses.





Our key
operating strategies include:





•
            Aligning
      ourselves with the leading manufacturers of technology infrastructure
      products of the type we provide. To this end, Cisco has always been our
      primary supplier for network routing and switching and IP telephony
      products that we offer, and we align ourselves with what we believe to be
      the “best of breed” manufacturer in each area of technology or specific
      product in order to provide our customers with the best technology
      available.





•
            Promoting
      our managed support and hosting services to generate increased recurring
      services revenues and improve gross margin on service
    revenue.





•
            Increasing
      the gross revenues from our higher gross margin services offerings, as
      compared to product sales that typically produce relatively lower gross
      margins.





•
            Opening
      new branch offices in new markets.





•
            Expanding
      geographically by acquiring complementary businesses and by opening new
      offices.





•
            Marketing
      to larger customers as we become more of a “national” level provider of
      technology infrastructure
solutions.





Increases
in the size and volume of the projects we undertake can challenge our cash
management. For example, larger projects can reduce our available cash by
requiring that we carry higher levels of inventory. Larger projects can also
require other investments in working capital. This is because, in some cases, we
do not receive payments from our customers for extended periods of time. Until
we invoice the customer and are paid, all of the cash expended on labor and
products for the project remains invested in work-in-progress or accounts
receivable. We expect that we will need increasing levels of working capital in
the future if we are successful in growing our business as we intend. To meet
our cash requirements to support planned growth, we expect to rely on capital
provided from our operations and our credit facility, which is collateralized by
our accounts receivable and substantially all of our other assets.





27


During
2008, 2007 and 2006, 82.2%, 86.7% and 86.7% of our revenue was attributable to
product sales, while 17.8%, 13.3% and 13.3% was attributable to services
revenues. The gross profit margins on our services revenues have been
substantially higher than those for product sales. We hope to be able to
increase revenue from services at a more rapid rate than increases in our
product sales revenue. We believe this is possible if we are successful in
marketing our managed support and hosting services, which generate recurring
services revenues. If we are successful at growing our service revenues at a
more rapid rate than our product sales revenues our overall gross margin on
total revenue should improve. The success of this aspect of our strategy depends
in part on our ability to attract and retain highly skilled and experienced
engineering employees and the acceptance by the market of our managed support
services offering.





For the
last three years, the largest component of our total cost of sales and service
has been purchases of Cisco products. The majority of those purchases were
directly from Cisco. We typically purchase from various wholesale distributors
only when we cannot purchase products directly from Cisco on a timely basis. Our
reliance on Cisco as the primary supplier for the products we offer means that
our results of operations from period to period depend substantially on the
terms upon which we are able to purchase these products from Cisco and, to a
much lesser extent, from wholesale distributors of Cisco’s products. Therefore,
our ability to manage the largest component of our cost of sales and service is
very limited and depends to a large degree on maintaining and improving our
relationship with Cisco. Our cost of products purchased from Cisco can be
substantially influenced by whether Cisco sponsors sales incentive programs and
whether we qualify for such incentives. There is a risk that we may not meet the
required incentive criteria in the future. The respective timing of when vendor
incentives become earned and determinable has created material fluctuations in
our gross margin on product sales in the past.





We also
plan to increase our business in other geographic areas through strategic
acquisitions of similar businesses or by opening our own offices. This aspect of
our strategy can affect our financial condition and results of operations in
many ways. The purchase price for business acquisitions and the costs of opening
offices may require substantial cash and may require us to incur long term debt.
The expenses associated with opening a new office in a new market may well
exceed the gross profit produced on revenues attributable to such new office for
some time, even if it performs as we expect. It is possible that our acquisition
activities may require that we record substantial amounts of goodwill if the
consideration paid for an acquisition exceeds the estimated fair value of the
net identified tangible and intangible assets acquired, which we expect is
likely. To the extent an acquisition results in goodwill, we will reevaluate the
value of that goodwill at least annually. If we determine that the value of the
goodwill has been impaired, the resulting adjustment could result in a non-cash
charge to earnings in the periods of revaluation.





Registered
Direct Offering





In June,
2008, we sold 900,000 shares of common stock through a registered direct
offering to certain institutional investors at a price of $11.00 per share. The
net cash proceeds, after deducting the placement agent’s fee and other offering
expenses of $1,149, were approximately $8,751. The net cash proceeds were
partially used to repay the $6,000 outstanding balance under the Acquisition
Facility, with the remainder to be used for general corporate purposes including
possible future acquisitions.





Acquisitions.





Access
Flow, Inc.





Under an
Asset Purchase Agreement dated June 6, 2008 (the “APA”), we purchased the
operations and certain assets, and assumed specified liabilities of Access Flow,
Inc. (“AccessFlow”). AccessFlow is a Sacramento, California-based consulting
organization focused on delivering VMware-based data center virtualization
solutions, with revenues for the twelve months ended March 31, 2008 of
approximately $10,500. The acquisition was completed simultaneously with the
execution of the APA. Neither AccessFlow nor any shareholder of AccessFlow has
any prior affiliation with INX. The APA contains customary representations and
warranties and requires AccessFlow and its Shareholders to indemnify us for
certain liabilities arising under the APA, subject to certain limitations and
conditions.





The
consideration paid at closing pursuant to the APA was (a) $2,450 in cash
and (b) 262,692 shares of our common stock. The common stock was
valued at $13.06 per share or $3,430. The number of common stock shares issued
was determined by dividing $2,627 by the lesser of (i) the average closing
price per share for the common stock, as reported by Nasdaq for the five
consecutive trading days ending prior to the second day before June 6,
2008, which was $12.96 per share or (ii) $10.00 per share.
24,000 shares of the stock consideration were placed in escrow under
holdback provisions defined in the APA. The two shareholders of AccessFlow
entered into five-year noncompete agreements at closing, which provide for
payments to each in the aggregate amount of $50 in equal monthly installments of
approximately $8 each per month over the six month period subsequent to closing.
Broker costs and professional fees of $346 were incurred in the purchase, of
which $174 was paid in cash, $16 accrued, and $156 was paid through the issuance
of 11,935 shares of common stock.





Additional
purchase consideration is payable to AccessFlow based on certain financial
performance during each of the two-year periods ending June 30, 2009 and
June 30, 2010. The financial performance upon which such additional
purchase consideration is based includes the following business components:
(i) the acquired AccessFlow Sacramento, California branch office revenue
excluding its hosting business, (ii) the acquired AccessFlow hosting
business, and (iii) customer billings for certain virtualization products
and services specified in the APA generated by the Company’s pre-existing
fourteen branch office locations. The APA specifies the computation of
additional purchase consideration earned under each business component,
including a minimum and maximum amount payable for each of the two years. For
each business component the minimum annual additional consideration payable is
zero and the maximum annual additional consideration payable is (i) $405,
(ii) $405, and (iii) $540, respectively. At our option, 50% of such
additional consideration may be paid in the form of common stock. Additional
purchase consideration, if any, will be recorded as goodwill.





28


NetTeks
Technology Consultants, Inc.





Under an
Asset Purchase Agreement dated November 14, 2008 (the “Agreement”), we
purchased the operations and certain assets, and assumed specified liabilities
of NetTeks Technology Consultants, Inc. (“NetTeks”). NetTeks is a Boston,
Massachusetts-based network consulting organization with offices in downtown
Boston and Glastonbury, Connecticut, with revenues for the twelve months ended
September 30, 2008 of approximately $12,700. We completed the acquisition
simultaneously with the execution of the Agreement. Neither NetTeks nor any
shareholder of NetTeks has any prior affiliation with the INX. The Agreement
contains customary representations and warranties and requires NetTeks and the
Shareholders to indemnify us for certain liabilities arising under the
Agreement, subject to certain limitations and conditions.





The
consideration paid at closing pursuant to the Agreement was (a) $1,350 in
cash and (b) 30,770 shares of our Common Stock, $0.001 par value
(the “Common Stock”), of which 15,385 Common Stock shares were held in escrow
under holdback provisions defined in the Agreement. The common stock was valued
at $5.29 per share or $163. The number of Common Stock shares issued was
determined by dividing $200 by $6.50 per share. Professional fees of $51 were
paid in connection with the purchase.





Additional
purchase consideration is payable based on NetTeks’ branch office operating
income contribution during each of the two-year periods ending November 30,
2009 and November 30, 2010. The Agreement specifies the computation of
additional purchase consideration earned including a minimum of zero for each of
the two-year periods and a maximum of $1,313 for the period ending
November 30, 2009 and $1,488 for the period ending November 30, 2010.
At our option, 50% of such additional purchase price may be paid in the form of
Common Stock. Additional purchase consideration, if any, will be recorded as
goodwill.





VocalMash





Under an
Asset Purchase Agreement dated December 4, 2008 (“VocalMash APA”), we
purchased the operations of VocalMash, a business owned and operated by INX’s
Vice President of Sales. VocalMash is an application integration company that
utilizes Web 2.0 technologies to integrate unified communications systems with
other enterprise applications. We completed the acquisition simultaneously with
the execution of the VocalMash APA. The VocalMash APA contains customary
representations and warranties and requires VocalMash and its Owner to indemnify
INX for certain liabilities arising under the VocalMash APA, subject to certain
limitations and conditions.





The
consideration paid at closing pursuant to the VocalMash APA was
60,000 shares of our Common Stock, $0.001 par value (the “Common
Stock”). The Common Stock was valued at $4.89 per share or $293. Additional
purchase consideration of up to a maximum of $380 may be payable under the
VocalMash APA based on the achievement of operating income contribution targets
for 2009. Additional purchase consideration, if any, will be recorded as
goodwill.





Select,
Inc.





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





The
consideration paid at closing pursuant to the SPA was (a) $6,250 in cash,
including $1,000 placed in escrow under holdback provisions defined in the SPA
and (b) 231,958 shares of our Common Stock, $0.01 par value (the
“Common Stock”) valued at $10.60 per share or $2,459, which amount of shares was
determined by dividing $2,250 by $9.70, which is the greater of (i) average
closing price per share for the Common Stock as reported by Nasdaq for the five
consecutive trading days ending August 28, 2007 and (ii) $9.50. The
President and major shareholder of Select entered into a five-year noncompete
agreement at closing providing for equal monthly payments of $21 over two years,
which were recorded at their present value of $450. Cash of $6,000 was borrowed
from the Acquisition Facility under the Credit Agreement with Castle Pines
Capital LLC. In connection with the stock purchase, the Credit Agreement with
Castle Pines Capital LLC was amended for the modification of certain financial
covenants and for the addition of Select as a party to the Credit Agreement.
Broker costs and professional fees of $512 were incurred in the purchase, of
which $388 was paid in cash and $124 was paid through the issuance of
11,598 shares of common stock.





29


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





Results
of Operations





Overview





Sources of
Revenue.  Our revenue consists of product and service revenue.
Product revenue consists of reselling technology products manufactured by
others. Cisco products represent the majority of the products we sell, but we
also sell network storage products manufactured by Network Appliance and EMC,
certain unified communications products from Microsoft, and various products
that are “best-of-breed” in certain areas of the solutions that we provide,
including products from Avotus, Cistera Networks, Converged Access, IPCelerate,
Riverbed, Sagem-Interstar, Tandberg, Variphy, VMWare and others. Service revenue
is generated by fees from a variety of implementation and support services.
Product prices are typically set by the market for the products we sell and
provide our lowest gross margins. Gross margin on service revenue varies based
on the cost of technical resources and our utilization of our technical
resources, which are reflected as a cost of service. Certain fixed and flat fee
service contracts that extend over three months or more are accounted for on the
percentage of completion method of accounting.





Historically,
the majority of our services revenue has been generated from professional
services, which we believe varies somewhat in proportion to our product sales.
Professional services revenue is project oriented and tends to be somewhat
volatile on a quarter-to-quarter basis as projects start and stop and we
redeploy technical resources to new projects. As the number, frequency and size
of our projects continue to grow, we hope to achieve better utilization of our
engineering resources, resulting in improved gross margins on professional
services revenue and less volatility in the amount of quarterly professional
services revenue realized. The normal sales cycle for corporate customers
typically ranges from approximately three to six months depending on the nature,
scope and size of the project. Our experience with educational organizations
utilizing E-Rate funding, which is a federal government funding program for
schools administered by the Schools and Libraries Division of the Universal
Services Administrative Corporation (the “SLD”), indicates that the sales cycle
for these projects is generally about six to twelve months or
longer.





In
mid-2004, we introduced our managed support service offering that consists
primarily of customer service personnel and a support center. This support
service offering requires that we incur the fixed cost to operate a network
operations center to monitor and manage customers’ systems. Early in the
development of our managed services offering this fixed cost, as compared to the
level of managed service revenue, resulted in negative gross margins from our
managed service offering. As revenue improved, gross margin from our managed
services offering turned positive and has improved recently. If we are
successful in continuing to realize increasing levels of managed services
revenue, we anticipate that our gross margin on managed services will eventually
exceed our gross margin on professional services and will improve overall
services gross margins. We recognize managed support service revenue evenly over
the entire service period for the customer.





Gross Profit and Gross Profit
Margin.  The mix of our various revenue components, each of
which has substantially different levels of gross margin, materially influences
our overall gross profit and gross margin in any particular quarter. In periods
in which service revenue is high as compared to product sales, our gross margin
generally improves as compared to periods in which we have higher levels of
product sales. Our gross margin for product sales also varies depending on the
type of product sold, the mix of large revenue product sales contracts, which
typically have lower gross margin as compared to smaller revenue product sales
contracts, which typically have higher gross margin. Gross margin percentage on
product sales is generally positively influenced by repeat business with
existing customers, which are typically smaller transactions that generate
slightly higher levels of gross margin as compared to large, competitively bid
projects.





Our
annual and quarterly gross profit and gross margin on product sales are
materially affected by vendor incentives, most of which are Cisco incentive
programs. The incentive programs sponsored by Cisco currently enable us to
qualify for cash rebates or product pricing discounts. The most significant
incentive is a Cisco incentive that is generally earned based on sales volumes
of particular Cisco products and customer satisfaction levels. The amounts
earned and costs incurred under these programs are recorded as a reduction of
cost of goods sold, and the increased gross profit results in an increase in
selling, general and administrative expenses related to sales commissions. We
recognized vendor incentives of $10,118, $7,200, and $6,303 in 2008, 2007 and
2006, respectively. The amounts earned under these programs are accrued when
they are deemed probable and can be reasonably measured; otherwise, they are
recorded when they are declared by the vendor or the cash is received, whichever
is earlier. Our product cost and resulting gross profit can vary significantly
from quarter to quarter depending upon vendor incentive criteria and our ability
to qualify for and recognize such incentives.





30


A
significant portion of our cost of services is comprised of labor, particularly
for our professional services revenue. Our gross margin on service revenue
fluctuates from period to period depending not only upon the prices charged to
customers for our services, but also upon the level of utilization of our
technical staff. Management of labor cost is important to maximize gross margin.
Our gross margin is also impacted by such factors as contract size, time and
material pricing versus fixed fee pricing, discounting, vendor incentives and
other business and marketing factors normally incurred during the conduct of
business. Several years ago we purposely over staffed technical and engineering
staff in order to have the technical competency necessary to gain market share
and create a successful organization. Over the past several years as we have
grown, we have been able to better utilize our technical and engineering staff
and this has helped to improve the gross margin percentage on service revenue in
more recent years as compared to several years ago. When we open new branch
offices in new markets, we also must over staff technical and engineering
resources in order to have the personnel necessary to win customer relationships
in the new market, and the fact that we opened multiple new offices in the
latter half of 2005 and first half of 2006 caused gross margin on our
professional services to be reduced during the latter half of 2005 through the
early part of 2007. If we open new offices in new markets in the future we
expect gross margin on our professional services to be negatively impacted by
such new branch office operations. The extent to which total professional
services gross margin will be negatively impacted will vary based on the number
and size of new branch offices we open in any given period, relative to the
number of and size of mature branch offices.





Selling, General and Administrative
Expenses.  Our selling, general and administrative expenses
include both fixed and variable expenses. Relatively fixed categories of
expenses in selling, general and administrative expenses include rent,
utilities, and administrative wages. Variable categories of expenses in selling,
general and administrative expenses include sales commissions and travel, which
will usually vary based on our sales and gross profit. Selling, general and
administrative expenses also include expenses which vary significantly from
period to period but not in proportion to sales or gross profit. These include
legal expenses and bad debt expense, both of which vary based on factors that
are difficult to predict.





A
significant portion of our selling, general and administrative expenses relate
to personnel costs, some of which are variable and others that are relatively
fixed. Our variable personnel costs consist primarily of sales commissions.
Sales commissions are typically calculated based upon our gross profit on a
particular sales transaction and thus generally fluctuate because of the size of
the transaction and the mix of associated products and services with our overall
gross profit. Prior to 2007, sales commissions were approximately 27% to 31% of
gross profit and in 2007 and 2008, sales commissions were approximately 20.0% to
23.0% of gross profit. Bad debt expense generally fluctuates somewhat in
proportion to sales levels, although not always in the same periods as increases
or decreases in sales. Legal expense varies based on legal issue activity, which
can vary substantially from period to period. Other selling, general and
administrative expenses are relatively fixed and do not vary in direct
proportion to increases in revenue, but will generally increase over time as the
organization grows. We believe that we can achieve some level of leverage on
these somewhat fixed operating expenses, relative to revenue growth, and if we
are successful in doing so that this will help to increase our net operating
margin.





Impairment
Charge.  As of December 31 each year, we perform an annual
goodwill impairment test as required under Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets”. Based on a
discounted cash flow analysis, the sharp decline in our market capitalization
beginning in November 2008, and the rapidly deteriorating macroeconomic
environment in the fourth quarter of 2008, we concluded that the goodwill of our
Access Flow, Inc., Select, Inc., Datatran Network Systems, InfoGroup Northwest,
Inc., and Network Architects, Corp. acquisitions was impaired and recorded an
impairment charge of $9,396 in the fourth quarter of 2008.





In
accordance with Statement of Financial Accounting Standards No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, we record
impairment charges on long-lived assets used in operations when events and
circumstances indicate that the assets may be impaired. Assets are considered
impaired when the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets and the net book value
of the assets exceeds their estimated fair value. In connection with the
triggering events discussed in the preceding paragraph, we tested the
recoverability of our long-lived assets and concluded the carrying values of
intangible assets and property and equipment from the AccessFlow, Inc. and
Select, Inc. acquisitions were no longer recoverable. Consequently, during the
fourth quarter of 2008, we recorded an impairment charge of $3,328 and $347 to
write the intangibles assets and property and equipment, respectively, down to
their estimated fair values.





Tax Loss
Carryforward.  Because of our tax operating losses in 2003,
2005, 2006, and 2007 and exercises of stock options, we have accumulated a net
operating loss carryforward for federal income tax purposes that, at
December 31, 2008, was approximately $2,540. Since United States tax laws
limit the time during which an NOL may be applied against future taxable income
and tax liabilities, we may not be able to take full advantage of our NOL
carryforward for federal income tax purposes. The carryforward will expire
during the period 2023 through 2027 if not otherwise used. A change in
ownership, as defined by federal income tax regulations, could significantly
limit the company’s ability to utilize its carryforward. If we achieve sustained
profitability, which may not occur, the use of net operating loss carryforwards
would reduce our tax liability and increase our net income and available cash
resources. When all operating loss carryforwards have been used or have expired,
we would again be subject to increased tax expense.





Deferred Tax
Assets.  In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which temporary differences, as determined pursuant to
SFAS No. 109, “Accounting for Income Taxes,” become deductible.
Management considers the reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
Management’s evaluation of the realizability of deferred tax assets must
consider both positive and negative evidence. The weight given to the potential
effects of positive and negative evidence is based on the extent to which it can
be objectively verified. During the fourth quarter of 2008, after giving
consideration to the impairment charge, we established a full valuation
allowance against the related deferred tax asset and all other temporary items
totaling $4,031 as we determined it was more like than not that the assets would
not be used to reduce future tax liabilities. During the fourth quarter of 2007,
we reversed the valuation allowance related to the net operating loss
carryforwards and other temporary items as we determined it was more likely than
not that we would be able to use the assets to reduce future tax liabilities.
The reversal resulted in recognition of an income tax benefit of $535 in 2007
and a corresponding increase in the deferred tax asset on the Consolidated
Balance Sheet in Part II, Item 8.





31


Restatement. On August
12, 2009, management of the Company in consultation with the Audit Committee of
the Board of Directors, determined that the our financial statements included in
the Annual Report on Form 10-K for the fiscal year ended December 31, 2008
required restatement.  This determination was made following a review
which included the following:





·
            We
      previously presented our floor plan financing balances as trade accounts
      payable because we believed that our principal vendor had a substantial
      investment in the floor plan financing company.  During the
      preparation of our Quarterly Report on Form 10-Q for the period June 30,
      2009, we became aware that the principal vendor had no ownership interest
      in its floor plan financing company.  Consequently, we are
      correcting our presentation of the floor plan balances in our Balance
      Sheets from trade accounts payable to floor plan financing and the related
      amounts in our Statements of Cash Flows from operating activities to
      financing activities.  The error affects our Annual Report on
      Form 10-K for the fiscal year ended December 31, 2008.  The
      correction of the error has no effect on the previously reported
      statements of operations.  There is no impact to our current
      liabilities or total liabilities as a result of this reclassification for
      each of the three years ended December 31,
2008.





·
            In
      addition to the aforementioned correction, we are recording certain
      immaterial adjustments that increase pre-tax expense by $76 for the year
      ended December 31, 2008, of which $26 was previously recorded in the three
      months ended March 31, 2009.  The adjustments consisted of a
      pre-tax expense of $50 related to stock option modifications and pre-tax
      expense of $26 related to the accrual of outside contractor
      costs.





The
effect of the aforementioned corrections on the consolidated financial
statements as of December 31, 2008 and 2007 and for the years ended December 31,
2008, 2007, and 2006 as previously filed on the Annual Report on Form 10-K for
the fiscal year ended December 31, 2008 are more fully described in Note 16 to
the consolidated financial statements in Part II, Item 8.  The
“Results of Operations” and “Liquidity and Capital Resources” sections of this
Item 7 have been restated to reflect the impact of the aforementioned
errors.





Period
Comparisons.  The following tables set forth, for the periods
indicated, certain financial data derived from our consolidated statements of
operations. Percentages shown in the table below are percentages of total
revenue, except for the product and service components of cost of goods sold and
gross profit, which are percentages of product and service revenue,
respectively.





Year Ended
December 31,2008
                                                        
                                                        2007
                                                        
                                                        2006Amount
                                                        
                                                        %
                                                        
                                                        Amount
                                                        
                                                        %
                                                        
                                                        Amount
                                                        
                                                        %Revenue:
                                                        
                                                        (As
      Restated)Products
                                                        
                                                        $
                                                        213,125
                                                        
                                                        
                                                        82.2
                                                        
                                                        $
                                                        180,311
                                                        
                                                        
                                                        86.7
                                                        
                                                        $
                                                        135,317
                                                        
                                                        
                                                        86.7Services
                                                        
                                                        
                                                        46,032
                                                        
                                                        
                                                        17.8
                                                        
                                                        
                                                        27,656
                                                        
                                                        
                                                        13.3
                                                        
                                                        
                                                        20,696
                                                        
                                                        
                                                        13.3Total
      revenue
                                                        
                                                        
                                                        259,157
                                                        
                                                        
                                                        100.0
                                                        
                                                        
                                                        207,967
                                                        
                                                        
                                                        100.0
                                                        
                                                        
                                                        156,013
                                                        
                                                        
                                                        100.0Gross
      profit:Products
                                                        
                                                        
                                                        37,881
                                                        
                                                        
                                                        17.8
                                                        
                                                        
                                                        31,747
                                                        
                                                        
                                                        17.6
                                                        
                                                        
                                                        25,132
                                                        
                                                        
                                                        18.6Services
                                                        
                                                        
                                                        13,250
                                                        
                                                        
                                                        28.8
                                                        
                                                        
                                                        7,900
                                                        
                                                        
                                                        28.6
                                                        
                                                        
                                                        5,365
                                                        
                                                        
                                                        25.9Total
      gross profit
                                                        
                                                        
                                                        51,131
                                                        
                                                        
                                                        19.7
                                                        
                                                        
                                                        39,647
                                                        
                                                        
                                                        19.1
                                                        
                                                        
                                                        30,497
                                                        
                                                        
                                                        19.5Selling,
      general and administrative expenses
                                                        
                                                        
                                                        48,784
                                                        
                                                        
                                                        18.8
                                                        
                                                        
                                                        36,152
                                                        
                                                        
                                                        17.4
                                                        
                                                        
                                                        28,710
                                                        
                                                        
                                                        18.4Impairment
      charge
                                                        
                                                        
                                                        13,071
                                                        
                                                        
                                                        5.0
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        —Operating
      (loss) income
                                                        
                                                        
                                                        (10,724
                                                        )
                                                        
                                                        (4.1
                                                        )
                                                        
                                                        3,495
                                                        
                                                        
                                                        1.7
                                                        
                                                        
                                                        1,787
                                                        
                                                        
                                                        1.1Interest
      and other expense, net
                                                        
                                                        
                                                        16
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        79
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        232
                                                        
                                                        
                                                        0.1Income
      tax expense (benefit)
                                                        
                                                        
                                                        2,011
                                                        
                                                        
                                                        (0.8
                                                        )
                                                        
                                                        (236
                                                        )
                                                        
                                                        (0.1
                                                        )
                                                        
                                                        44
                                                        
                                                        
                                                        —Net
      (loss) income from continuing operations
                                                        
                                                        
                                                        (12,751
                                                        )
                                                        
                                                        (4.9
                                                        )
                                                        
                                                        3,652
                                                        
                                                        
                                                        1.8
                                                        
                                                        
                                                        1,511
                                                        
                                                        
                                                        1.0Income
      (loss) from discontinued operations, net of taxes
                                                        
                                                        
                                                        37
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        83
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        (316
                                                        )
                                                        
                                                        (0.2
                                                        )Net
      (loss) income
                                                        
                                                        $
                                                        (12,714
                                                        )
                                                        
                                                        (4.9
                                                        )
                                                        $
                                                        3,735
                                                        
                                                        
                                                        1.8
                                                        
                                                        $
                                                        1,195
                                                        
                                                        
                                                        0.8





Year
Ended December 31, 2008 Compared to Year Ended December 31,
2007





Total
Revenue.  Total revenue increased by $51,190, or 24.6%, to
$259,157 from $207,967. Products revenue increased by $32,814 or 18.2%, to
$213,125 from $180,311. The increase in products revenue is primarily due to a
full year revenue contribution in 2008 from the Select, Inc. acquisition vs four
months in 2007 ($15,937) and growth in our Northwest Region ($10,008) and
National Accounts Division ($6,260). Services revenue increased by $18,376 or
66.4% to $46,032 from $27,656. The increase in services revenue is primarily due
to higher revenue in our Federal Division ($9,517) from Federal Government
subcontracts and significant services revenue increases across substantially all
regions.





Gross
Profit.  Total gross profit increased by $11,484, or 29.0%, to
$51,131 from $39,647. Overall gross profit as a percentage of sales increased to
19.7% from 19.1%. Gross profit on product sales increased $6,134, or 19.3%, to
$37,881 from $31,747 as a result of increased sales and, as a percentage of
product sales, increased to 17.8% from 17.6%. Gross profit on services revenue
increased $5,350 or 67.7% to $13,250 from $7,900 as a result of increased sales
and gross profit as a percent of services revenue increased to 28.8% from
28.6%.





32


Selling, General and Administrative
Expenses.  Selling, general and administrative expenses
increased by $12,632, or 34.9% to $48,784 from $36,152. As a percentage of total
revenue, these expenses increased to 18.8% from 17.4%. The increase in selling,
general and administrative expenses as a percentage of sales was due to 2008
fourth quarter charges for bad debt expense of $566, severance costs of $202,
lawsuit settlement costs of $140, increased headcount in selling and
administrative functions, and higher depreciation and amortization costs
primarily due to acquisitions. The severance costs were a result of headcount
reductions at December 31, 2008 to better align our cost structure with
current market conditions.





Impairment
Charge.  The total impairment charge was $13,071 in 2008
compared to zero in 2007. As further discussed in Notes 2 and 4 to the
consolidated financial statements in Part II, Item 8, we performed our
annual goodwill impairment test during the fourth quarter of 2008. We concluded
that the goodwill of our Access Flow, Inc., Select, Inc., Network Architects,
Corp., InfoGroup Northwest, Inc., and Datatran Network Systems acquisitions was
impaired and recorded an impairment charge of $9,396. Additionally, we record an
impairment charges on long-lived assets used in operations when events and
circumstances indicate that the assets may be impaired. We tested the
recoverability of our long-lived assets and concluded the carrying values of
intangible assets and property and equipment from the AccessFlow, Inc. and
Select, Inc. acquisitions were no longer recoverable. Consequently, during the
fourth quarter of 2008, we recorded an impairment charge of $3,675 to write the
intangibles assets and property and equipment down to their estimated fair
values.





Operating (Loss)
Income.  Operating income decreased $14,219 to a loss of
$10,724 from income of $3,495, primarily due to the $13,071 impairment charge
discussed above and other 2008 fourth quarter charges discussed under selling,
general and administrative expenses.





Interest and Other Expense,
net.  Interest and other income, net, decreased $63 to $16 from
$79 primarily due to the elimination of borrowings under our senior credit
facility in June 2008.





Income Tax Expense
(Benefit).  Income tax expense increased by $2,247 to expense
of $2,011 from a benefit of $236. The 2008 income tax expense resulted primarily
from the recording of the valuation allowance against deferred tax assets which
was necessary due to the 2008 operating loss. The 2007 income tax benefit
resulted from the reversal of the valuation allowance related to the net
operating loss carryforwards and other temporary items of $402, partially offset
by federal and state income tax expense of $166. The reversal of the valuation
allowance was a result of the determination that it was now more likely than not
that we would be able to use deferred tax assets to reduce future tax
liabilities. This tax benefit was partially offset by federal and state income
tax accruals, which included $135 for the Texas Margin Tax initially assessed
for 2007.





Income from Discontinued Operations,
net of tax.  Income from discontinued operations decreased by
$46, to income of $37 from income of $83.





Net (Loss)
Income.  Net income decreased $16,449 to a net loss of $12,714
from net income of $3,735, primarily due to the impairment charge of $13,071
discussed above, the recording of a deferred tax assets valuation allowance in
2008 and other 2008 fourth quarter charges discussed under selling, general and
administrative expenses.





Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006





Total
Revenue.  Total revenue increased by $51,954, or 33.3%, to
$207,967 from $156,013. Products revenue increased by $44,994 or 33.3%, to
$180,311 from $135,317. The increase in products revenue is primarily due to
four months revenue contribution of the Select, Inc. acquisition ($12,890) and
growth in our Austin location ($11,900), Federal Division ($8,918), Northwest
Region ($6,371), and Los Angeles location ($4,264). Services revenue increased
by $6,960 or 33.6% to $27,656 from $20,696. The increase in services revenue is
primarily due to growth across substantially all locations, four months revenue
contribution of the Select, Inc. acquisition, and continued growth of recurring
support services revenue.





Gross
Profit.  Total gross profit increased by $9,150, or 30.0%, to
$39,647 from $30,497. Overall gross profit as a percentage of sales decreased to
19.1% from 19.5%. Gross profit on product sales increased $6,615, or 26.3%, to
$31,747 from $25,132 and, as a percentage of product sales, decreased to 17.6%
from 18.6%. Products gross profit percentage decreased due to lower vendor
rebates as a percentage of products sales, primarily due to Cisco rebate program
changes and proportionately lower vendor rebates earned on products sales by the
newly acquired Boston location. Vendor rebates represented 4.0% and 4.7% of
products sales in 2007 and 2006, respectively. Gross profit on services revenue
increased $2,535 or 47.3% to $7,900 from $5,365 and gross profit as a percent of
services revenue increased to 28.6% from 25.9%. The increase in services gross
margin was the result of improved utilization of engineering staff in 2007
compared to 2006, higher managed services margins increasing to 30.5% in 2007
from 29.1% in 2006, and the positive margin impact of revenue recognized ($520)
as a result of early cessation of the implementation portion of a contract with
IBM Corporation.





Selling, General and Administrative
Expenses.  Selling, general and administrative expenses
increased by $7,442, or 25.9% to $36,152 from $28,710. As a percentage of total
revenue, these expenses decreased to 17.4% from 18.4%. The decrease in selling,
general and administrative expenses as a percentage of sales was due to improved
leverage resulting from lower expense growth compared to revenue growth. 2007
selling, general and administrative expenses increased due to the sales and
administrative costs of the newly acquired Boston location, additional sales
compensation costs on substantially higher revenues, increased performance based
compensation expense resulting from improved operating results, and higher
professional fees due to increased audit fees and Sarbanes-Oxley consulting
fees.





33


Operating
Income.  Operating income increased $1,708 to $3,495 from
$1,787, primarily due to product and service revenue increasing 33.3% compared
to the 25.9% increase in selling, general and administrative
expenses.





Interest and Other Income (Expense),
net.  Interest and other income (expense), net, changed by $153
to an expense of $79 from an expense of $232 primarily due to lower average
borrowings under our credit facility and increased interest income on the
short-term investment of excess cash.





Income Tax Expense
(Benefit).  Income tax expense (benefit) changed by $280 to a
benefit of $236 from expense of $44. The 2007 income tax benefit resulted from
the reversal of the valuation allowance related to the net operating loss
carryforwards and other temporary items of $402, partially offset by federal and
state income tax expense of $166. The reversal of the valuation allowance was a
result of the determination that it was now more likely than not that we would
be able to use deferred tax assets to reduce future tax liabilities. This tax
benefit was partially offset by federal and state income tax accruals, which
included $135 for the Texas Margin Tax initially assessed for 2007.





Income (Loss) from Discontinued
Operations, net of tax.  Income (loss) from discontinued
operations increased by $399, to income of $83 from a loss of $316. Income from
discontinued operations of $83 was due to the gain on sale of Valerent of $60,
operating income from Valerent and Stratasoft totaling $51, less income tax
expense of $28. The loss from discontinued operations of $316 in 2006 consisted
of a loss from operations of $1,118, partially offset by the gain on disposal of
Stratasoft in January 2006 of $302, a $469 gain from settlement of a lawsuit in
the Computer Products Division, and a $31 gain from the sale of
Valerent.





Net Income.  Net
income increased $2,540 to $3,735 from $1,195, primarily due to product and
service revenue increasing more rapidly than increase in selling, general and
administrative expenses combined with the income tax benefit of reversing the
valuation allowance related to the net operating loss carryforwards and other
temporary items and increased income from discontinued operations.





Quarterly
Results





The
following table sets forth certain unaudited quarterly financial information for
each of our last eight quarters and, in the opinion of management, includes all
adjustments (consisting of only normal recurring adjustments) that we consider
necessary for a fair presentation of the information set forth therein. Our
quarterly results may vary significantly depending on factors such as the timing
of large customer orders, timing of new product introductions, adequacy of
product supply, variations in our product costs, variations in our product mix,
promotions, seasonal influences and fluctuations in competitive pricing
pressures. The results of any particular quarter may not be indicative of
results for the full year or any future period.





2008
                      
                      
                      2007Fourth
                        Quarter
                      
                      
                      Third
                        Quarter
                      
                      
                      Second
                        Quarter
                      
                      
                      First
                        Quarter
                      
                      
                      Fourth
                        Quarter
                      
                      
                      Third
                        Quarter
                      
                      
                      Second
                        Quarter
                      
                      
                      First
                        QuarterRevenue:
                      (As
      Restated)
                      
                      
                      (As
      Restated)Products
                      $
                      51,628
                      
                      
                      $
                      59,576
                      
                      
                      $
                      51,430
                      
                      
                      $
                      50,491
                      
                      
                      $
                      48,621
                      
                      
                      $
                      45,222
                      
                      
                      $
                      46,918
                      
                      
                      $
                      39,550Services
                      
                      11,953
                      
                      
                      
                      12,366
                      
                      
                      
                      12,561
                      
                      
                      
                      9,152
                      
                      
                      
                      7,978
                      
                      
                      
                      6,776
                      
                      
                      
                      6,809
                      
                      
                      
                      6,093Total
      revenue
                      $
                      63,581
                      
                      
                      $
                      71,942
                      
                      
                      $
                      63,991
                      
                      
                      $
                      59,643
                      
                      
                      $
                      56,599
                      
                      
                      $
                      51,998
                      
                      
                      $
                      53,727
                      
                      
                      $
                      45,643Gross
      profit:Products
                      $
                      8,841
                      
                      
                      $
                      10,067
                      
                      
                      $
                      9,766
                      
                      
                      $
                      9,207
                      
                      
                      $
                      8,753
                      
                      
                      $
                      7,887
                      
                      
                      $
                      7,889
                      
                      
                      $
                      7,218Services
                      
                      3,065
                      
                      
                      
                      3,259
                      
                      
                      
                      3,986
                      
                      
                      
                      2,940
                      
                      
                      
                      2,789
                      
                      
                      
                      1,666
                      
                      
                      
                      2,156
                      
                      
                      
                      1,289Total
      gross profit
                      
                      11,906
                      
                      
                      
                      13,326
                      
                      
                      
                      13,752
                      
                      
                      
                      12,147
                      
                      
                      
                      11,542
                      
                      
                      
                      9,553
                      
                      
                      
                      10,045
                      
                      
                      
                      8,507Selling,
      general and
                        administrative
      expenses
                      
                      13,934
                      
                      
                      
                      12,595
                      
                      
                      
                      11,871
                      
                      
                      
                      10,384
                      
                      
                      
                      10,395
                      
                      
                      
                      8,543
                      
                      
                      
                      9,042
                      
                      
                      
                      8,172Impairment
      charge
                      
                      13,071
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Operating
      income (loss)
                      
                      (15,099
                      )
                      
                      
                      731
                      
                      
                      
                      1,881
                      
                      
                      
                      1,763
                      
                      
                      
                      1,147
                      
                      
                      
                      1,010
                      
                      
                      
                      1,003
                      
                      
                      
                      335Interest
      and other (income)
                        expense,
      net
                      
                      (49
                      )
                      
                      
                      (106
                      )
                      
                      
                      98
                      
                      
                      
                      73
                      
                      
                      
                      79
                      
                      
                      
                      17
                      
                      
                      
                      (41
                      )
                      
                      
                      24Income
      tax expense (benefit)
                      
                      182
                      
                      
                      
                      466
                      
                      
                      
                      680
                      
                      
                      
                      683
                      
                      
                      
                      (257
                      )
                      
                      
                      7
                      
                      
                      
                      7
                      
                      
                      
                      7Net
      income (loss) from
                        continuing
      operations
                      
                      (15,232
                      )
                      
                      
                      371
                      
                      
                      
                      1,103
                      
                      
                      
                      1,007
                      
                      
                      
                      1,325
                      
                      
                      
                      986
                      
                      
                      
                      1,037
                      
                      
                      
                      304Income
      (loss) from discontinued
                        operations,
      net of taxes
                      
                      14
                      
                      
                      
                      9
                      
                      
                      
                      10
                      
                      
                      
                      4
                      
                      
                      
                      (14
                      )
                      
                      
                      38
                      
                      
                      
                      (3
                      )
                      
                      
                      62Net
      income (loss)
                      $
                      (15,218
                      )
                      
                      $
                      380
                      
                      
                      $
                      1,113
                      
                      
                      $
                      1,011
                      
                      
                      $
                      1,311
                      
                      
                      $
                      1,024
                      
                      
                      $
                      1,034
                      
                      
                      $
                      366Income
      (loss) from continuing
                        operations
      per share:Basic
                      $
                      (1.75
                      )
                      
                      $
                      0.04
                      
                      
                      $
                      0.15
                      
                      
                      $
                      0.13
                      
                      
                      $
                      0.18
                      
                      
                      $
                      0.14
                      
                      
                      $
                      0.15
                      
                      
                      $
                      0.04Diluted
                      $
                      (1.75
                      )
                      
                      $
                      0.04
                      
                      
                      $
                      0.13
                      
                      
                      $
                      0.12
                      
                      
                      $
                      0.16
                      
                      
                      $
                      0.12
                      
                      
                      $
                      0.13
                      
                      
                      $
                      0.04Net
      income (loss) per share:Basic
                      $
                      (1.76
                      )
                      
                      $
                      0.04
                      
                      
                      $
                      0.15
                      
                      
                      $
                      0.13
                      
                      
                      $
                      0.17
                      
                      
                      $
                      0.14
                      
                      
                      $
                      0.15
                      
                      
                      $
                      0.05Diluted
                      $
                      (1.76
                      )
                      
                      $
                      0.04
                      
                      
                      $
                      0.13
                      
                      
                      $
                      0.12
                      
                      
                      $
                      0.16
                      
                      
                      $
                      0.13
                      
                      
                      $
                      0.13
                      
                      
                      $
                      0.05Shares
      used in computing net
                        income
      (loss) per share:Basic
                      
                      8,655,761
                      
                      
                      
                      8,746,691
                      
                      
                      
                      7,579,303
                      
                      
                      
                      7,550,904
                      
                      
                      
                      7,499,620
                      
                      
                      
                      7,081,511
                      
                      
                      
                      6,862,538
                      
                      
                      
                      6,662,839Diluted
                      
                      8,655,761
                      
                      
                      
                      9,338,353
                      
                      
                      
                      8,281,715
                      
                      
                      
                      8,242,191
                      
                      
                      
                      8,408,437
                      
                      
                      
                      8,037,221
                      
                      
                      
                      7,817,371
                      
                      
                      
                      7,729,681





34


As more
fully described in Note 16 to the consolidated financial statements in Part II,
Item 8, certain immaterial correcting adjustments were recorded affecting the
third and fourth quarters of 2008 which increased pre-tax expense by $50 and
$26, respectively.  The third quarter 2008 adjustment was related to
stock option modifications and the fourth quarter 2008 adjustment was related to
the accrual of outside contractor costs.





Products
revenue was consistent through 2008 except for substantially increased sales in
the third quarter, primarily due to large projects in our Northwest, National,
and North Texas Regions. The increase in services revenue during the first and
second quarters of 2008 was primarily due to higher revenue under Federal
Government subcontracts and significant services revenue increases across
substantially all regions.





The
Select, Inc. acquisition was completed in the third quarter of 2007 and
contributed revenues of $3,937 and $9,601 in the third and fourth quarters of
2007, respectively. The revenue increase between the first and second quarters
of 2007 was primarily a result of increased sales in our Austin, Los Angeles,
and Albuquerque locations. The fourth quarter of 2007 reflected the positive
margin impact of revenue recognized ($520) as a result of early cessation of the
implementation portion of a contract with IBM Corporation.





Our gross
profit has fluctuated between quarters primarily due to changes in our revenue
mix between products and services revenues and variations in Cisco vendor
rebates. The respective timing of when vendor incentives become earned and
determinable can create significant quarter to quarter gross margin
fluctuations. Services gross profit and gross margin varied primarily based on
the level of utilization of billable technical staff and the type of service
revenues generated, which can vary from period to period and result in varying
levels of gross profit and gross margin.





Selling,
general and administrative expenses fluctuate between quarters primarily due to
variations in sales compensation directly related to fluctuations in the amount
of gross profit and variations in bonus compensation due executives and managers
resulting from fluctuations in quarterly profitability. The fourth quarter of
2008 included an $13,071 impairment charge discussed further in Note 4 to
consolidated financial statements in Part II, Item 8, bad debt expense
of $566, severance costs of $202, and lawsuit settlement costs of $140. The
fourth quarter of 2007 included an adjustment of $167 for the accrual of
vacation pay.





Critical
Accounting Policies





Revenue
Recognition





We have a
number of different revenue sources for which revenue is recognized differently
based on the following policies:





Products revenueoccurs when
products manufactured or otherwise provided by other parties are purchased and
resold to a customer and product payment is not contingent upon performance of
installation or service obligations. If product acceptance and payment are
contingent on installation or service obligations as specified in the customer
contract, revenue is not recognized until installation occurs. Revenue is
recognized from the sales of hardware when the rights and risks of ownership
have passed to the customer and upon shipment or receipt by the customer,
depending on the terms of the sales contract with the customer. We recognize
revenue when persuasive evidence of an arrangement exists, delivery has occurred
or services have been rendered, the price is fixed or determinable, and
collectability is reasonably assured. Amounts billed to customers for shipping
and handling are classified as revenue.





We sell
hardware maintenance contracts that are serviced and supported solely by a third
party, who is the primary obligor of these contracts. There are multiple factors
under Emerging Issues Task Force Issue No. 99-19, “Reporting Revenue Gross
as a Principal versus Net as an Agent,” or EITF 99-19, but the primary
obligor is a strong factor in determining whether we act as a principal or agent
and whether gross or net revenue presentation is appropriate. As we have
concluded that we are more of an agent in the sale of hardware maintenance
contracts, revenue is reported net of the cost of the hardware maintenance
contracts from the third party.





For
arrangements where the customer agrees to purchase products but we retain
possession until the customer requests shipment, or “bill and hold”
arrangements, revenue is not recognized until delivery to the customer has
occurred and all other revenue recognition criteria have been met.





Softwareis accounted for in
accordance with Statement of Position No. 97-2, “Software Revenue
Recognition,” and all related interpretations. Revenue from the sales of
software not requiring significant modification or customization is recognized
upon delivery or installation. Installation services for third party software do
not include significant alterations to its features or functionality. Third
party software vendors provide all post-contract support for software sold.
Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and collectability is
reasonably assured.





35


Technical support services
revenue, consisting of remote monitoring and management of customers’ IP
telephony and network infrastructure equipment and applications, is recognized
ratably over the term of the underlying customer contract. Commission costs paid
in advance are deferred and recognized ratably over the term of the underlying
customer contract.





Revenue for fixed and flat fee
services contractsrelated to customized network and IP telephony
solutions are recognized under a proportional performance model utilizing an
input based approach (labor hours). Our contracts function similar to a time and
materials type contract and generally do not specify or quantify interim
deliverables or milestones. Such service contracts encompass the design and
installation of IP telephony and computer networks under which customers receive
the benefit of services provided over the period of contract
performance.





Other service revenueis
earned from providing stand-alone services such as billings for engineering and
technician time, installation and programming services, which are provided on
either an hourly basis or a flat-fee basis, and the service component of
maintenance and repair service ticket transactions. These services are
contracted for separately from any product sale. Other service revenues are
recognized when the service is performed and when collection is reasonably
assured. Revenue arrangements generally do not include specific customer
acceptance criteria. In instances where final acceptance of the system or
solution is specified by the customer, revenue is deferred until all acceptance
criteria have been met.





Arrangements with multiple
deliverablesare arrangements under which a combination of products and
services are provided to customers. Such arrangements are evaluated under
Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with
Multiple Deliverables,” (“EITF 00-21”), which addresses certain aspects of
accounting by a vendor for arrangements under which the vendor will perform
multiple revenue generating activities. The application of the appropriate
accounting guidance requires judgment and is dependent upon the specific
transaction and whether the sale includes hardware, software, services or a
combination of these items.





We enter
into product and service contracts for customers that are generally considered a
single arrangement and which include separate units of accounting for product
and for service. Product primarily consists of IP telephony and computer network
infrastructure components and third party software. Service encompasses the
design and installation of IP telephony and computer networks and installation
of third party software. Installation services for third party software do not
include significant alterations to its features or functionality. All products
and services are regularly sold separately. For products and services sold in a
single arrangement, the product is typically delivered first and the related
services are completed within four to six weeks. Product is shipped, billed, and
recognized as revenue independent of services because:





•
            The
      customer is required to pay the product billing in its entirety
      independent of any services
performed.





•
            The
      product has value to the customer on a standalone basis and pricing is
      comparable whether sold with or without
  services.





•
            The
      product is standard equipment not significantly altered by
      installation.





•
            Installation
      of the product can be performed by many other
  companies.





•
            Although
      there is a general right of return relative to delivered product, delivery
      of the undelivered items is considered probable and is substantially in
      our control.





We sell
comparable products and services on a standalone basis and under multiple
element arrangements at similar prices. Stand alone pricing is vendor-specific
objective evidence under EITF 00-21. If objective and reliable evidence
exists for the fair value of all items in a multiple element arrangement, we
recognize revenue based on the relative fair value of the separate elements.
When there is objective and reliable evidence for the fair values of undelivered
items but no such evidence exists for the items already delivered, the amount of
revenue allocated to the delivered items is computed on the residual method.
Customers are not required to and frequently do not select the same vendor for
product and service. The customers’ decision does not impact the pricing of the
portion of the bid selected.





Contracts
and customer purchase orders are generally used to determine the existence of an
arrangement. Shipping documents and customer acceptance, when applicable, are
used to verify delivery. Determination that the fee is fixed or determinable is
based on the payment terms associated with the transaction and whether the sales
price is subject to refund or adjustment. Accruals for estimated sales returns
and other allowances and deferrals are recorded as a reduction of revenue at the
time of revenue recognition. These provisions are based on contract terms and
prior claims experience and involve significant estimates. If these estimates
are significantly different from actual results, our revenue could be
impacted.





We
maintain allowances for doubtful accounts receivable for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances might be
required.





36


Credit
and collections policy inherent in our revenue recognition policy is the
determination of the collectibility of amounts due from our customers, which
requires us to use estimates and exercise judgment. We routinely monitor our
customer’s payment history and current credit worthiness to determine that
collectability is reasonably assured and, then in some instances, require
letters of credit in support of contracted amounts.





This
requires us to make frequent judgments and estimates in order to determine the
appropriate period to recognize a sale to a customer and the amount of valuation
allowances required for doubtful accounts. We record provisions for doubtful
accounts when it becomes evident that the customer will not be able to make the
required payments either at contractual due dates or in the future. Changes in
the financial condition of our customers, either adverse or positive, could
impact the amount and timing of any additional provision for doubtful accounts
that may be required.





Vendor
Incentive Recognition





We
participate in vendor incentive programs, including a significant vendor
incentive program with our primary vendor, Cisco. These incentives are generally
earned based on sales volume and customer satisfaction levels. The amounts
earned under these programs are accrued when they are deemed probable and can be
reasonably measured; otherwise, they are recorded when they are declared by the
vendor or the cash is received, whichever is earlier. As a result of these
estimates, the amount of rebates declared by the vendor, or the amount of
rebates received in cash, the effect of vendor incentives on cost of goods can
vary significantly between quarterly and annual reporting periods. Failure to
achieve the requirements set by the vendor to earn a particular incentive could
result in us not receiving a vendor incentive and result in lower gross margin
on our product sales revenue. The incentives are recorded as a reduction of cost
of goods. Selling, general and administrative expenses are increased for any
associated commission expense and payroll tax related to the
incentives.





Share-Based
Compensation Expense





We
account for share-based compensation in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment,”
(“SFAS 123R”) which requires the measurement and recognition of
compensation expense based on estimated fair values for share-based payment
awards. In December 2007, the Securities and Exchange Commission (“SEC”) issued
Staff Accounting Bulletin No. 110 (“SAB 110”) to extend the use
of “simplified method” for estimating the expected term of “plain vanilla”
employee stock options for award valuation. The method was initially allowed
under Staff Accounting Bulletin No. 107 (“SAB 107”) in
contemplation of the adoption of SFAS 123(R) to expense the compensation
cost based on the grant date fair value of the award. SAB 110 does not
provide an expiration date for the use of the method. However, as more external
information about exercise behavior will be available over time, it is expected
that this method will not be used when more relevant guidance is
available.





SFAS 123R
requires all share-based payments to be recognized in the results of operations
at their grant-date fair values. We adopted SFAS 123R using the modified
prospective transition method, which requires the application of the accounting
standard as of January 1, 2006, the first day of our 2006 fiscal year.
Under this transition method, compensation cost recognized in 2006 includes:
(a) compensation cost for all share-based payments granted prior to but not
yet vested as of December 31, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123, and
(b) compensation cost for all share-based payments granted subsequent to
December 31, 2005, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123R. In accordance with the
modified prospective method of adoption, our results of operations and financial
position for prior periods have not been restated.





We use
the Black-Scholes option pricing model to calculate the grant-date fair value of
an award. The fair value of options granted during the 2008, 2007 and 2006
periods were calculated using the following estimated weighted average
assumptions:





2008
              2007
              2006Expected
      volatility
              61.1%
              60.3%
              63.1%Expected
      term (in years)
              6.5
              6.5
              6.3Risk-free
      interest rate
              2.8%
              4.4%
              4.7%Expected
      dividend yield
              0%
              0%
              0%





Expected
volatility is based on historical volatility over the period our current
operations represented our primary line of business. We use the simplified
method outlined in SAB 110 to estimate expected lives for options granted
during the period. The risk-free interest rate is based on the yield on
zero-coupon U.S. Treasury securities for a period that is commensurate with
the expected term assumption. We have not historically issued any dividends and
do not expect to in the future.





We use
the straight-line attribution method to recognize expense for unvested options.
The amount of share-based compensation recognized during a period is based on
the value of the awards that are ultimately expected to vest. SFAS 123R
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. We will re-evaluate the forfeiture rate annually and adjust it as
necessary, and the adjustments could be material.





Goodwill





We test
our recorded goodwill annually for impairment as of the end of our fiscal year
as well as whenever events or changes in circumstances indicate that the
carrying value may not be recoverable, in accordance with FASB Statement No.
142, Goodwill and Other
Intangibles Assets (“SFAS 142”). Circumstances that could trigger an
interim impairment test include but are not limited to: a significant adverse
change in the business climate or legal factors; an adverse action or assessment
by a regulator; unanticipated competition; loss of key personnel; the likelihood
that a reporting unit or significant portion of a reporting unit will be sold or
otherwise disposed; or results of testing for recoverability of a significant
asset group within a reporting unit.





37


The
goodwill impairment test consists of a two-step process.  Step 1 of
the impairment test involves comparing the fair values of the applicable
reporting units with their carrying values, including goodwill. If the carrying
amount of a reporting unit exceeds the reporting unit’s fair value, we perform
Step 2 of the goodwill impairment test to determine the amount of impairment
loss. Step 2 of the goodwill impairment test involves comparing the implied fair
value of the affected reporting unit’s goodwill against the carrying value of
that goodwill.  In performing the first step of the impairment test,
we reconcile the aggregate estimated fair value of our reporting units to our
market capitalization (together with an implied control premium).




SFAS 142
requires the testing of goodwill for impairment be performed at a level referred
to as a reporting unit. We currently have twelve reporting units based primarily
on our geographical regions, of which eleven reporting units have goodwill
assigned.  Goodwill is assigned based on (1) goodwill incurred in the
purchase of the reporting unit and (2) goodwill allocated to reporting units
existing at the time of an acquisition and directly benefiting from the business
combination.





To
estimate the fair value of our reporting units, we use the income approach and
the market approach.  Once the fair value of each reporting unit is
determined under each valuation method, we apply a weighting of 90% to the
income approach and 10% to the market approach. We place greater reliance on the
income approach because we believe the discounted cash flow projections are a
more reliable methodology.





The
income approach is based on a discounted cash flow analysis (“DCF”) and
calculates the fair value by estimating the after-tax cash flows attributable to
a reporting unit and then discounting the after-tax cash flows to a present
value using a risk-adjusted discount rate. Assumptions used in the DCF require
the exercise of significant judgment, including judgment about appropriate
discount rates and terminal values, growth rates, and the amount and timing of
expected future cash flows. The forecasted cash flows are based on our most
recent budget and for years beyond the budget, the estimates are based on
assumed growth rates. We believe the assumptions are consistent with the plans
and estimates used to manage the underlying businesses. The discount rates,
which are intended to reflect the risks inherent in future cash flow
projections, used in the DCF are based on estimates of the weighted-average cost
of capital (“WACC”) of a market participant relative to each respective
reporting unit. Such estimates are derived from our analysis of peer companies
and considered the industry weighted average return on debt and equity from a
market participant perspective for its reporting units.  Specific
assumptions used were as follows:




December
      31, 2008
                
                December
      31, 2007Weighted
      average cost of capital
                28.4
      - 28.7%
                
                21.7
      – 25.1%Compound
      annual revenue growth rate for five years
                (9.9)
      - 32.7%
                
                13.8
      – 22.1%Terminal
      year stable growth rate
                3.5
      – 4.0%
                
                4.0%





The
market approach considers comparable market data based on multiples of revenue,
gross profit, earnings before taxes, depreciation and amortization (“EBITDA”),
and net income. We believe the assumptions used to determine the fair value of
our respective reporting units are reasonable. If different assumptions were
used, particularly with respect to forecasted cash flows, WACCs, or market
multiples, different estimates of fair value may result and there could be the
potential that an impairment charge could result. Actual operating results and
the related cash flows of the reporting units could differ from the estimated
operating results and related cash flows. The valuation multiples calculated
were as follows, where MVIC represents the market value of invested capital
(market capitalization plus interest bearing debt):




December
      31, 2008
                
                December
      31, 2007MVIC/Revenues
                0.17x
                
                N/AMVIC/Gross
      profit
                0.83x
                
                1.1xMVIC/EBITDA
                4.75x
                
                12.5xMarket
      cap/Net income
                10.23x
                
                16.2x





The 2008
impairment charges for the reporting units are primarily attributable to the
assumption of higher discount rates and lower projected future cash flows as
compared to those used in the annual impairment test performed in 2007. The
higher discount rates for the three reporting units, which ranged from 28.4% to
28.7% compared to 21.7% to 25.1% used the previous year, reflect an increase in
the risks inherent in the estimated future cash flows and the higher rate of
return a market participant would require based on the current macro-economic
environment.





As of
December 31, 2008, the North Texas, Central Texas, Federal, and National
reporting units with goodwill totaling $1,940, had estimated fair values
exceeding their carrying values by a minimum of 70 percent. The Southwest, Gulf
Coast, and Southern California reporting units with goodwill totaling $4,323,
had estimated fair values exceeding their carrying values by 9 to 15 percent.
The NetTeks and VocalMash reporting units with goodwill totaling $504 had
carrying values that approximated fair value as these reporting units were
recently acquired. Lastly ,the Northwest, New England, and Northern California
reporting units with goodwill totaling $5,983, had estimated fair values which
approximated their carrying values as a result of the impairment charge recorded
at December 31, 2008.  During 2009 the National reporting unit was
merged into the Gulf Coast reporting unit and the NetTeks reporting unit was
merged into the New England reporting unit.




38




With the
exception of potential regional economic differences, the fair value of all of
our reporting units are primarily affected by the forecasted demand and spending
on technology products in our principal markets which are:  network
infrastructure, unified communications and data center products and
services.  Some of the inherent assumptions and estimates used in
determining the estimated fair value of these reporting units are outside the
control of management, including interest rates, cost of capital, and tax
rates.  It is possible that changes in circumstances, existing at the
measurement date or at other times in the future, or in the numerous estimates
associated with management’s judgments, assumptions and estimates made in
assessing the fair value of our goodwill, may result in an impairment charge of
a portion or all of the goodwill amounts previously noted.  If we
record an impairment charge, our financial position and results of operations
could be adversely affected.





For
illustrative purposes, had the December 31, 2008 fair values of each reporting
unit been lower by 10%, an additional goodwill impairment charge of $2,108 would
have been recorded. Our goodwill balance was $12,751 as of December 31, 2008 and
$16,603 at December 31, 2007.





Impairment
of Long-Lived Assets





We record
impairment losses on long-lived assets, such as amortizable intangible assets
and property and equipment, when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those
assets.  Evaluation of long-lived assets for impairment is performed
at the asset group level, which represents the lowest level for which
identifiable cash flows are largely independent of the cash flows of other
groups of assets and liabilities.  Our asset group level corresponds
to the same level as the reporting units used in our goodwill impairment
testing.





Liquidity
and Capital Resources





Sources
of Liquidity





Our
principal sources of liquidity are collections from our accounts receivable and
our credit facility with Castle Pines Capital (the “Credit Facility”), which we
believe are sufficient to meet our short-term and long-term liquidity
requirements. We use the Credit Facility to finance the majority of our
purchases of inventory, and to provide working capital when our cash flow from
operations is insufficient. In 2008, we eliminated borrowings under the
interest-bearing portion of our Credit Facility. Our working capital increased
to $14,173 at December 31, 2008 from $9,833 at December 31, 2007 as a
result of improved operating results excluding noncash charges and the
registered direct offering discussed below.





To give
us greater flexibility to efficiently raise capital and put us in a position to
take advantage of favorable market conditions as they arise, we filed a shelf
registration statement on Form S-3 for primary offerings of securities. The
shelf registration provides the ability to offer and sell, from time to time, in
one or more offerings, shares of our common stock and/or warrants to purchase
common stock for proceeds in the aggregate amount up to $100 million. The
terms of any offering under this registration statement will be established at
the time of the offering and will be stated in a prospectus supplement if and
when we decide to sell securities under the shelf registration statement. We
currently intend to use the net proceeds from any offering under the shelf
registration statement for working capital and other general corporate purposes,
and to fund the acquisition of companies, businesses, technologies, products or
assets, as set forth in the registration statement. In June, 2008, we sold
900,000 shares of common stock through a registered direct offering to
certain institutional investors at a price of $11.00 per share. The net cash
proceeds, after deducting the placement agent’s fee and other offering expenses
of $1,149, were approximately $8,751. The net cash proceeds were partially used
to repay the $6,000 outstanding balance under the Acquisition Facility, with the
remainder to be used for general corporate purposes including possible future
acquisitions.





Accounts
Receivable.  The timing of our collection of accounts
receivable is a significant influence on our cash flow from operations. We
typically sell our products and services on short-term credit terms. We try to
minimize our credit risk by performing credit checks, obtaining letters of
credit in certain instances, and conducting our own collection efforts. Our
accounts receivable, net of allowance for doubtful accounts, were $52,866 and
$45,128 at December 31, 2008 and 2007, respectively. The increase in
accounts receivable was attributable to significantly higher sales in the fourth
quarter of 2008 compared to 2007 partially offset by improved
collections.





Inventory.  We had
inventory of $2,406 and $1,439 at December 31, 2008 and 2007, respectively.
The higher level of 2008 inventory is attributable to customer orders to be
shipped in the first quarter of 2009. We try to minimize the amount of inventory
on hand to reduce the risk that the inventory will become obsolete or decline in
value. We are able to do this by relying on the ready availability of products
from our principal suppliers. As noted above, we rely principally on our Credit
Facility to finance our inventory purchases.





39




Accounts Payable and Floor Plan
Financing.  We rely on our Credit Facility to finance a
substantial portion of our inventory purchases under terms ranging from 30 to
60 days. Credit Facility balances within terms are non-interest bearing and
classified as floor plan financing in our balance sheet. Credit Facility
balances outstanding in excess of terms are interest bearing and classified as
notes payable in our balance sheet, of which there was no balance outstanding at
December 31, 2008.  The total of accounts payable and floor plan
financing were $45,172 and $37,186 at December 31, 2008 and 2007,
respectively. The increase was attributable to significantly increased purchases
directly related to increased sales in the fourth quarter of 2008 compared to
2007.





Credit
Facility.  On June 3, 2008, the Company amended its senior
credit facility agreement (“Agreement”) with Castle Pines Capital LLC (“CPC”)
which provides inventory financing and working capital funding. Key terms of the
Agreement are summarized as follows:





•
            The
      Agreement provides a discretionary line of credit up to a maximum
      aggregate amount of $60,000 to purchase inventory from CPC approved
      vendors.





•
            The
      Agreement provides a working capital revolving line of credit under the
      above line of credit with an aggregate outstanding sublimit of
      $10,000.





•
            The
      working capital revolving line of credit incurs interest payable monthly
      at the rate of prime plus 0.5%.





•
            The
      Agreement contains customary covenants regarding maintenance of insurance
      coverage, maintenance of and reporting collateral, and submission of
      financial statements. The Agreement also contains covenants measured as of
      the end of each calendar quarter covering required maintenance of minimum
      current ratio, tangible net worth, working capital, and total liabilities
      to tangible net worth ratio (all as defined in the Agreement, as
      amended).





•
            The
      credit facility is collateralized by substantially all assets of the
      Company.





•
            The
      term of the Agreement is for one year, with automatic renewals for one
      year periods, except as otherwise provided under the
      Agreement.





The
senior credit facility also provides an additional $10,000 credit facility
specifically for acquisitions (“Acquisition Facility”). Key terms of the
Amendment are summarized as follows:





•
            $10,000
      maximum aggregate commitment for
acquisitions.





•
            Advances
      under the Acquisition Facility are not to exceed 80% of purchase price or
      six times adjusted EBITDA, as defined in the Amendment, for the twelve
      months immediately preceding the acquisition closing
  date.





•
            Interest
      is payable at the rate of prime plus
2%.





•
            An
      acquisition commitment fee of 1% of the advance amount is payable with
      one-eighth paid at closing and seven-eighths paid with each loan
      funding.





•
            Repayment
      of each advance under the Acquisition Facility is interest only for first
      year then amortizing for 36 to 48 months, to be determined for each
      advance, with no penalty to prepay any principal balance. The loan will
      also be reduced annually by an amount equal to 25% of excess cash flow, as
      defined in the Amendment, beginning December 31,
  2008.





•
            CPC
      may negotiate with the Company to revise existing financial covenants in
      conjunction with each advance as
required.





•
            Termination
      date of the senior credit facility was extended to August 1, 2009,
      subject to automatic renewal as defined in the
  Amendment.





As of
December 31, 2008, borrowing capacity and availability under the Credit
Facility was as follows:





Total
      Credit Facility
                  
                  $
                  60,000Borrowing
      base limitation
                  
                  
                  (16,873
                  )Total
      borrowing capacity
                  
                  
                  43,127Less
      interest-bearing borrowings
                  
                  
                  —Less
      non-interest bearing advances
                  
                  
                  (40,002
                  )Total
      unused availability
                  
                  $
                  3,125





40


The
“unused availability” is the amount not borrowed, but eligible to be borrowed.
The borrowing base restrictions generally restrict our borrowings under the
Credit Facility to 85% of the eligible receivables, 100% of our Floorplanned
inventory and 75% of Cisco vendor rebates receivable.





We use
the Credit Facility to finance purchases of Cisco products from Cisco and from
certain wholesale distributors. Cisco provides 60-day terms, and other wholesale
distributors typically provide 30-day terms. Balances under the Credit Facility
that are within those respective 60-day and 30-day periods (the “Free Finance
Period”) do not accrue interest and are classified as floor plan financing in
our balance sheet.





To the
extent that we have credit availability under the Credit Facility, it gives us
the ability to extend the payment terms past the Free Finance Period. Amounts
extended past the Free Finance Period accrue interest and are classified as
notes payable on our balance sheet, for which there was no balance outstanding
at December 31, 2008. These extended payment balances under the Credit Facility
accrue interest at the prime rate (3.25% at December 31, 2008) plus
0.5%.





As
defined in the Credit Facility there are restrictive covenants that are measured
at each quarter and year end. The covenants effective June 3, 2008, require
us to:





•
            maintain
      Minimum Tangible Net Worth of
$8.0 million;





•
            maintain
      a maximum Debt to Tangible Net Worth ratio of 7.0 to
  1;





•
            maintain
      Minimum Working Capital of not less than
      $6.5 million; and





•
            maintain
      a Current Ratio of not less than 1.10 to
1.0.





At
December 31, 2008, we were in compliance with the loan covenants, and we
anticipate that we will be able to comply with the loan covenants during the
next twelve months. If we violate any of the loan covenants, we would be
required to seek waivers from CPC for those non-compliance events. If CPC
refused to provide waivers, the amount due under the Credit Facility could be
accelerated and we could be required to seek other sources of
financing.





Cash Flows.  During
2008, our cash increased by $1,597. Operating activities used $1,209, investing
activities used $6,321 and financing activities provided $9,127.





Operating
Activities.  Operating activities used $1,209 in 2008 as
compared to providing $3,544 in 2007 and using cash of $16,688 in 2006.
Adjustments for non-cash-related items in 2008 of $17,463 including $13,071 from
an impairment charge, $2,667 from depreciation and amortization and $1,615 from
share-based compensation, and deferred income tax expense of $535, partially
offset by excess tax benefits from stock option exercises of $1,107. Changes in
asset and liability accounts used $5,976. The most significant use was accounts
receivable which used $8,279 due to increased sales.





Investing
Activities.  Investing activities used $6,321 in 2008 compared
to the use of $5,584 in 2007 and $2,606 in 2006. Investing activities related to
cash paid for acquisitions were $4,062 in 2008, $4,011 in 2007, and $2,177 in
2006. Our investing activities related to capital expenditures in all three
years were primarily related to purchases of computer equipment and software,
and to a lesser degree, leasehold improvements. Discontinued operations provided
cash from investing activities in 2006 of $1,492 as a result of the sales of
Stratasoft and Valerent.





Financing
Activities.  Financing activities provided $9,127 in 2008
compared to providing $9,585 in 2007 and providing $18,492 in 2006. Financing
activities in 2008 included common stock issued through a registered direct
offering ($8,751), the proceeds of which were partially used to repay the 2007
borrowings for the Select, Inc. acquisition ($6,000). Net borrowings under floor
plan financing provided cash of $7,530 in 2008, $6,481 in 2007, and $15,978 in
2006.  Borrowings under the Credit Facility used cash of $4,350 in
2007 and provided cash of $1,886 in 2006. There were no borrowings in 2008.
Stock option holders exercised stock options, which provided cash of $831,
$1,449, and $613 in 2008, 2007, and 2006, respectively.





41




Recent
Accounting Pronouncements





In June
2008, the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities”(“FSP
EITF 03-6-1”). FSP EITF 03-6-1 clarified that all outstanding unvested
share-based payment awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders. Awards of this
nature are considered participating securities and the two-class method of
computing basic and diluted EPS must be applied. FSP EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008. The Company
is currently assessing the impact of FSP EITF 03-6-1 and anticipates any
impact to basic earnings per share will be immaterial.





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





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”
(SFAS 141R). The purpose of issuing the statement is to replace current
guidance in SFAS 141 to better represent the economic value of a business
combination transaction. The changes to be effected with SFAS 141R from the
current guidance include, but are not limited to: (1) acquisition costs
will be recognized separately from the acquisition; (2) known contractual
contingencies at the time of the acquisition will be considered part of the
liabilities acquired measured at their fair value; all other contingencies will
be part of the liabilities acquired measured at their fair value only if it is
more likely than not that they meet the definition of a liability;
(3) contingent consideration based on the outcome of future events will be
recognized and measured at the time of the acquisition; (4) business
combinations achieved in stages (step acquisitions) will need to recognize the
identifiable assets and liabilities, as well as noncontrolling interests, in the
acquiree, at the full amounts of their fair values; and (5) a bargain
purchase (defined as a business combination in which the total acquisition-date
fair value of the identifiable net assets acquired exceeds the fair value of the
consideration transferred plus any noncontrolling interest in the acquiree) will
require that excess to be recognized as a gain attributable to the acquirer. The
Company does anticipate that the adoption of SFAS 141R will have a future
impact on the way in which business combinations will be accounted for compared
to current practice. SFAS 141R is effective for the Company beginning
January 1, 2009. Early adoption is not permitted.





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





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





42


Item 7A.Quantitative and
Qualitative Disclosures About Market Risk





Interest
Rate Risk





We
attempt to manage our borrowings under our senior credit facility (“Senior
Facility”) and under our acquisition facility (“Acquisition Facility”) with
Castle Pines Capital LLC to minimize interest expense. The interest rate of the
Senior Facility is the prime rate plus 0.5% and the interest rate of the
Acquisition Facility is the prime rate plus 2.0% (see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Liquidity and Capital Resources”). During the year ended December 31, 2008,
there were no borrowings under the Senior Facility and the interest rates of
borrowings under the Acquisition Facility ranged from 5.5% to 7.75%. A one
percent change in variable interest rates will not have a material impact on our
results of operations or cash flows.





Item 8.Financial Statements and
Supplementary Data





INX
INC. AND SUBSIDIARIES





INDEX
TO THE CONSOLIDATED FINANCIAL STATEMENTS


AND
FINANCIAL STATEMENT SCHEDULE





PageReport
      of Independent Registered Public Accounting Firm
                44Consolidated
      Balance Sheets at December 31, 2008 and 2007
                45Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007
      and 2006
                46Consolidated
      Statements of Stockholders’ Equity for the years ended December 31,
      2008, 2007 and 2006
                47Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007
      and 2006
                48Notes
      to Consolidated Financial Statements
                50Schedule II
      Valuation and Qualifying Accounts
                73





43


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Stockholders


INX
Inc.





We have
audited the accompanying consolidated balance sheets of INX Inc. (a Delaware
corporation) and subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2008.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of internal control
over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of INX Inc. and subsidiaries as
of December 31, 2008 and 2007, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America.





As
described in Note 16 to the consolidated financial statements, the consolidated
balance sheets for 2008 and 2007 and the consolidated cash flow statements for
2008, 2007 and 2006 have been restated to reflect floor plan borrowing and
repayments as financing cash flows.  The consolidated statement of
operations for the year ended December 31, 2008 has also been restated to record
two immaterial adjustments.





/s/  GRANT
THORNTON LLP





Houston,
Texas


March 4,
2009, except for Note 16,


as to
which the date is September 2, 2009





44
 
 INX
INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share and par value amounts)





December 31,2008
                        
                        
                        2007(As
      Restated, Note 16)
                        
                        
                        (As
      Restated, Note 16)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                        
                        $
                        10,937
                        
                        
                        $
                        9,340Accounts
      receivable — trade, net of allowance of $735 and $470
                        
                        
                        52,866
                        
                        
                        
                        45,128Inventory,
      net
                        
                        
                        2,406
                        
                        
                        
                        1,439Deferred
      income taxes
                        
                        
                        —
                        
                        
                        
                        2,100Other
      current assets
                        
                        
                        1,275
                        
                        
                        
                        2,062Total
      current assets
                        
                        
                        67,484
                        
                        
                        
                        60,069Property
      and equipment, net of accumulated depreciation of $5,429 and
      $3,728
                        
                        
                        5,207
                        
                        
                        
                        4,421Goodwill
                        
                        
                        12,751
                        
                        
                        
                        16,603Intangible
      assets, net of accumulated amortization of $2,346 and
    $1,592
                        
                        
                        1,852
                        
                        
                        
                        3,148Total
      assets
                        
                        $
                        87,294
                        
                        
                        $
                        84,241LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Notes
      payable
                        
                        $
                        91
                        
                        
                        $
                        6,200Current
      portion of capital lease obligations
                        
                        
                        77
                        
                        
                        
                        —Accounts
      payable
                        
                        
                        5,170
                        
                        
                        
                        4,714Floor
      plan financing
                        
                        
                        40,002
                        
                        
                        
                        32,472Accrued
      payroll and related costs
                        
                        
                        4,258
                        
                        
                        
                        3,788Accrued
      expenses
                        
                        
                        2,641
                        
                        
                        
                        1,622Other
      current liabilities
                        
                        
                        1,072
                        
                        
                        
                        1,440Total
      current liabilities
                        
                        
                        53,311
                        
                        
                        
                        50,236Long-term
      liabilities:Long-term
      portion of capital lease obligations
                        
                        
                        163
                        
                        
                        
                        —Deferred
      income taxes
                        
                        
                        —
                        
                        
                        
                        1,565Other
      long-term liabilities
                        
                        
                        250
                        
                        
                        
                        413Total
      long-term liabilities
                        
                        
                        413
                        
                        
                        
                        1,978Commitments
      and ContingenciesStockholders’
      Equity:Preferred
      stock, $.01 par value, 5,000,000 shares authorized, no shares
      issued
                        
                        
                        —
                        
                        
                        
                        —Common
      stock, $.01 par value, 15,000,000 shares authorized, 8,709,304
      and 7,548,892 issued
                        
                        
                        87
                        
                        
                        
                        75Additional
      paid-in capital
                        
                        
                        50,742
                        
                        
                        
                        36,497Accumulated
      deficit
                        
                        
                        (17,259
                        )
                        
                        
                        (4,545
                        )Total
      stockholders’ equity
                        
                        
                        33,570
                        
                        
                        
                        32,027Total
      liabilities and stockholders’ equity
                        
                        $
                        87,294
                        
                        
                        $
                        84,241





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





45


INX
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except share and par value amounts)








Year Ended
December 31,2008
                    
                    
                    2007
                    
                    
                    2006(As
      Restated, Note 16)Revenue:Products
                    
                    $
                    213,125
                    
                    
                    $
                    180,311
                    
                    
                    $
                    135,317Services
                    
                    
                    46,032
                    
                    
                    
                    27,656
                    
                    
                    
                    20,696Total
      revenue
                    
                    
                    259,157
                    
                    
                    
                    207,967
                    
                    
                    
                    156,013Cost
      of goods and services:Products
                    
                    
                    175,244
                    
                    
                    
                    148,564
                    
                    
                    
                    110,185Services
                    
                    
                    32,782
                    
                    
                    
                    19,756
                    
                    
                    
                    15,331Total
      cost of goods and services
                    
                    
                    208,026
                    
                    
                    
                    168,320
                    
                    
                    
                    125,516Gross
      profit
                    
                    
                    51,131
                    
                    
                    
                    39,647
                    
                    
                    
                    30,497Selling,
      general and administrative expenses
                    
                    
                    48,784
                    
                    
                    
                    36,152
                    
                    
                    
                    28,710Impairment
      charge
                    
                    
                    13,071
                    
                    
                    
                    —
                    
                    
                    
                    —Operating
      (loss) income
                    
                    
                    (10,724
                    )
                    
                    
                    3,495
                    
                    
                    
                    1,787Interest
      expense
                    
                    
                    (330
                    )
                    
                    
                    (354
                    )
                    
                    
                    (273
                    )Interest
      income
                    
                    
                    357
                    
                    
                    
                    286
                    
                    
                    
                    42Other
      expense, net
                    
                    
                    (43
                    )
                    
                    
                    (11
                    )
                    
                    
                    (1
                    )(Loss)
      income from continuing operations before income taxes
                    
                    
                    (10,740
                    )
                    
                    
                    3,416
                    
                    
                    
                    1,555Income
      tax expense (benefit)
                    
                    
                    2,011
                    
                    
                    
                    (236
                    )
                    
                    
                    44Net
      (loss) income from continuing operations
                    
                    
                    (12,751
                    )
                    
                    
                    3,652
                    
                    
                    
                    1,511(Loss)
      income from discontinued operations, net of taxes
                    
                    
                    37
                    
                    
                    
                    83
                    
                    
                    
                    (316
                    )Net
      (loss) income
                    
                    $
                    (12,714
                    )
                    
                    $
                    3,735
                    
                    
                    $
                    1,195Net
      (loss) income per share:Basic:Net
      (loss) income from continuing operations
                    
                    $
                    (1.56
                    )
                    
                    $
                    0.52
                    
                    
                    $
                    0.24(Loss)
      income from discontinued operations, net of taxes
                    
                    
                    —
                    
                    
                    
                    0.01
                    
                    
                    
                    (0.05
                    )Net
      (loss) income per share
                    
                    $
                    (1.56
                    )
                    
                    $
                    0.53
                    
                    
                    $
                    0.19Diluted:Net
      (loss) income from continuing operations
                    
                    $
                    (1.56
                    )
                    
                    $
                    0.45
                    
                    
                    $
                    0.21(Loss)
      income from discontinued operations, net of taxes
                    
                    
                    —
                    
                    
                    
                    0.02
                    
                    
                    
                    (0.05
                    )Net
      (loss) income per share
                    
                    $
                    (1.56
                    )
                    
                    $
                    0.47
                    
                    
                    $
                    0.16Shares
      used in computing net income (loss) per share:Basic
                    
                    
                    8,133,165
                    
                    
                    
                    7,026,623
                    
                    
                    
                    6,318,674Diluted
                    
                    
                    8,133,165
                    
                    
                    
                    8,027,286
                    
                    
                    
                    7,293,737





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





46
 
 INX
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


(In
thousands, except share and par value amounts)





$.01 Par
      Value
                                  
                                  
                                  AdditionalCommon Stock
                                  
                                  
                                  Paid-In
                                  
                                  
                                  AccumulatedShares
                                  
                                  
                                  Amount
                                  
                                  
                                  Capital
                                  
                                  
                                  Deficit
                                  
                                  
                                  Total(As
      Restated, Note 16)
                                  
                                  
                                  (As
      Restated, Note 16)
                                  
                                  
                                  (As
      Restated, Note 16)Balance
      at December 31, 2005
                                  
                                  
                                  5,975,626
                                  
                                  
                                  $
                                  60
                                  
                                  
                                  $
                                  27,546
                                  
                                  
                                  $
                                  (9,600
                                  )
                                  
                                  $
                                  18,006Cumulative effect of correction of accounting for professional fees as
      provided under SAB 108
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  125
                                  
                                  
                                  
                                  125Balance at January 1, 2006
                                  
                                  
                                  5,975,626
                                  
                                  
                                  
                                  60
                                  
                                  
                                  
                                  27,546
                                  
                                  
                                  
                                  (9,475
                                  )
                                  
                                  
                                  18,131Exercise of common stock options and other
                                  
                                  
                                  332,859
                                  
                                  
                                  
                                  3
                                  
                                  
                                  
                                  610
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  613Issuance of shares for Datatran acquisition
                                  
                                  
                                  73,108
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  514
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  515Issuance of shares as additional purchase price consideration for Network
      Architects acquisition
                                  
                                  
                                  97,413
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  570
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  571Issuance of shares as additional purchase price consideration for
      InfoGroup Northwest acquisition
                                  
                                  
                                  122,544
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  750
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  751Issuance of warrants
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  128
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  128Common stock grant to employee
                                  
                                  
                                  1,520
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  10
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  10Share-based compensation expense related to employee stock options and
      employee restricted stock grants
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  470
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  470Net income
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,195
                                  
                                  
                                  
                                  1,195Balance
      at December 31, 2006
                                  
                                  
                                  6,603,070
                                  
                                  
                                  
                                  66
                                  
                                  
                                  
                                  30,598
                                  
                                  
                                  
                                  (8,280
                                  )
                                  
                                  
                                  22,384Exercise of common stock options
                                  
                                  
                                  591,011
                                  
                                  
                                  
                                  6
                                  
                                  
                                  
                                  1,443
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,449Issuance of vested restricted common stock
                                  
                                  
                                  4,928
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Issuance of shares as additional purchase price consideration for Datatran
      acquisition
                                  
                                  
                                  25,253
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  250
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  250Issuance of shares as additional purchase price consideration for Network
      Architects, Corp. acquisition
                                  
                                  
                                  75,000
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  676
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  677Issuance of shares as purchase price consideration for Select, Inc.
      acquisition
                                  
                                  
                                  243,556
                                  
                                  
                                  
                                  2
                                  
                                  
                                  
                                  2,580
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  2,582Share-based compensation expense related to employee stock options and
      employee restricted stock grants
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  645
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  645Share-based compensation expense related to directors’ stock
      grants
                                  
                                  
                                  9,072
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  90
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  90Excess tax benefit from stock option exercises
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  160
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  160Issuance of warrants
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  86
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  86Purchase and retirement of treasury stock resulting from grantee election
      to fund payroll taxes out of restricted stock grant
                                  
                                  
                                  (1,198
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (13
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (13
                                  )Repurchase and retirement of common stock
                                  
                                  
                                  (1,800
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (18
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (18
                                  )Net income
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  3,735
                                  
                                  
                                  
                                  3,735Balance
      at December 31, 2007
                                  
                                  
                                  7,548,892
                                  
                                  
                                  
                                  75
                                  
                                  
                                  
                                  36,497
                                  
                                  
                                  
                                  (4,545
                                  )
                                  
                                  
                                  32,027Issuance of common stock, net of issuance costs
                                  
                                  
                                  900,000
                                  
                                  
                                  
                                  9
                                  
                                  
                                  
                                  8,742
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  8,751Exercise of common stock options
                                  
                                  
                                  151,624
                                  
                                  
                                  
                                  2
                                  
                                  
                                  
                                  829
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  831Issuance of vested restricted common stock
                                  
                                  
                                  50,265
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Issuance of shares as additional purchase price consideration for Network
      Architects, Corp. acquisition
                                  
                                  
                                  75,000
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  740
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  741Issuance of shares as purchase price consideration and broker fees for
      Access Flow, Inc. acquisition
                                  
                                  
                                  274,627
                                  
                                  
                                  
                                  3
                                  
                                  
                                  
                                  3,583
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  3,586Issuance of shares as purchase price consideration for NetTeks Technology
      Consultants, Inc. acquisition
                                  
                                  
                                  30,770
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  163
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  163Issuance of shares as purchase price consideration for VocalMash
      acquisition
                                  
                                  
                                  60,000
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  292
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  293Share-based compensation expense related to employee stock options and
      employee restricted stock grants
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,422
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,422Share-based compensation expense related to directors’ stock
      grants
                                  
                                  
                                  7,443
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  90
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  90Share-based compensation expense related to Employee Stock Purchase
      Plan
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  193
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  193Issuance of common stock under the Employee Stock Purchase
      Plan
                                  
                                  
                                  77,600
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  343
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  344Excess tax benefit from stock option exercises
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,107
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,107Issuance of common stock grant
                                  
                                  
                                  6,000
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  26
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  26Exercise of warrants
                                  
                                  
                                  3,155
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Purchase and retirement of treasury stock resulting from grantee election
      to fund payroll taxes out of restricted stock grant
                                  
                                  
                                  (9,868
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (56
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (56
                                  )Repurchase and retirement of common stock
                                  
                                  
                                  (466,204
                                  )
                                  
                                  
                                  (5
                                  )
                                  
                                  
                                  (3,229
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (3,234
                                  )Net loss
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (12,714
                                  )
                                  
                                  
                                  (12,714
                                  )Balance
      at December 31, 2008
                                  
                                  
                                  8,709,304
                                  
                                  
                                  $
                                  87
                                  
                                  
                                  $
                                  50,742
                                  
                                  
                                  $
                                  (17,259
                                  )
                                  
                                  $
                                  33,570





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


47
 
 INX
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
Thousands)





Year Ended
December 31,2008
                      
                      
                      2007
                      
                      
                      2006(As
      Restated, Note 16)
                      
                      
                      (As
      Restated, Note 16)
                      
                      
                      (As
      Restated, Note 16)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                      
                      $
                      (12,714
                      )
                      
                      $
                      3,735
                      
                      
                      $
                      1,195Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:(Income)
      loss from discontinued operations
                      
                      
                      (37
                      )
                      
                      
                      (111
                      )
                      
                      
                      316Depreciation
      and amortization
                      
                      
                      2,667
                      
                      
                      
                      1,659
                      
                      
                      
                      1,178Impairment
      charge
                      
                      
                      13,071
                      
                      
                      
                      —
                      
                      
                      
                      —Deferred
      income tax expense (benefit)
                      
                      
                      535
                      
                      
                      
                      (535
                      )
                      
                      
                      —Share-based
      compensation expense
                      
                      
                      1,615
                      
                      
                      
                      653
                      
                      
                      
                      415Excess
      tax benefits from stock option exercises
                      
                      
                      (1,107
                      )
                      
                      
                      (160
                      )
                      
                      
                      —Bad
      debt expense
                      
                      
                      541
                      
                      
                      
                      268
                      
                      
                      
                      63Issuance
      of warrants
                      
                      
                      —
                      
                      
                      
                      86
                      
                      
                      
                      —Issuance
      of stock grant
                      
                      
                      116
                      
                      
                      
                      90
                      
                      
                      
                      10Loss
      on retirement of assets
                      
                      
                      43
                      
                      
                      
                      12
                      
                      
                      
                      9Tax
      expense (benefit) from discontinued operations
                      
                      
                      19
                      
                      
                      
                      28
                      
                      
                      
                      —Changes
      in assets and liabilities that provided (used) cash:Accounts
      receivable, net
                      
                      
                      (8,279
                      )
                      
                      
                      2,733
                      
                      
                      
                      (17,584
                      )Inventory
                      
                      
                      (953
                      )
                      
                      
                      156
                      
                      
                      
                      (1,053
                      )Other
      current assets
                      
                      
                      758
                      
                      
                      
                      130
                      
                      
                      
                      (1,206
                      )Other
      assets
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      21Accounts
      payable
                      
                      
                      456
                      
                      
                      
                      (4,875
                      )
                      
                      
                      (997
                      )Accrued
      expenses
                      
                      
                      1,437
                      
                      
                      
                      (105
                      )
                      
                      
                      837Other
      current and long-term liabilities
                      
                      
                      605
                      
                      
                      
                      (248
                      )
                      
                      
                      792Net
      cash (used in) provided by continuing operations
                      
                      
                      (1,227
                      )
                      
                      
                      3,516
                      
                      
                      
                      (16,004
                      )Net
      operating activities from discontinued operations
                      
                      
                      18
                      
                      
                      
                      28
                      
                      
                      
                      (684
                      )Net
      cash (used in) provided by operating activities
                      
                      
                      (1,209
                      )
                      
                      
                      3,544
                      
                      
                      
                      (16,688
                      )CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures, net of acquisitions
                      
                      
                      (2,260
                      )
                      
                      
                      (1,591
                      )
                      
                      
                      (1,921
                      )Acquisition
      of Access Flow, Inc.
                      
                      
                      (2,550
                      )
                      
                      
                      —
                      
                      
                      
                      —Acquisition
      of NetTeks Technology Consultants, Inc.
                      
                      
                      (1,440
                      )
                      
                      
                      —
                      
                      
                      
                      —Acquisition
      of Select, Inc., net of $2,864 cash acquired
                      
                      
                      153
                      
                      
                      
                      (3,375
                      )
                      
                      
                      —Acquisition
      of Datatran Network Systems
                      
                      
                      —
                      
                      
                      
                      (250
                      )
                      
                      
                      (1,000
                      )Acquisition
      of InfoGroup Northwest, Inc.
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (751
                      )Acquisition
      of Network Architects, Corp.
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (394
                      )Proceeds
      of sale of fixed assets
                      
                      
                      1
                      
                      
                      
                      3
                      
                      
                      
                      —Transaction
      costs paid for acquisitions
                      
                      
                      (225
                      )
                      
                      
                      (386
                      )
                      
                      
                      (32
                      )Net
      cash used in investing activities of continuing operations
                      
                      
                      (6,321
                      )
                      
                      
                      (5,599
                      )
                      
                      
                      (4,098
                      )Net
      investing activities of discontinued operations
                      
                      
                      —
                      
                      
                      
                      15
                      
                      
                      
                      1,492Net
      cash used in investing activities
                      
                      
                      (6,321
                      )
                      
                      
                      (5,584
                      )
                      
                      
                      (2,606
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of common stock
                      
                      
                      8,751
                      
                      
                      
                      —
                      
                      
                      
                      —Proceeds
      from issuance of common stock for purchases under Employee Stock Purchase
      Plan
                      
                      
                      344
                      
                      
                      
                      —
                      
                      
                      
                      —(Payments)
      borrowings under acquisition credit facility
                      
                      
                      (6,000
                      )
                      
                      
                      6,000
                      
                      
                      
                      —Borrowings
      (payments) of short-term interest bearing credit facility,
    net
                      
                      
                      —
                      
                      
                      
                      (4,350
                      )
                      
                      
                      1,886Borrowings
      under non-interest bearing floor plan financing, net
                      
                      
                      7,530
                      
                      
                      
                      6,481
                      
                      
                      
                      15,978Proceeds
      from exercise of stock options
                      
                      
                      831
                      
                      
                      
                      1,449
                      
                      
                      
                      613Excess
      tax benefits from stock option exercises
                      
                      
                      1,107
                      
                      
                      
                      160
                      
                      
                      
                      —Proceeds
      from other short-term borrowings
                      
                      
                      460
                      
                      
                      
                      472
                      
                      
                      
                      407Payments
      of other short-term borrowings
                      
                      
                      (601
                      )
                      
                      
                      (531
                      )
                      
                      
                      (391
                      )Debt
      issuance costs paid
                      
                      
                      —
                      
                      
                      
                      (65
                      )
                      
                      
                      —Purchase
      of treasury stock resulting from grantee election
                      
                      
                      (61
                      )
                      
                      
                      (13
                      )
                      
                      
                      —Purchase
      of common stock
                      
                      
                      (3,234
                      )
                      
                      
                      (18
                      )
                      
                      
                      —Net
      cash provided by financing activities of continuing
    operations
                      
                      
                      9,127
                      
                      
                      
                      9,585
                      
                      
                      
                      18,493Net
      financing activities of discontinued operations
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (1
                      )Net
      cash provided by financing activities
                      
                      
                      9,127
                      
                      
                      
                      9,585
                      
                      
                      
                      18,492NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                      
                      
                      1,597
                      
                      
                      
                      7,545
                      
                      
                      
                      (802
                      )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                      
                      
                      9,340
                      
                      
                      
                      1,795
                      
                      
                      
                      2,597CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                      
                      $
                      10,937
                      
                      
                      $
                      9,340
                      
                      
                      $
                      1,795





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


48


INX
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
Thousands)





Year Ended
December 31,2008
                            
                            
                            2007
                            
                            
                            2006SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid for interest
                            
                            $
                            256
                            
                            
                            $
                            272
                            
                            
                            $
                            219Cash
      paid for income taxes
                            
                            $
                            156
                            
                            
                            $
                            16
                            
                            
                            $
                            14SUPPLEMENTAL
      NONCASH INVESTING AND FINANCING ACTIVITIES:Acquisition
      of Access Flow, Inc.:Fair
      value of assets acquired
                            
                            $
                            6,582
                            
                            
                            $
                            —
                            
                            
                            $
                            —Common
      stock issued
                            
                            
                            (3,586
                            )
                            
                            
                            —
                            
                            
                            
                            —Capital
      lease obligation assumed
                            
                            
                            (272
                            )
                            
                            
                            —
                            
                            
                            
                            —Transaction
      costs accrued
                            
                            
                            (16
                            )
                            
                            
                            —
                            
                            
                            
                            —Acquisition
      of NetTeks Technology Consultants, Inc.:Fair
      value of assets acquired
                            
                            
                            1,654
                            
                            
                            
                            —
                            
                            
                            
                            —Common
      stock issued
                            
                            
                            (163
                            )
                            
                            
                            —
                            
                            
                            
                            —Acquisition
      of VocalMash:Fair
      value of assets acquired
                            
                            
                            293
                            
                            
                            
                            —
                            
                            
                            
                            —Common
      stock issued
                            
                            
                            (293
                            )
                            
                            
                            —
                            
                            
                            
                            —Acquisition
      of Select, Inc.:Fair
      value of assets acquired
                            
                            
                            —
                            
                            
                            
                            6,807
                            
                            
                            
                            —Common
      stock issued
                            
                            
                            —
                            
                            
                            
                            (2,582
                            )
                            
                            
                            —Noncompete
      agreement liability
                            
                            
                            —
                            
                            
                            
                            (450
                            )
                            
                            
                            —Transaction
      costs accrued
                            
                            
                            —
                            
                            
                            
                            (50
                            )
                            
                            
                            —Acquisition
      of Datatran Network Systems:Fair
      value of assets acquired
                            
                            
                            —
                            
                            
                            
                            500
                            
                            
                            
                            1,515Common
      stock issued
                            
                            
                            —
                            
                            
                            
                            (250
                            )
                            
                            
                            (515
                            )Acquisition
      of Network Architects, Corp.:Fair
      value of assets acquired
                            
                            
                            741
                            
                            
                            
                            677
                            
                            
                            
                            965Common
      stock issued
                            
                            
                            (741
                            )
                            
                            
                            (677
                            )
                            
                            
                            (571
                            )Acquisition
      of InfoGroup Northwest, Inc.:Fair
      value of assets acquired
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,502Common
      stock issued
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (751
                            )Obligation
      under software license agreement:Fair
      value of asset acquired
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            775Obligation
      incurred
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (775
                            )Issuance
      of warrants in connection with sale of Stratasoft,
    Inc.
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (128
                            )





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





49


INX
INC. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


For
the Years Ended December 31, 2008, 2007 and 2006


(In
thousands, except share and per share amounts)





1.  Description
of Business





INX Inc.
(“INX” or the “Company”) is a provider of technology infrastructure solutions
for enterprise-class organizations such as corporations, schools and federal,
state and local governmental agencies. The solutions INX provides consist of
three broad categories of technology infrastructure: network infrastructure,
unified communications and data center. Network infrastructure solutions consist
of network routing and switching, wireless networking and network security
solutions. Unified communications solutions consist of Internet Protocol (“IP”)
network-based voice or telephone solutions as well as IP network-based video
communications solutions. Data center solutions consist of network storage
solutions and data center server virtualization solutions. The accompanying
consolidated financial statements include the accounts of INX Inc. and its
wholly-owned subsidiaries, Select, Inc. and Valerent, Inc. All intercompany
transactions and accounts are eliminated in consolidation. Select, Inc. and
Valerent, Inc. were merged into INX Inc. as of the close of business on
December 31, 2008.





2.  Summary
of Significant Accounting Policies





Basis of Presentation —
During 2006, the Company sold the Stratasoft subsidiary and Valerent operations
as further discussed in Note 5. The Stratasoft and Valerent results of
operations and cash flows are classified as discontinued operations for all
periods presented. Although continuing operations are described in this report
in terms of the products sold and the services provided, the base of customers
and the geographic areas in which it operates, the Company has concluded that
its operations comprise one reportable segment pursuant to Statement of
Financial Accounting Standards No. 131 — Disclosures about Segments of
an Enterprise and Related Information. In making this determination, the Company
considered that each reporting unit has similar characteristics and long-term
prospects, includes similar services, has similar types of customers and is
subject to the same regulatory environment.





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





Principles of
Consolidation — The accompanying consolidated financial statements
include the accounts of INX Inc. and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.





Cash and Cash
Equivalents — Cash equivalents are comprised of certain highly
liquid investments with maturity of three months or less when purchased. The
Company maintains its cash in bank deposit accounts, which at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.





Accounts Receivable —
Trade accounts receivable are recorded at the invoiced amount, are non-interest
bearing and are recorded net of reserves for sales returns and allowances and an
allowance for doubtful accounts. The Company extends credit to its customers in
the normal course of business and generally does not require collateral or other
security. The Company performs ongoing credit evaluations of its customers’
financial condition and, in some instances, requires letters of credit or
additional guarantees in support of contracted amounts. Earnings are charged
with a provision for doubtful accounts based on a current review of the
collectability of the accounts and using a systematic approach based on
historical collections and age of the amounts due. Accounts deemed uncollectible
are applied against the allowance for doubtful accounts. Accruals for estimated
sales returns and other allowances and deferrals are recorded as a reduction of
revenue at the time of revenue recognition. These provisions are based on
contract terms and prior claims experience and involve significant
estimates.





Inventory — Inventory
consists primarily of Cisco network equipment, computer equipment and components
and is valued at the lower of cost or market with cost determined on the
first-in first-out method. Substantially all inventory is finished goods.
Reserves to reduce inventory to market value are based on current inventory
levels, historical usage and product life cycles.





Property and Equipment —
Property and equipment are recorded at cost. Expenditures for repairs and
maintenance are charged to expense when incurred, while expenditures for
betterments are capitalized. Disposals are removed at cost less accumulated
depreciation with the resulting gain or loss reflected in operations in the year
of disposal.





50


Goodwill — Goodwill is
the excess of the purchase price over the fair values assigned to the net assets
acquired in business combinations. Goodwill is not amortized, but instead is
subject to periodic testing for impairment. Goodwill is tested for impairment on
an annual basis and more frequently if facts and circumstances indicate goodwill
carrying values exceed estimated reporting unit fair values.





The
annual goodwill impairment test consists of a two-step process as
follows:





Step 1.  The
Company compares the fair value of each reporting unit to its carrying amount,
including the existing goodwill. The fair value of each reporting unit is
determined using a discounted cash flow valuation analysis. The carrying value
of each reporting unit is determined by specifically identifying and allocating
the assets and liabilities to each reporting unit based on headcount, relative
revenues, or other methods as deemed appropriate by management. If the carrying
amount of a reporting unit exceeds its fair value, an indication exists that the
reporting unit’s goodwill may be impaired and the Company then performs the
second step of the impairment test. If the fair value of a reporting unit
exceeds its carrying amount, no further analysis is required.





Step 2.  If further
analysis is required, the Company compares the implied fair value of the
reporting unit’s goodwill, determined by allocating the reporting unit’s fair
value to all of its assets and its liabilities in a manner similar to a purchase
price allocation, to its carrying amount. If the carrying amount of the
reporting unit’s goodwill exceeds its fair value, an impairment loss will be
recognized in an amount equal to that excess.





Goodwill
is written down when impaired. Based on the impairment tests performed, the
Company determined there was impairment of goodwill in 2008 resulting in an
impairment charge as further discussed in Note 4. There was no impairment
of goodwill in 2007 or 2006.





Intangible Assets —
Intangible assets are being amortized over their estimated useful lives of one
to five years (see Note 7).





Impairment of Long-Lived
Assets — Impairment losses are recorded on long-lived assets used in
operations other than goodwill when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
Based on the impairment tests performed, the Company determined there was
impairment of long-lived assets in 2008 resulting in an impairment charge as
further discussed in Note 4. There was no impairment of long-lived assets
in 2007 or 2006.





Income Taxes — Income
taxes are accounted for under the liability method, which requires, among other
things, recognition of deferred income tax liabilities and assets for the
expected future tax consequences of events that have been recognized in the
consolidated financial statements or tax returns. Under this method, deferred
income tax liabilities and assets are determined based on the temporary
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities and the recognition of available tax
carryforwards. The tax provision allocated to discontinued operations is based
on the incremental tax effect after computing the tax provision on continuing
operations. It is the company’s policy to provide for uncertain tax positions
and the related interest and penalties based upon management’s assessment of
whether a tax benefit is more likely than not to be sustained upon examination
by tax authorities





Use of Estimates — The
preparation of the 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenue and expense during
the reporting period. Actual results could differ from these
estimates.





Revenue Recognition —
INX recognizes revenue as follows:





Products revenueoccurs when
products manufactured or otherwise provided by other parties are purchased and
resold to a customer and product payment is not contingent upon performance of
installation or service obligations. If product acceptance and payment are
contingent on installation or service obligations as specified in the customer
contract, revenue is not recognized until installation occurs. Revenue is
recognized from the sales of hardware when the rights and risks of ownership
have passed to the customer and upon shipment or receipt by the customer,
depending on the terms of the sales contract with the customer. The Company
recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, the price is fixed or determinable,
and collectability is reasonably assured. Amounts billed to customers for
shipping and handling are classified as revenue.





51


The
Company sells hardware maintenance contracts that are serviced and supported
solely by a third party, who is the primary obligor of these contracts. There
are multiple factors under Emerging Issues Task Force Issue No. 99-19,
“Reporting Revenue Gross as a Principal versus Net as an Agent,” or
EITF 99-19, but the primary obligor is a strong factor in determining
whether the Company acts as a principal or agent and whether gross or net
revenue presentation is appropriate. As the Company has concluded that it is
more of an agent in the sale of hardware maintenance contracts, revenue is
reported by the Company net of the cost of the hardware maintenance contract
from the third party.





For
arrangements where the customer agrees to purchase products, but we retain
possession until the customer requests shipment, or “bill and hold”
arrangements, revenue is not recognized until delivery to the customer has
occurred and all other revenue recognition criteria have been met.





Softwareis accounted for in
accordance with Statement of Position No. 97-2, “Software Revenue Recognition,”
and all related interpretations. Revenue from the sales of software not
requiring significant modification or customization is recognized upon delivery
or installation. Installation services for third party software do not include
significant alterations to its features or functionality. Third party software
vendors provide all post-contract support for software sold by the Company.
Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and collectability is
reasonably assured.





Technical support services
revenue, consisting of remote monitoring and management of customers’ IP
telephony and network infrastructure equipment and applications, is recognized
ratably over the term of the underlying customer contract. Commission costs paid
in advance are deferred and recognized ratably over the term of the underlying
customer contract.





Revenue for fixed and flat fee
services contractsrelated to customized network and IP telephony
solutions are recognized under a proportional performance model utilizing an
input based approach (labor hours). The Company’s contracts function similar to
a time and materials type contract and generally do not specify or quantify
interim deliverables or milestones. Such service contracts encompass the design
and installation of IP telephony and computer networks under which customers
receive the benefit of services provided over the period of contract
performance.





Other service revenueis
earned from providing stand-alone services such as billings for engineering and
technician time, installation and programming services, which are provided on
either an hourly basis or a flat-fee basis, and the service component of
maintenance and repair service ticket transactions. These services are
contracted for separately from any product sale. Other service revenues are
recognized when the service is performed and when collection is reasonably
assured. Revenue arrangements generally do not include specific customer
acceptance criteria. In instances where final acceptance of the system or
solution is specified by the customer, revenue is deferred until all acceptance
criteria have been met.





Arrangements with multiple
deliverablesare arrangements under which a combination of products and
services are provided to customers. Such arrangements are evaluated under
Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables,” (“EITF 00-21”), which addresses certain aspects of
accounting by a vendor for arrangements under which the vendor will perform
multiple revenue generating activities. The application of the appropriate
accounting guidance requires judgment and is dependent upon the specific
transaction and whether the sale includes hardware, software, services or a
combination of these items.





The
Company enters into product and service contracts for customers that are
generally considered a single arrangement and which include separate units of
accounting for product and for service. Product primarily consists of IP
telephony and computer network infrastructure components and third party
software. Service encompasses the design and installation of IP telephony and
computer networks and installation of third party software. Installation
services for third party software do not include significant alterations to its
features or functionality. All products and services are regularly sold
separately. For products and services sold in a single arrangement, the product
is typically delivered first and the related services are completed within four
to six weeks. Product is shipped, billed, and recognized as revenue independent
of services because:





•
            The
      customer is required to pay the product billing in its entirety
      independent of any services
performed.





•
            The
      product has value to the customer on a standalone basis and pricing is
      comparable whether sold with or without
  services.





•
            The
      product is standard equipment not significantly altered by
      installation.





•
            Installation
      of the product can be performed by many other
  companies.





•
            Although
      there is a general right of return relative to delivered product, delivery
      of the undelivered items is considered probable and is substantially in
      the control of the Company.





52


Comparable
products and services are sold on a standalone basis and under multiple element
arrangements at similar prices. Stand alone pricing is vendor-specific objective
evidence under EITF 00-21. If objective and reliable evidence exists for
the fair value of all items in a multiple element arrangement, the Company
recognizes revenue based on the relative fair value of the separate elements.
When there is objective and reliable evidence for the fair values of undelivered
items, but no such evidence exists for the items already delivered, the amount
of revenue allocated to the delivered items is computed on the residual method.
Customers are not required to and frequently do not select the same vendor for
product and service. The customers’ decision does not impact the pricing of the
portion of the bid selected.





Contracts
and customer purchase orders are generally used to determine the existence of an
arrangement. Shipping documents and customer acceptance, when applicable, are
used to verify delivery. Determination that the fee is fixed or determinable is
based on the payment terms associated with the transaction and whether the sales
price is subject to refund or adjustment.





The
Company records taxes applicable under EITF No. 06-3, “How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross versus Net Presentation)” on a net basis.
Collectability is assessed based primarily on the creditworthiness of the
customer as determined by credit checks and analysis, as well as the customer’s
payment history. Accruals for estimated sales returns and other allowances and
deferrals are recorded as a reduction of revenue at the time of revenue
recognition. These provisions are based on contract terms and prior claims
experience and involve significant estimates. If these estimates are
significantly different from actual results, our revenue could be
impacted.





Vendor Incentives — INX
participates in a vendor incentive program under which incentives are
principally earned by sales volume, sales growth and customer satisfaction
levels. The amounts earned under these programs are accrued when they are deemed
probable and can be reasonably measured; otherwise, they are recorded when they
are declared by the vendor or the cash is received, whichever is earlier. As a
result of these estimates, the amount of rebates declared by the vendor, or the
amount of rebates received in cash, the effect of vendor incentives on cost of
goods can vary significantly between quarterly and annual reporting periods. The
incentives are recorded as a reduction of cost of goods and services. Selling,
general and administrative expenses are increased for any associated commission
expense and payroll tax related to the incentives. The Company recognized vendor
incentives of $10,118, $7,200 and $6,303 in 2008, 2007 and 2006, respectively.
Accounts receivable from vendors of $3,201 and $2,851 at December 31, 2008
and 2007, respectively, are reported under “Accounts receivable — trade” in
the consolidated balance sheets.





Advertising Costs —
Advertising costs consist of print advertising and trade show materials and are
expensed as incurred.





Research and Development
Costs — Research and development expenditures are charged to
operations as incurred and consist primarily of compensation costs, outside
services, and expensed materials. The Company incurred research and development
expenditures of $289 in 2006. No research and development expenditures were
incurred in 2007 or 2008.





Share-Based
Compensation — The Company accounts for share-based compensation in
accordance with Statement of Financial Accounting Standards No. 123
(revised 2004), “Share-Based Payment,” (“SFAS 123R”) which requires the
measurement and recognition of compensation expense based on estimated fair
values for share-based payment awards. In December 2007, the Securities and
Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 110
(“SAB 110”) to extend the use of “simplified method” for estimating the
expected term of “plain vanilla” employee stock options for award valuation. The
method was initially allowed under Staff Accounting Bulletin No. 107
(“SAB 107”) in contemplation of the adoption of SFAS 123(R) to expense
the compensation cost based on the grant date fair value of the award.
SAB 110 does not provide an expiration date for the use of the method.
However, as more external information about exercise behavior will be available
over time, it is expected that this method will not be used when more relevant
guidance is available.





SFAS 123R
requires all share-based payments to be recognized in the results of operations
at their grant-date fair values. The Company adopted SFAS 123R using the
modified prospective transition method, which requires the application of the
accounting standard as of January 1, 2006, the first day of the Company’s
2006 fiscal year. Under this transition method, compensation cost recognized in
2006 includes: (a) compensation cost for all share-based payments granted
prior to, but not yet vested as of December 31, 2005, based on the
grant-date fair value estimated in accordance with the provisions of
SFAS 123, and (b) compensation cost for all share-based payments
granted subsequent to December 31, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123R. In accordance
with the modified prospective method of adoption, the Company’s results of
operations and financial position for prior periods have not been
restated.





53


Earnings Per Share —
Basic net income per share is computed on the basis of the weighted-average
number of common shares outstanding during the periods. Diluted net income per
share is computed based upon the weighted- average number of common shares plus
the assumed issuance of common shares for all potentially dilutive securities
using the treasury stock method (See Note 8).





Fair Value of Financial
Instruments — INX’s financial instruments consist of cash and cash
equivalents, accounts receivable and accounts payable for which the carrying
values approximate fair values given the short-term maturity of the instruments.
The carrying value of the Company’s debt instruments approximate their fair
value based on estimates of rates offered to the Company for instruments with
the same maturity dates and security structures.





Recent Accounting
Pronouncements — In June 2008, the FASB issued FASB Staff Position
EITF 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1
clarified that all outstanding unvested share-based payment awards that contain
rights to nonforfeitable dividends participate in undistributed earnings with
common shareholders. Awards of this nature are considered participating
securities and the two-class method of computing basic and diluted EPS must be
applied. FSP EITF 03-6-1 is effective for fiscal years beginning after
December 15, 2008. The Company is currently assessing the impact of FSP
EITF 03-6-1 and anticipates any impact to basic earnings per share will be
immaterial.





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





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”
(SFAS 141R). The purpose of issuing the statement is to replace current
guidance in SFAS 141 to better represent the economic value of a business
combination transaction. The changes to be effected with SFAS 141R from the
current guidance include, but are not limited to: (1) acquisition costs
will be recognized separately from the acquisition; (2) known contractual
contingencies at the time of the acquisition will be considered part of the
liabilities acquired measured at their fair value; all other contingencies will
be part of the liabilities acquired measured at their fair value only if it is
more likely than not that they meet the definition of a liability;
(3) contingent consideration based on the outcome of future events will be
recognized and measured at the time of the acquisition; (4) business
combinations achieved in stages (step acquisitions) will need to recognize the
identifiable assets and liabilities, as well as noncontrolling interests, in the
acquiree, at the full amounts of their fair values; and (5) a bargain
purchase (defined as a business combination in which the total acquisition-date
fair value of the identifiable net assets acquired exceeds the fair value of the
consideration transferred plus any noncontrolling interest in the acquiree) will
require that excess to be recognized as a gain attributable to the acquirer. The
Company does anticipate that the adoption of SFAS 141R will have a future
impact on the way in which business combinations will be accounted for compared
to current practice. SFAS 141R is effective for the Company beginning
January 1, 2009. Early adoption is not permitted.





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





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





54


3.  Acquisitions





The
Company completed three acquisitions in 2008, one acquisition in 2007, and one
acquisition in 2006. The acquisitions were consummated to improve the Company’s
geographical presence and enhance its technical capabilities.





Access
Flow, Inc.





Under an
Asset Purchase Agreement dated June 6, 2008 (the “APA”), the Company
purchased the operations and certain assets, and assumed specified liabilities
of Access Flow, Inc. (“AccessFlow”). AccessFlow is a Sacramento,
California-based consulting organization focused on delivering VMware-based data
center virtualization solutions, with revenues for the twelve months ended
March 31, 2008 of approximately $10,500. The Company completed the
acquisition simultaneously with the execution of the APA. Neither AccessFlow nor
any shareholder of AccessFlow has any prior affiliation with the Company. The
APA contains customary representations and warranties and requires AccessFlow
and its Shareholders to indemnify the Company for certain liabilities arising
under the APA, subject to certain limitations and conditions.





The
consideration paid at closing pursuant to the APA was (a) $2,450 in cash
and (b) 262,692 shares of the Company’s common stock. The common stock
was valued at $13.06 per share or $3,430. The number of common stock shares
issued was determined by dividing $2,627 by the lesser of (i) the average
closing price per share for the common stock, as reported by Nasdaq for the five
consecutive trading days ending prior to the second day before June 6,
2008, which was $12.96 per share or (ii) $10.00 per share.
24,000 shares of the stock consideration were placed in escrow under
holdback provisions defined in the APA. The two shareholders of AccessFlow
entered into five-year noncompete agreements at closing, which provide for
payments to each in the aggregate amount of $50 in equal monthly installments of
approximately $8 each per month over the six month period subsequent to closing.
Broker costs and professional fees of $346 were incurred in the purchase, of
which $174 was paid in cash, $16 accrued, and $156 was paid through the issuance
of 11,935 shares of common stock.





Additional
purchase consideration is payable to AccessFlow based on certain financial
performance during each of the two-year periods ending June 30, 2009 and
June 30, 2010. The financial performance upon which such additional
purchase consideration is based includes the following business components:
(i) the acquired AccessFlow Sacramento, California branch office revenue
excluding its hosting business, (ii) the acquired AccessFlow hosting
business, and (iii) customer billings for certain virtualization products
and services specified in the APA generated by the Company’s pre-existing
fourteen branch office locations. The APA specifies the computation of
additional purchase consideration earned under each business component,
including a minimum and maximum amount payable for each of the two years. For
each business component the minimum annual additional consideration payable is
zero and the maximum annual additional consideration payable is (i) $405,
(ii) $405, and (iii) $540, respectively. At the Company’s option, 50%
of such additional consideration may be paid in the form of common stock.
Additional purchase consideration, if any, will be recorded as
goodwill.





NetTeks
Technology Consultants, Inc.





Under an
Asset Purchase Agreement dated November 14, 2008 (the “Agreement”), the
Company purchased the operations and certain assets, and assumed specified
liabilities of NetTeks Technology Consultants, Inc. (“NetTeks”). NetTeks is a
Boston, Massachusetts-based network consulting organization with offices in
downtown Boston and Glastonbury, Connecticut, with revenues for the twelve
months ended September 30, 2008 of approximately $12,700. The Company
completed the acquisition simultaneously with the execution of the Agreement.
Neither NetTeks nor any shareholder of NetTeks has any prior affiliation with
the Company. The Agreement contains customary representations and warranties and
requires NetTeks and its shareholders to indemnify the Company for certain
liabilities arising under the Agreement, subject to certain limitations and
conditions.





55


The
consideration paid at closing pursuant to the Agreement was (a) $1,350 in
cash and (b) 30,770 shares of the Company’s common stock, of which
15,385 common stock shares were held in escrow under holdback provisions defined
in the Agreement. The common stock was valued at $5.29 per share or $163.
The number of common stock shares issued was determined by dividing $200 by
$6.50 per share. The three shareholders of NetTeks entered into five-year
noncompete agreements at closing for a lump sum payment to each in the aggregate
amount of $90. Professional fees of $51 were paid in connection with the
purchase.





Additional
purchase consideration is payable based on NetTeks’ branch office operating
income contribution during each of the two-year periods ending November 30,
2009 and November 30, 2010. The Agreement specifies the computation of
additional purchase consideration earned including a minimum of zero for each of
the two-year periods and a maximum of $1,313 for the period ending
November 30, 2009 and $1,488 for the period ending November 30, 2010.
At the Company’s option, 50% of such additional purchase price may be paid in
the form of Common Stock. Additional purchase consideration, if any, will be
recorded as goodwill.





VocalMash





Under an
Asset Purchase Agreement dated December 4, 2008 (“VocalMash APA”), the
Company purchased the operations of VocalMash, a business owned and operated by
INX’s Vice President of Sales. VocalMash is an application integration company
that utilizes Web 2.0 technologies to integrate unified communications systems
with other enterprise applications. The Company completed the acquisition
simultaneously with the execution of the VocalMash APA. The VocalMash APA
contains customary representations and warranties and requires VocalMash and its
Owner to indemnify the Company for certain liabilities arising under the
VocalMash APA, subject to certain limitations and conditions.





The
consideration paid at closing pursuant to the VocalMash APA was
60,000 shares of the Company’s common stock. The common stock was valued at
$4.89 per share or $293. Additional purchase consideration of up to a
maximum of $380 may be payable under the VocalMash APA based on the achievement
of operating income contribution targets for 2009. Additional purchase
consideration, if any, will be recorded as goodwill.





Select,
Inc.





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





The
consideration paid at closing pursuant to the SPA was (a) $6,250 in cash,
including $1,000 placed in escrow under holdback provisions defined in the SPA
and (b) 231,958 shares of the Company’s common stock valued at
$10.60 per share or $2,459, which amount of shares was determined by
dividing $2,250 by $9.70, which is the greater of (i) average closing price
per share for the common stock as reported by Nasdaq for the five consecutive
trading days ending August 28, 2007 and (ii) $9.50. The President and
major shareholder of Select entered into a five-year noncompete agreement at
closing providing for equal monthly payments of $21 over two years, which were
recorded at their present value of $450. Cash of $6,000 was borrowed from the
Acquisition Facility under the Credit Agreement with Castle Pines Capital LLC.
In connection with the stock purchase, the Credit Agreement with Castle Pines
Capital LLC was amended for the modification of certain financial covenants and
for the addition of Select as a party to the Credit Agreement. Broker costs and
professional fees of $512 were incurred in the purchase, of which $388 was paid
in cash and $124 was paid through the issuance of 11,598 shares of common
stock.





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





56





Pro
Forma Summary (Unaudited)





The
following pro forma consolidated amounts give effect to the Company’s
acquisition of Select, NetTeks, and VocalMash as if they had occurred
January 1, 2007. The pro forma consolidated amounts presented below are
based on continuing operations. The pro forma consolidated amounts are not
necessarily indicative of the operating results that would have been achieved
had the transaction been in effect and should not be construed as being
representative of future operating results.





Year Ended
December 31,2008
                    
                    
                    2007Revenues
                    
                    $
                    275,258
                    
                    
                    $
                    257,745Net
      (loss) income from continuing operations
                    
                    $
                    (12,212
                    )
                    
                    $
                    3,682Net
      (loss) income per share from continuing operations:Basic
                    
                    $
                    (1.49
                    )
                    
                    $
                    0.50Diluted
                    
                    $
                    (1.49
                    )
                    
                    $
                    0.44Weighted
      average shares used in calculation:Basic
                    
                    
                    8,215,756
                    
                    
                    
                    7,361,250Diluted
                    
                    
                    8,215,756
                    
                    
                    
                    8,361,913





Datatran
Network Systems





Under an
Asset Purchase Agreement dated February 3, 2006, the Company purchased the
assets and operations of Datatran Network Systems (“DNS”). DNS is a specialized
provider of network solutions serving the Southern California market. DNS
designs, implements and supports solutions based on Cisco technologies with a
primary focus on IP Telephony. The Company completed the acquisition
simultaneously with the execution of the Asset Purchase Agreement.





The
consideration paid at closing pursuant to the Asset Purchase Agreement was
$1,000 in cash, including $100 placed in escrow under holdback provisions
defined in the Asset Purchase Agreement and 71,003 shares of the Company’s
common stock valued at $500. Legal and other costs of $47 were paid in
connection with the transaction, of which $32 was paid in cash and $15 was paid
through the issuance of 2,105 shares of common stock. The calculation of
the 71,003 shares of the Company’s common stock was determined by dividing
$500 by the greater of (i) average closing price per share for the Common
Stock as reported by AMEX for the five consecutive trading days ending prior to
February 1, 2006 or (ii) $4.50.





Additional
purchase price consideration valued at $500 and recorded as goodwill was paid to
DNS in June 2007 for achievement of certain operating profit milestones during
the twelve-month period ending February 28, 2007. The consideration
consisted of a cash payment of $250 and issuance of 25,253 shares of the
Company’s common stock with a value of $250. The calculation of the number of
shares of Company’s common stock was determined by dividing $250 by $9.90, the
average closing price per share for the common stock as reported by Nasdaq for
the five consecutive trading days prior to March 1, 2007. Additionally,
cash of $36 was paid to the broker of the transaction.





Network
Architects, Corp.





Effective
May 26, 2005, the Company acquired the operations and certain assets of
Network Architects, Corp. (“Network Architects”), a data network and IP
telephony systems design, installation and support business with branches in
Albuquerque, New Mexico, and El Paso, Texas. Additional purchase price
consideration consisting of 75,000 shares of the Company’s common stock was
issued to Network Architects in July 2008 for achievement of certain operating
profit milestones during the twelve-month period ending May 31, 2008. The
additional purchase price consideration was valued at $741 and was recorded as
additional goodwill.





Acquisitions
Summary





The
following table summarizes the estimated fair values, including professional
fees and other related acquisition costs, at the date of acquisition, including
additional purchase price consideration subsequently paid. The amortization
periods for intangible assets presented below are based on the acquisition date
assessment of useful life.




57





VocalMash
                  
                  NetTeks
                    Technology
                    Consultants,
                    Inc.
                  
                  Access
                    Flow, Inc.
                  
                  Select, Inc.
                  
                  Datatran
                    Network
                    Systems
                  
                  Network
                    Architects,
                    Corp.Allocated
      acquisition cost:Intangible
      assets:Customer
      relationships, amortized from 2 to 10 years
                  $
                  —
                  
                  $
                  513
                  
                  $
                  169
                  
                  $
                  2,489
                  
                  $
                  123
                  
                  $
                  151Noncompete
      agreements, amortized from 3 to 5 years
                  
                  7
                  
                  
                  340
                  
                  
                  556
                  
                  
                  704
                  
                  
                  45
                  
                  
                  91Trademark,
      amortized from 3 to 5 years
                  
                  —
                  
                  
                  214
                  
                  
                  319
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Strategic
      relationships, amortized from 3 to 5 years
                  
                  —
                  
                  
                  —
                  
                  
                  308
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Backlog,
      amortized from 3 to 5 years
                  
                  —
                  
                  
                  229
                  
                  
                  131
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Cash
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,864
                  
                  
                  —
                  
                  
                  —Accounts
      receivable
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5,705
                  
                  
                  —
                  
                  
                  —Inventory
                  
                  —
                  
                  
                  9
                  
                  
                  5
                  
                  
                  429
                  
                  
                  25
                  
                  
                  —Property
      and equipment
                  
                  —
                  
                  
                  134
                  
                  
                  696
                  
                  
                  331
                  
                  
                  38
                  
                  
                  500Other
      assets
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  31
                  
                  
                  5
                  
                  
                  4Goodwill
                  
                  286
                  
                  
                  218
                  
                  
                  4,414
                  
                  
                  4,489
                  
                  
                  1,841
                  
                  
                  6,014Accounts
      payable and other liabilities assumed
                  
                  —
                  
                  
                  (3
                  )
                  
                  (272
                  )
                  
                  (7,371
                  )
                  
                  —
                  
                  
                  —Net
      assets acquired
                  
                  293
                  
                  
                  1,654
                  
                  
                  6,326
                  
                  
                  9,671
                  
                  
                  2,077
                  
                  
                  6,760Less:
      cash acquired
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (2,864
                  )
                  
                  —
                  
                  
                  —Net
      amount paid for acquisition
                  $
                  293
                  
                  $
                  1,654
                  
                  $
                  6,326
                  
                  $
                  6,807
                  
                  $
                  2,077
                  
                  $
                  6,760





Certain
amounts of goodwill and other acquired intangible assets and property and
equipment were determined to impaired during the fourth quarter of 2008 as
discussed in Note 4.





4.  Impairment
Charge





As of
December 31 each year, the Company performs an annual goodwill impairment
test as required under Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangible Assets”. Based on a discounted cash flow
analysis, the sharp decline in the Company’s market capitalization beginning in
November 2008, and the rapidly deteriorating macroeconomic environment in the
fourth quarter of 2008, the Company concluded that the goodwill of its Access
Flow, Inc., Select, Inc., Datatran Network Systems, InfoGroup Northwest, Inc.,
and Network Architects, Corp. acquisitions was impaired and recorded an
impairment charge of $9,396 in the fourth quarter of 2008.





In
accordance with Statement of Financial Accounting Standards No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company
records impairment charges on long-lived assets used in operations when events
and circumstances indicate that the assets may be impaired. Assets are
considered impaired when the undiscounted cash flows estimated to be generated
by those assets are less than the carrying amount of those assets and the net
book value of the assets exceeds their estimated fair value. In connection with
the triggering events discussed in the preceding paragraph, the Company tested
the recoverability of its long-lived assets and concluded the carrying values of
intangible assets and property and equipment from the AccessFlow, Inc. and
Select, Inc. acquisitions were no longer recoverable. Consequently, during the
fourth quarter of 2008, the Company recorded an impairment charge of $3,328 and
$347 to write the intangibles assets and property and equipment, respectively,
down to their estimated fair values.





5.  Discontinued
Operations





Telecom
and Computer Products Divisions





Prior to
2004, INX sold a computer products reselling business, PBX telephone systems
dealer business, and the Telecom Systems division. During 2005, the Company
resolved the collectability of certain accounts receivable of these operations.
In 2006, the Company settled a lawsuit for $100 filed in August 2002, by Inacom
Corp. claiming INX owed the sum of approximately $570. The excess accrual of
$469 was reflected in the gain on disposal of discontinued operations detailed
below.





Stratasoft
and Valerent Subsidiaries





On
November 3, 2005, the Company’s Board of Directors approved a plan to sell
its Stratasoft subsidiary and Valerent operations. This action was taken due to
continuing losses at Stratasoft and the decision to build value with a focused
strategy in the operations at INX. Under a Stock Purchase Agreement
(“Agreement”) dated January 26, 2006, INX sold all outstanding shares of
Stratasoft’s common stock for a pretax gain on disposal of $302. Key terms of
the sale are summarized as follows:





58


•
            All
      outstanding Stratasoft common stock was sold for a purchase price of
      $3,000, which has been or is subject to reduction as
    follows:





•
            $800
      placed in escrow, which is available to satisfy indemnified losses, if
      any, as defined in the Agreement. Funds placed in escrow are excluded from
      the estimated gain stated above. Approximately $778 in indemnified losses,
      net of interest earned, have been paid or presented for payment as of
      December 31, 2008.





•
            $221
      representing a preliminary net working capital adjustment, as defined. The
      final working capital adjustment recorded during June 2006 resulted in the
      further reduction of the sale proceeds of
$40.





•
            The
      Company indemnified the buyer for potential losses as defined in the
      Agreement to a maximum of $1,400, inclusive of amounts placed in escrow.
      Excess funds held in escrow were scheduled to be released on
      January 26, 2008. However, certain potential third-party claims
      remain outstanding, including the Schneider Rucinski lawsuit discussed
      further in Note 15. As provided in the Agreement, funds of $22 held
      in escrow at December 31, 2008 will not be released until such claims
      are resolved.





•
            The
      Agreement provided for additional consideration to the Company if either
      of the following conditions were met: (1) Stratasoft revenue exceeds
      $10,000 for any consecutive twelve month period within two years of
      closing or (2) Stratasoft is sold by the buyer to another party prior
      to January 26, 2008, for an amount in excess of $15,000. Neither
      condition was met; therefore, no consideration is due the
      Company.





Transaction
costs of $815 were incurred by the Company in connection with the transaction,
including the $128 value of warrants issued to the investment banker for the
transaction for 40,000 shares of common stock with an exercise price of
$6 per share. The warrants expire on January 26, 2011. Additional
costs of $134 were recorded as a reduction of the gain on sale for space leased
by INX that will not be subleased to Stratasoft in the future.





The sale
of Valerent operations involved two separate transactions which were closed in
October 2006. The managed services business and related inventory, property and
equipment were sold to OuterNet Management, L.P. for a cash sales price of $185.
The consulting business and related property and equipment were sold to Vicano
Acquisition Corp., a company owned by Valerent’s former president and
brother-in-law of our CEO and largest shareholder. The consulting business was
sold for cash paid at closing of $50 and a $70 promissory note payable in
twenty-four monthly installments of $3 plus interest of 10%. All installments of
the promissory note were paid as scheduled and the gain recognized as payments
were received. Additional consideration of $26 was earned for each of the first
and second earnout periods ended October 12, 2007 and October 12,
2008, respectively.





The
results of operations and gain on disposal of discontinued operations are
summarized below:





Year Ended
December 31,2008
                  
                  
                  2007
                  
                  
                  2006Revenues:Stratasoft.
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  268Valerent
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  4,330Total
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  4,598Income
      (loss) from operations of discontinued subsidiaries:Stratasoft.
                  
                  $
                  —
                  
                  
                  $
                  12
                  
                  
                  $
                  (288
                  )Valerent
                  
                  
                  —
                  
                  
                  
                  39
                  
                  
                  
                  (830
                  )Total
                  
                  
                  —
                  
                  
                  
                  51
                  
                  
                  
                  (1,118
                  )Gain
      on disposal of discontinued operations:Stratasoft.
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  302Valerent
                  
                  
                  56
                  
                  
                  
                  60
                  
                  
                  
                  31Telecom
      and Computer Products Divisions
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  469Cumulative
      effect of change in accounting method at Stratasoft
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Income
      tax (expense) benefit
                  
                  
                  (19
                  )
                  
                  
                  (28
                  )
                  
                  
                  —Income
      (loss) from discontinued operations, net of taxes
                  
                  $
                  37
                  
                  
                  $
                  83
                  
                  
                  $
                  (316
                  )





The
components of assets and liabilities of discontinued operations in the
accompanying balance sheets are as follows:





59





December 31,2008
                    
                    
                    2007Other
      current assets:Notes
      receivable, current
                    
                    $
                    —
                    
                    
                    $
                    29Other
      current liabilities:Accrued
      expenses
                    
                    $
                    44
                    
                    
                    $
                    44Deferred
      revenue
                    
                    
                    —
                    
                    
                    
                    29Total
                    
                    $
                    44
                    
                    
                    $
                    73





6.  Property
and Equipment





Property
and equipment consisted of the following:





December 31,2008
                    
                    
                    2007Equipment
                    
                    $
                    281
                    
                    
                    $
                    348Computer
      equipment
                    
                    
                    4,750
                    
                    
                    
                    3,585Computer
      software
                    
                    
                    3,015
                    
                    
                    
                    2,127Computer
      equipment under capital lease obligations
                    
                    
                    229
                    
                    
                    
                    —Furniture
      and fixtures
                    
                    
                    1,047
                    
                    
                    
                    971Leasehold
      improvements
                    
                    
                    1,209
                    
                    
                    
                    1,013Vehicles
                    
                    
                    105
                    
                    
                    
                    10510,636
                    
                    
                    
                    8,149Accumulated
      depreciation and amortization
                    
                    
                    (5,429
                    )
                    
                    
                    (3,728
                    )Total
                    
                    $
                    5,207
                    
                    
                    $
                    4,421





Property
and equipment are depreciated over their estimated useful lives ranging from
three to ten years using the straight-line method. Depreciation expense totaled
$1,913, $1,331 and $921 for 2008, 2007 and 2006, respectively. Depreciation
expense includes capital lease amortization expense.





7.  Intangible
Assets





December 31, 2008
                        
                        
                        December 31, 2007WeightedGross
                        
                        
                        
                        
                        
                        Gross
                        
                        
                        
                        
                        
                        AverageCarrying
                        
                        
                        Accumulated
                        
                        
                        Carrying
                        
                        
                        Accumulated
                        
                        
                        RemainingAmount
                        
                        
                        Amortization
                        
                        
                        Amount
                        
                        
                        Amortization
                        
                        
                        LifeAmortized
      intangible assets:Customer
      lists
                        
                        $
                        2,293
                        
                        
                        $
                        1,537
                        
                        
                        $
                        3,649
                        
                        
                        $
                        1,208
                        
                        
                        
                        2.92Other
                        
                        
                        1,905
                        
                        
                        
                        809
                        
                        
                        
                        1,091
                        
                        
                        
                        384
                        
                        
                        
                        2.96Total
                        
                        $
                        4,198
                        
                        
                        $
                        2,346
                        
                        
                        $
                        4,740
                        
                        
                        $
                        1,592





The
decrease in gross carrying amount of customer lists and other intangibles from
December 31, 2007 to December 31, 2008 was due to the $3,328
intangible asset impairment charge discussed further in Note 4, offset by
intangibles acquired in the Access Flow, Inc., NetTeks Technology Consultants,
Inc., and VocalMash acquisitions as discussed further in Note 3.
Amortization expense totaled $754, $328 and $257 for 2008, 2007 and 2006,
respectively.





The
estimated aggregate amortization expense for future years is as
follows:





2009
                
                $
                7182010
                
                
                5092011
                
                
                4772012
                
                
                892013
                
                
                59Total
                
                $
                1,852





60




8.  Earnings
Per Share





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





Year Ended
December 31,2008
                    
                    
                    2007
                    
                    
                    2006Numerator
      for basic and diluted earnings per share:Net
      (loss) income from continuing operations
                    
                    $
                    (12,751
                    )
                    
                    $
                    3,652
                    
                    
                    $
                    1,511Income
      (loss) from discontinued operations, net of taxes
                    
                    
                    37
                    
                    
                    
                    83
                    
                    
                    
                    (316
                    )Net
      (loss) income
                    
                    $
                    (12,714
                    )
                    
                    $
                    3,735
                    
                    
                    $
                    1,195Denominator
      for basic earnings per share — weighted-average shares
      outstanding
                    
                    
                    8,133,165
                    
                    
                    
                    7,026,623
                    
                    
                    
                    6,318,674Effect
      of dilutive securities:Shares
      issuable from assumed conversion of common stock options and restrictedstock
                    
                    
                    —
                    
                    
                    
                    1,000,662
                    
                    
                    
                    975,063Denominator
      for diluted earnings per share — weighted-average shares
      outstanding
                    
                    
                    8,133,165
                    
                    
                    
                    8,027,286
                    
                    
                    
                    7,293,737





For 2007
and 2006, we did not include 625,000 warrants and for 2008 we did not include
11,896 warrants to purchase common stock in determination of the dilutive shares
since they are antidilutive. For the years ended December 31, 2007 and
December 31, 2006 no options were excluded in the calculation of diluted
earnings. Options to purchase 558,347 shares for the year ended
December 31, 2008 were not used in the calculation of diluted earnings
since the effect of potentially dilutive securities in computing a loss per
share is antidilutive.





9.  Notes
Payable





Notes
payable on the accompanying balance sheets consist of the
following:





December 31,2008
                    
                    
                    2007Revolving
      acquisition credit facility bearing interest of prime plus
      2.0%
                    
                    $
                    —
                    
                    
                    $
                    6,000Notes
      payable bearing interest of 4.80% payable monthly due September
      2009
                    
                    
                    91
                    
                    
                    
                    200Total,
      all due within 12 months
                    
                    $
                    91
                    
                    
                    $
                    6,200





On
June 3, 2008, the Company amended its senior credit facility agreement
(“Agreement”) with Castle Pines Capital LLC (“CPC”) which provides inventory
financing and working capital funding. Key terms of the Agreement are summarized
as follows:





•
            The
      Agreement provides a discretionary line of credit up to a maximum
      aggregate amount of $60,000 to purchase inventory from CPC approved
      vendors.





•
            The
      Agreement provides a working capital revolving line of credit under the
      above line of credit with an aggregate outstanding sublimit of
      $10,000.





•
            The
      working capital revolving line of credit incurs interest payable monthly
      at the rate of prime plus 0.5%.





•
            The
      Agreement contains customary covenants regarding maintenance of insurance
      coverage, maintenance of and reporting collateral, and submission of
      financial statements. The Agreement also contains covenants measured as of
      the end of each calendar quarter covering required maintenance of minimum
      current ratio, tangible net worth, working capital, and total liabilities
      to tangible net worth ratio (all as defined in the Agreement, as
      amended).





•
            The
      credit facility is collateralized by substantially all assets of the
      Company.





•
            The
      term of the Agreement is for one year, with automatic renewals for one
      year periods, except as otherwise provided under the
      Agreement.





61


The
senior credit facility also provides an additional $10,000 credit facility
specifically for acquisitions (“Acquisition Facility”). Key terms of the
Amendment are summarized as follows:





•
            $10,000
      maximum aggregate commitment for
acquisitions.





•
            Advances
      under the Acquisition Facility are not to exceed 80% of purchase price or
      six times adjusted EBITDA, as defined in the Amendment, for the twelve
      months immediately preceding the acquisition closing
  date.





•
            Interest
      is payable at the rate of prime plus
2%.





•
            An
      acquisition commitment fee of 1% of the advance amount is payable with
      one-eighth paid at closing and seven-eighths paid with each loan
      funding.





•
            Repayment
      of each advance under the Acquisition Facility is interest only for first
      year then amortizing for 36 to 48 months, to be determined for each
      advance, with no penalty to prepay any principal balance. The loan will
      also be reduced annually by an amount equal to 25% of excess cash flow, as
      defined in the Amendment, beginning December 31,
  2008.





•
            CPC
      may negotiate with the Company to revise existing financial covenants in
      conjunction with each advance as
required.





•
            Termination
      date of the senior credit facility was extended to August 1, 2009,
      subject to automatic renewal as defined in the
  Amendment.





Inventory
floor plan borrowings are reflected in floor plan financing in the accompanying
consolidated balance sheets and no amounts are interest bearing in either
consolidated balance sheets at December 31, 2008 and December 31,
2007. Borrowings accrue interest at the prime rate (3.25% at December 31,
2008) plus 0.5% on outstanding balances that extend beyond the vendor
approved free interest period. At December 31, 2008, INX was in compliance
with the loan covenants effective at that date and anticipates that it will be
able to comply with its loan covenants for the next twelve months. In the event
INX does not maintain compliance, it would be required to seek waivers from CPC
for those events, which, if not obtained, could accelerate repayment and require
INX to seek other sources of financing. At December 31, 2008, INX had
$40,002 outstanding on inventory floor plan finance borrowings, and the unused
availability was $3,125.





The
weighted-average interest rate for borrowings under all credit line arrangements
in effect during 2008, 2007 and 2006 was 7.5%, 9.4% and 8.5%, respectively. The
average amount of borrowings under all credit line arrangements in effect during
2008, 2007 and 2006 was $3,000, $3,180 and $3,004 respectively.





10.  Income
Taxes





The
provision for income taxes consisted of the following:





Year Ended
December 31,2008
                    
                    
                    2007
                    
                    
                    2006Current
      provision:Federal
                    
                    $
                    64
                    
                    
                    $
                    —
                    
                    
                    $
                    16State
                    
                    
                    220
                    
                    
                    
                    166
                    
                    
                    
                    28Total
      current provision
                    
                    
                    284
                    
                    
                    
                    166
                    
                    
                    
                    44Deferred
      expense (benefit)
                    
                    
                    1,727
                    
                    
                    
                    (402
                    )
                    
                    
                    —Total
      expense (benefit) from continuing operations
                    
                    
                    2,011
                    
                    
                    
                    (236
                    )
                    
                    
                    44Total
      expense (benefit) from discontinued operations
                    
                    
                    19
                    
                    
                    
                    28
                    
                    
                    
                    —Total
      expense (benefit)
                    
                    $
                    2,030
                    
                    
                    $
                    (208
                    )
                    
                    $
                    44





The total
provision for income taxes for continuing operations during the years ended
December 31, 2008, 2007 and 2006 varied from the U.S. federal
statutory rate due to the following:





Year Ended
December 31,2008
                    
                    
                    2007
                    
                    
                    2006Federal
      income tax at statutory rate
                    
                    $
                    (3,652
                    )
                    
                    $
                    1,162
                    
                    
                    $
                    761Impairment
      of non-deductible goodwill and intangible assets
                    
                    
                    1,395
                    
                    
                    
                    —
                    
                    
                    
                    —Meals
      and entertainment expenses
                    
                    
                    100
                    
                    
                    
                    82
                    
                    
                    
                    59State
      taxes, net of federal tax benefit
                    
                    
                    (5
                    )
                    
                    
                    110
                    
                    
                    
                    19Equity
      compensation
                    
                    
                    182
                    
                    
                    
                    —
                    
                    
                    
                    —Other
                    
                    
                    (40
                    )
                    
                    
                    43
                    
                    
                    
                    15Valuation
      allowance
                    
                    
                    4,031
                    
                    
                    
                    (1,633
                    )
                    
                    
                    (810
                    )Total
      expense (benefit) from continuing operations
                    
                    $
                    2,011
                    
                    
                    $
                    (236
                    )
                    
                    $
                    44





62


Net
deferred tax assets computed at the statutory rate related to temporary
differences were as follows:





Year
      Ended
                      December 31,2008
                    
                    
                    2007Deferred
      tax assets:Accounts
      and notes receivable
                    
                    $
                    824
                    
                    
                    $
                    619Closing
      and severance costs
                    
                    
                    85
                    
                    
                    
                    23Deferred
      service revenue
                    
                    
                    269
                    
                    
                    
                    331Share-based
      compensation
                    
                    
                    155
                    
                    
                    
                    55Accrued
      liabilities
                    
                    
                    1,409
                    
                    
                    
                    1,396Depreciation
                    
                    
                    45
                    
                    
                    
                    —Amortization
      of intangibles
                    
                    
                    1,559
                    
                    
                    
                    —Other
                    
                    
                    23
                    
                    
                    
                    17Net
      operating loss carryforward /tax credit carryforward
                    
                    
                    64
                    
                    
                    
                    —Total
      deferred tax assets
                    
                    
                    4,433
                    
                    
                    
                    2,441Less:
      Valuation allowance
                    
                    
                    (4,031
                    )
                    
                    
                    —Net
      deferred tax asset
                    
                    
                    402
                    
                    
                    
                    2,441Deferred
      tax liabilities:Amortization
      of intangibles
                    
                    
                    —
                    
                    
                    
                    (1,444
                    )Inventory
      reserves
                    
                    
                    (402
                    )
                    
                    
                    (286
                    )Depreciation
                    
                    
                    —
                    
                    
                    
                    (176
                    )Other
                    
                    
                    —
                    
                    
                    
                    —Total
      deferred tax liabilities
                    
                    
                    (402
                    )
                    
                    
                    (1,906
                    )Net
      deferred tax asset (liability)
                    
                    $
                    —
                    
                    
                    $
                    535





In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which temporary
differences, as determined pursuant to SFAS No. 109, “Accounting for
Income Taxes,” become deductible. Management considers the reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Management’s evaluation of the realizability of deferred
tax assets must consider both positive and negative evidence. The weight given
to the potential effects of positive and negative evidence is based on the
extent to which it can be objectively verified. During the fourth quarter of
2008, after giving consideration to the impairment charge, we established a full
valuation allowance against the related deferred tax asset and all other
temporary items totaling $4,031 as we determined it was more like than not that
the assets would not be used to reduce future tax liabilities. During the fourth
quarter of 2007, the Company reversed the valuation allowance related to the net
operating loss carryforwards and other temporary items as the Company determined
it was more likely than not that it would be able to use the assets to reduce
future tax liabilities. The reversal resulted in recognition of an income tax
benefit of $535 in 2007 and a corresponding increase in the deferred tax asset
on the Consolidated Balance Sheet.





At
December 31, 2008, INX has a net operating loss (NOL) carryforward for
federal income tax return purposes of approximately $2,540. Since United States
tax laws limit the time during which an NOL may be applied against future
taxable income and tax liabilities, INX may not be able to take full advantage
of its NOL carryforward for federal income tax purposes. The carryforward will
expire during the period 2023 through 2027 if not otherwise used. A change in
ownership, as defined by federal income tax regulations, could significantly
limit the company’s ability to utilize its carryforward.





As a
result of the adoption of SFAS 123(R), the Company recognizes tax benefits
associated with the exercise of stock options directly to stockholders’ equity
only when realized. Accordingly, deferred tax assets are not recognized for net
operating loss carryforwards resulting from windfall tax benefits. A windfall
tax benefit occurs when the actual tax benefit realized upon an employee’s
disposition of a share-based award exceeds the cumulative book compensation
charge associated with the award. At December 31, 2008, windfall tax
benefits included in NOL carryforward but not reflected in deferred tax assets
are $2,540.





63




11.  Adoption
of FASB Interpretation No. 48





Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109” (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This Interpretation also provides related guidance on
derecognition, classification, interest and penalties, and accounting in interim
periods and disclosure. The adoption of FIN 48 did not have a material
impact on the consolidated financial statements for the year ended
December 31, 2007.





The
Company and its subsidiary file income tax returns in the U.S. federal
jurisdiction and several states. With few exceptions, the Company is no longer
subject to U.S. federal or state and local income tax examinations by tax
authorities for years before 2003. The Company is currently not undergoing an
income tax examination in any jurisdiction. The Company has not recorded a
FIN 48 liability as of January 1, 2007, the date of
adoption.





There
were no interest or penalties recorded for unrecognized tax benefits for the
year ended December 31, 2008 and 2007. There were no interest or penalties
accrued in the consolidated balance sheets for the years ended December 31,
2008 and 2007.





12.  Stockholders’
Equity





Registered
Direct Offering





In June,
2008, the Company sold 900,000 shares of common stock through a registered
direct offering to certain institutional investors at a price of $11.00 per
share. The net cash proceeds, after deducting the placement agent’s fee and
other offering expenses of $1,149, were approximately $8,751. The net cash
proceeds were partially used to repay the $6,000 outstanding balance under the
Acquisition Facility, with the remainder to be used for general corporate
purposes including possible future acquisitions.





Equity
Compensation Plans





The
Company currently grants stock options under the following equity compensation
plans:





1996 Incentive Stock Plan and the
1996 Non-Employee Director Stock Option Plan — The 1996 Incentive
Stock Plan (the “1996 Incentive Plan”) and the 1996 Non-Employee Director Stock
Option Plan (the “Director Plan”) were approved by the shareholders and no
further shares may be granted under either plan. The 1996 Incentive Plan
provided for the granting of incentive awards in the form of stock options,
restricted stock, phantom stock, stock bonuses and cash bonuses in accordance
with the provisions of the plan. The Director Plan provided for a one-time
option by newly elected directors to purchase up to 5,000 common shares, after
which each director was entitled to receive an option to purchase up to 5,000
common shares upon each date of re-election to INX’s Board of Directors. Options
granted under the Director Plan and the 1996 Incentive Plan have an exercise
price equal to the fair market value on the date of grant, are fully vested at
December 31, 2007, and generally expire ten years after the grant
date.





2000 Stock Incentive
Plan — INX adopted the 2000 Stock Incentive Plan (the “2000
Incentive Plan”) as approved at the May 2000 annual shareholder’s meeting. At
the May 13, 2008 shareholder’s meeting the 2000 Incentive Plan was
amended to increase the number of shares of common stock available for stock
option grants to 3,073,103. The 2000 Incentive Plan provides for the granting of
incentive awards in the form of stock-based awards and cash bonuses in
accordance with the provisions of the plan. All employees, including officers,
and consultants and non-employee directors are eligible to participate in the
2000 Incentive Plan. Generally, the Compensation Committee has the discretion to
determine the exercise price of each stock option under the 2000 Incentive Plan,
and they expire within ten years of the grant date, except those classified as
Incentive Stock Option (“ISO”) grants to a 10% or greater stockholder. ISO
grants to a 10% or greater stockholder expire within five years of the grant
date. The exercise price of each ISO grant may not be less than 100% of the fair
market value of a share of common stock on the date of grant (110% in the case
of a 10% or greater stockholder). Options granted under the 2000 Incentive Plan
are subject to either cliff or graded vesting, generally ranging from three to
ten years. At December 31, 2008, 125,780 shares were available for
future option grants under the 2000 Incentive Plan.





64


Grant-Date
Fair Value





The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an award. The fair value of options granted during the 2008, 2007
and 2006 periods were calculated using the following estimated weighted average
assumptions:





2008
              2007
              2006Expected
      volatility
              61.1%
              60.3%
              63.1%Expected
      term (in years)
              6.5
              6.5
              6.3Risk-free
      interest rate
              2.8%
              4.4%
              4.7%Expected
      dividend yield
              0%
              0%
              0%





The
Company uses the simplified method outlined in SAB 110 to estimate expected
lives for options granted during the period. The risk-free interest rate is
based on the yield on zero-coupon U.S. Treasury securities for a period
that is commensurate with the expected term assumption. The Company has not
historically issued any dividends and does not expect to in the
future.





Share-Based
Compensation Expense





The
Company uses the straight-line attribution method to recognize expense for
unvested options. The amount of share-based compensation recognized during a
period is based on the value of the awards that are ultimately expected to vest.
SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The Company will re-evaluate the forfeiture rate annually and
adjust it as necessary, and the adjustments could be material.





Share-based
compensation expense for employee stock purchases, restricted stock awards and
stock options recognized under SFAS 123R for the years ended
December 31, 2008, 2007 and 2006 was as follows:





Year Ended
December 31,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006(Restated)Cost
      of products and services — services
                                        
                                        $
                                        265
                                        
                                        
                                        $
                                        78
                                        
                                        
                                        $
                                        57Selling,
      general and administrative expenses
                                        
                                        
                                        1,440
                                        
                                        
                                        
                                        665
                                        
                                        
                                        
                                        368Share-based
      compensation from continuing operations before income
taxes
                                        
                                        
                                        1,705
                                        
                                        
                                        
                                        743
                                        
                                        
                                        
                                        425Income
      tax benefit
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Share-based
      compensation from continuing operations
                                        
                                        
                                        1,705
                                        
                                        
                                        
                                        743
                                        
                                        
                                        
                                        425Share-based
      compensation from discontinued operations
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (8
                                        )
                                        
                                        
                                        55Total
      share-based compensation
                                        
                                        $
                                        1,705
                                        
                                        
                                        $
                                        735
                                        
                                        
                                        $
                                        480Impact
      of total share-based compensation on net income per share:Basic
                                        
                                        $
                                        (0.21
                                        )
                                        
                                        $
                                        (0.10
                                        )
                                        
                                        $
                                        (0.08
                                        )Diluted
                                        
                                        $
                                        (0.21
                                        )
                                        
                                        $
                                        (0.09
                                        )
                                        
                                        $
                                        (0.07
                                        )





Option
Activity





A summary
of the activity under the Company’s stock option plans for the year ended
December 31, 2008 is presented below:





Shares
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Term (Years)
                
                
                Aggregate
                  Intrinsic
                  ValueOptions
      outstanding at December 31, 2007
                
                
                1,480,736
                
                
                $
                4.83Granted
                
                
                20,000
                
                
                
                7.59
                
                
                
                
                
                $
                —Exercised
                
                
                (151,624
                )
                
                
                5.48
                
                
                
                
                
                $
                688Canceled
                
                
                (63,530
                )
                
                
                8.27
                
                
                
                
                
                $
                —Options
      outstanding December 31, 2008
                
                
                1,285,582
                
                
                $
                4.63
                
                
                
                5.51
                
                
                $
                1,768Options
      exercisable at December 31, 2008
                
                
                948,782
                
                
                $
                3.23
                
                
                
                4.62
                
                
                $
                1,768Options
      vested and options expected to vest at December 31,
    2008
                
                
                1,173,424
                
                
                $
                4.37
                
                
                
                5.84
                
                
                $
                1,767





The total
intrinsic value of options exercised during the year ended December 31,
2008, 2007 and 2006 was $688, $5,376 and $1,682, respectively. The total
grant-date fair value of stock options that became fully vested during the year
ended December 31, 2008, 2007 and 2006 was approximately $677, $532 and
$412, respectively. The weighted average grant-date fair value of options
granted during the year ended December 31, 2008, 2007 and 2006 was $5.28,
$6.41 and $4.46, respectively. As of December 31, 2008, there was $1,612 of
total unrecognized compensation cost, net of estimated forfeitures, related to
unvested share-based awards, which is expected to be recognized over a
weighted-average period of 1.8 years.





65


A summary
of the status of nonvested shares as of December 31, 2007 and changes
during the year ended December 31, 2008 is presented below:





Nonvested Shares
              
              Shares
              
              
              Weighted
      Average
                Grant
      Date
                Fair ValueNonvested
      at December 31, 2007
              
              
              195,509
              
              
              
              —Granted
              
              
              332,443
              
              
              $
              8.18Vested
              
              
              (57,708
              )
              
              $
              11.17Forfeited
              
              
              (33,250
              )
              
              $
              10.00Nonvested
      at December 31, 2008
              
              
              436,994
              
              
              $
              9.04





Share-based
compensation expense related to employee restricted stock grants was $771, $88
and $8 for the years ended December 31, 2008, 2007 and 2006, respectively.
As of December 31, 2008, there was $3,415 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under the Plan, which is expected to be recognized over the
weighted-average period of 4 years.





On
November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued
FASB Staff Position No. FAS 123R-3 “Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards.” The Company has
elected to adopt the alternative transition method provided in the FASB Staff
Position for calculating the tax effects of stock-based compensation pursuant to
SFAS 123R. The alternative transition method includes simplified methods to
establish the beginning balance of the additional paid-in capital pool (“APIC
pool”) related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Consolidated Statements of
Cash Flows of the tax effects of employee stock-based compensation awards that
are outstanding upon adoption of SFAS 123R. SFAS 123R also requires
the benefits of tax deductions in excess of recognized compensation expense to
be reported as a financing cash flow, rather than as an operating cash flow as
prescribed under the prior accounting rules. This requirement reduces net
operating cash flows and increases net financing cash flows in periods after
adoption. Total cash flow remains unchanged from what would have been reported
under prior accounting rules. Since no tax benefit was recorded in the
consolidated statements of operations for share-based payment awards in the
years ended December 31, 2008, 2007 and 2006, the aforementioned provisions
of SFAS 123R and the related FASB Staff Position No. FAS 123R-3
had no impact on the consolidated financial statements.





Upon
re-election to the Board of Directors in May 2008 and 2007, INX issued 7,443 and
9,072 shares, respectively to its non-employee directors. The issued shares
were valued at $90 determined by multiplying the shares issued by the closing
price per share for the common stock as reported by Nasdaq on May 13, 2008
and May 15, 2007.





Employee
Stock Purchase Plan





On
April 3, 2008, the Company’s Board of Directors approved the INX Inc. 2008
Employee Stock Purchase Plan (the “Purchase Plan”) which was approved by Company
stockholders at the Annual Meeting on May 13, 2008. The purpose of the
Purchase Plan is to provide employees of the Company and its designated
subsidiaries with an opportunity to purchase common stock of the Company. The
aggregate number of shares of the Company’s common stock that will be available
for issuance under the Purchase Plan is 500,000 shares, which shares may be
authorized, but unissued shares or treasury shares. Eligible employees may elect
to participate in each offering period by electing to contribute between 1% and
6% of such employee’s compensation to the Purchase Plan on each payroll date
during the offering period. The Purchase Plan was initially implemented with a
$6 limit on the amount of contributions that may be made to the Purchase Plan
during any offering period. The purchase price per share is equal to 85% of the
fair market value on the first trading day of the offering period or, if less,
85% of the fair market value on the last trading day of the purchase period.
Under the Purchase Plan, the company issued 77,600 shares during 2008 and
recognized share based compensation expense of $193.





Capital
Stock





Holders
of INX’s common stock are entitled to one vote per share on all matters to be
voted on by shareholders and are entitled to receive dividends, if any, as may
be declared from time to time by the Board of Directors of INX (the “Board”).
Upon any liquidation or dissolution of INX, the holders of common stock are
entitled, subject to any preferential rights of the holders of preferred stock,
to receive a pro rata share of all of the assets remaining available for
distribution to shareholders after payment of all liabilities. There are no
shares of preferred stock issued or outstanding.





66




Common
Stock Repurchase Plan





Effective
December 4, 2007, the Board of Directors authorized the purchase of up to
$2,000 of the Company’s common stock on or before March 31, 2008. These
purchases were required to be made in open market or privately negotiated
transactions in compliance with Rule 10b-18 under the Securities Exchange
Act of 1934, as amended, subject to market and business conditions, applicable
legal requirements and other factors. The plan also requires the purchased
shares to be retired as soon as practicable following the purchase. The plan did
not obligate the Company to purchase any particular amount of common stock and
could be suspended at any time at the Company’s discretion. During the
three-month period ended March 31, 2008, 184,985 shares were purchased
for $1,536, of which 3,800 shares were purchased in 2007 and settled and
recorded in 2008. From inception of the repurchase plan to March 31, 2008,
186,785 shares were purchased for $1,554, an average purchase price of
$8.27 per share. The December 4, 2007 repurchase plan expired on
March 31, 2008.





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





On
September 10, 2008, the Board of Directors authorized a new repurchase plan
of up to $2,000 of the Company’s common stock on or before December 31,
2008 under similar terms as the plan authorized on December 4, 2007. During
September 2008, 78,940 shares were purchased under the plan for $557, an
average purchase price of $7.03 per share. During the three month period
ended December 31, 2008, 201,933 shares were purchased under the plan
for $1,138, an average purchase price of $5.61 per share. On
December 3, 2008, the Board of Directors modified the existing common stock
repurchase plan, authorizing the repurchase of $2,000 during the period
January 1, 2009 to March 31, 2009.





Warrants





Included
in the units issued by INX on May 7, 2004 were 575,000 warrants to purchase
common stock at an exercise price of $12.45 per share. These warrants are
exercisable through May 7, 2009 and are subject to redemption by INX at a
price of $0.25 per warrant upon 30 days notice to the holders;
however, INX may only redeem the warrants if the closing price for INX common
stock, as reported on Nasdaq, for any five consecutive days has equaled or
exceeded $16.60.





On
May 7, 2004 INX issued warrants to the underwriters to purchase up to
50,000 units at an exercise price equal to $19.92 per unit. These
warrants are exercisable during the four-year period beginning May 7, 2005
which is one year from the date of the prospectus. Pursuant to NASD
Rule 2710(g), these warrants cannot be sold, transferred, assigned, pledged
or hypothecated by any person for a period of one year following the effective
date of the offering, except to any NASD member participating in the offering,
to bona fide officers, by operation of law or if we are reorganized, so long as
the securities so transferred remain subject to the same transfer restriction
for the remainder of the one-year period. The holder of the representative’s
warrant will have, in that capacity, no voting, dividend or other stockholder
rights.





In
January 2007, INX issued warrants to an investor relations firm under a personal
services agreement to purchase up to 50,000 shares of common stock at an
exercise price equal to $8.00 per share expiring January 1, 2009. The
warrants are exercisable and resulted in a charge to 2007 earnings of $86, which
was reflected as an increase in selling, general, and administrative expenses
with a corresponding increase in additional paid-in-capital. There was no impact
on total stockholders’ equity.





13.  Major
Customers and Geographic Concentrations





International
sales were approximately 3.5%, 3.7% and 4.9% of consolidated revenues for 2008,
2007 and 2006, respectively, based on the country in which the products were
delivered or services provided. No single customer represented more than 10% of
2008, 2007 or 2006 consolidated revenues.





14.  Related
Party Transactions





Under an
agreement that expired on January 31, 2007 (the “Old Lease”), the Company
leased approximately 48,000 square feet of office space from Allstar
Equities, Inc., (“Allstar”), wholly-owned by Mr. James H. Long, the
Company’s Chief Executive Officer and largest shareholder. The office space was
leased under the Old Lease at the rate of $37 per month triple net. Due to
the sale of the Company’s former Stratasoft and Valerent subsidiaries,
substantially less space was required by the Company at this location.
Accordingly, on October 11, 2006, the Company executed a new lease
agreement (“New Lease”) with Allstar effective February 1, 2007, reducing
the leased space to 16,488 square feet for a lease term of eighty-four
months ending January 31, 2014 and base rent of $20 per month, gross. Under
the Old Lease, occupancy expenses such as electricity, gas, water, janitorial,
and security averaging approximately $280 per year are paid by the Company.
Under the New Lease these services are included in the base rent with the costs
borne by the landlord.





67


On
January 25, 2008, Allstar sold the building and rights under the Lease to
the General Consulate of Equatorial Guinea (“Consulate”), an unrelated third
party. In connection with the sale of the building, INX, Allstar and Consulate
executed a First Amendment to INX Inc. Lease Agreement (“Amendment”) on
January 22, 2008, which included the following terms:





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





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





Rental
expense under the lease agreements with Allstar for the years ended
December 31, 2008, 2007 and 2006 totaled approximately $20, $257, and $446,
respectively. The Company paid for remodeling, parking lot repaving, and other
improvements of the building leased from Allstar totaling $7, $106, and $267 for
the years ended December 31, 2008, 2007 and 2006,
respectively.





The Audit
Committee of the Board of Directors reviewed and approved those transactions
with Allstar defined as related party transactions by the SEC as required by
Nasdaq rules.





In
December 2008, the Company purchased the operations of VocalMash, an application
integration company, from Andrew Cadwell, Vice President of Sales. The purchase
price consideration was 60,000 shares of the Company’s common stock valued
at $293 as more fully discussed in Note 3. The Board of Directors reviewed
and approved the related party transaction contemplated by the
Amendment.





15.  Commitments
and Contingencies





Litigation — The Company
served as a subcontractor to Complete Communications Services, Inc. (“CoCom”), a
subcontractor on certain school district contracts during 2007. On
August 24, 2007, CoCom filed a Chapter 11 Petition in
U.S. Bankruptcy Court. As of December 31, 2007, the Company had an
accounts receivable from CoCom of $325, less an allowance for doubtful accounts
of $250. The remaining net accounts receivable of $75 was covered by a
subcontractor bond, which was collected in July 2008. The Company received
payments of $102 during the ninety day period preceding the bankruptcy filing
which could potentially be deemed preferential. While the result of the
potential preference claims cannot be predicted with certainty, INX believes the
final outcome of such matters will not have a materially adverse effect on its
results of operations or financial position.





On
January 6, 2009, Lyondell Chemical Company (“Lyondell”) filed a
Chapter 11 Petition in U.S. Bankruptcy Court. As of December 31,
2008, the Company had an accounts receivable from Lyondell of $99, less an
allowance for doubtful accounts of $99. The Company received payments of $539
during the ninety day period preceding the bankruptcy filing which could
potentially be deemed preferential. INX cannot predict the final outcome of this
matter, including whether it could have a materially adverse effect on its
results of operations or financial position.





On
January 24, 2008, Schneider Rucinski Enterprises (“Plaintiff”) filed a
lawsuit in the United States District Court Southern District of California
(“Court”) styled Schneider
Rucinski Enterprises v. Touch Asia Outsourcing Solutions,
Stratasoft, Inc., INX
Inc., et alclaiming damages of $555 and other relief including
relief under RICO statutes. On December 8, 2008, we filed motions to
dismiss on the grounds of lack of federal jurisdiction and failure to state
claims upon which relief could be granted. Oral arguments were made during a
hearing on February 24, 2009 and, on March 3, 2009, the Court ruled in
INX’s favor, dismissing the lawsuit and closing the case.





On
February 6, 2009, INX filed a lawsuit in the United States District Court
Eastern District of Texas styled InternetworkExperts, Inc.
(INX) v. International Business Machines Corporationclaiming damages totaling $1,791 plus interest, attorney fees, and costs
of suit for breach of purchase orders in 2004 and 2006 under which payments were
due upon early termination of services. The amount that may ultimately be
recovered, if any, cannot be determined at this time, and such amount will be
recorded only upon settlement or payment by the defendant.





68


INX is
also party to other litigation and claims which management believes are normal
in the course of its operations. While the results of such litigation and claims
cannot be predicted with certainty, INX believes the final outcome of such
matters will not have a materially adverse effect on its results of operations
or financial position.





Operating Leases — Rent
expense for the years ended December 31, 2008, 2007 and 2006 totaled
approximately $1,940, $1,404, and $1,111, respectively. Future minimum rental
commitments on noncancellable operating leases with remaining terms in excess of
one year amount to approximately $1,672 in 2009, $1,119 in 2010, $617 in 2011,
$492 in 2012, $294 in 2013, and $20 thereafter.





Capital Leases — Future
minimum lease payments on capital leases are $85 in 2009, $85 in 2010, $64 in
2011, and $21 in 2012 and include total imputed interest of $15.





401(k) Plan — INX
maintains a 401(k) savings plan wherein it matches a portion of the employee
contribution. Effective March 1, 2008, the company match was increased to
50 percent of the employee’s contribution to a maximum of three percent of
compensation. Previously the company match was $10 per pay period plus
three percent of the employee’s contribution. In addition, there is a
discretionary matching fund based on the net profitability of INX. All full-time
employees who have completed 90 days of service with INX are eligible to
participate in the plan. Declaration of the discretionary portion of the
matching fund is the decision of the Board. INX has made no additional
contributions to the plan for the three years ended December 31, 2008.
Under the standard plan matching program, INX’s expense was $557, $80 and $86
for the years ended December 31, 2008, 2007 and 2006,
respectively.





16.
Restatement of Previously Issued Financial Statements





On August
12, 2009, management of the Company in consultation with the Audit Committee of
the Board of Directors, determined that the Company's financial statements
included in the Annual Report on Form 10-K for the fiscal year ended December
31, 2008 required restatement.  This determination was made following
a review which included the following:





·
            The
      Company previously presented its floor plan financing balances as trade
      accounts payable because it believed that its principal vendor had a
      substantial investment in the floor plan financing
      company.  During the preparation of the Quarterly Report on Form
      10-Q for the quarter ended June 30, 2009, the Company became aware that
      the principal vendor had no ownership interest in its floor plan financing
      company.  Consequently, the Company is correcting its
      presentation of the floor plan balances in its Balance Sheets from trade
      accounts payable to floor plan financing and the related amounts in its
      Statements of Cash Flows from operating activities to financing
      activities.  The error affects the Company’s Annual Report on
      Form 10-K for the three years ended December 31, 2008 and has no effect on
      the previously reported Statements of Operations.  There is no
      impact to the Company's current liabilities or total liabilities as a
      result of this reclassification for each of the three years ended December
      31, 2008.





·
            In
      addition to the aforementioned correction, we are recording certain
      immaterial adjustments that increase pre-tax expense by $76 for the year
      ended December 31, 2008, of which $26 was previously recorded in the three
      months ended March 31, 2009.  The adjustments consisted of a
      pre-tax expense of $50 related to stock option modifications and pre-tax
      expense of $26 related to the accrual of outside contractor
      costs.







The
effect of the aforementioned corrections on the consolidated financial
statements as of December 31, 2008 and 2007 and for the three years ended
December 31, 2008 as previously filed on the Annual Report on Form 10-K for the
year ended December 31, 2008 are disclosed below.





69


The
following is a summary of the impact of the restatement on the Consolidated
Balance Sheets as of  December 31, 2008, 2007, and 2006.





December
      31, 2008As
      Previously
                  Reported
                
                
                Restatement
                  Adjustment
                
                
                As
      RestatedCurrent
      Assets:Cash
      and cash equivalents
                
                $
                10,937
                
                
                
                
                
                $
                10,937Accounts
      receivable, net
                
                
                52,866
                
                
                
                
                
                
                52,866Inventory,
      net
                
                
                2,406
                
                
                
                
                
                
                2,406Other
      current assets
                
                
                1,275
                
                
                
                
                
                
                1,275Total
      current assets
                
                
                67,484
                
                
                
                
                
                
                67,484Property
      and equipment, net
                
                
                5,207
                
                
                
                
                
                
                5,207Goodwill
                
                
                12,751
                
                
                
                
                
                
                12,751Intangible
      and other assets, net
                
                
                1,852
                
                
                
                
                
                
                1,852Total
      assets
                
                $
                87,294
                
                
                $
                —
                
                
                $
                87,294Current
      Liabilities:Accounts
      payable
                
                $
                45,172
                
                
                $
                (40,002
                )
                
                $
                5,170Floor
      plan financing
                
                
                —
                
                
                
                40,002
                
                
                
                40,002Accrued
      expenses
                
                
                6,873
                
                
                
                26
                
                
                
                6,899Current
      portion of capital lease obligations
                
                
                77
                
                
                
                
                
                
                
                77Notes
      payable
                
                
                91
                
                
                
                
                
                
                
                91Other
      current liabilities
                
                
                1,072
                
                
                
                
                
                
                
                1,072Total
      current liabilities
                
                
                53,285
                
                
                
                26
                
                
                
                53,311Long-term
      Liabilities:Long-term
      portion of capital lease obligations
                
                
                163
                
                
                
                
                
                
                
                163Other
      long-term liabilities
                
                
                250
                
                
                
                
                
                
                
                250Total
      long-term liabilities
                
                
                413
                
                
                
                
                
                
                
                413Stockholders’
      Equity:Common
      stock
                
                
                87
                
                
                
                
                
                
                
                87Additional
      paid-in capital
                
                
                50,692
                
                
                
                50
                
                
                
                50,742Accumulated
      deficit
                
                
                (17,183
                )
                
                
                (76
                )
                
                
                (17,259
                )Total
      stockholders’ equity
                
                
                33,596
                
                
                
                (26
                )
                
                
                33,570Total
      liabilities and stockholders’ equity
                
                $
                87,294
                
                
                $
                —
                
                
                $
                87,294






December
      31, 2007As
      Previously
                  Reported
                
                
                Restatement
                  Adjustment
                
                
                As
      RestatedAccounts
      payable
                
                $
                37,233
                
                
                $
                (32,519
                )
                
                $
                4,714Floor
      plan financing
                
                
                —
                
                
                
                32,472
                
                
                
                32,472Accrued
      expenses
                
                
                1,575
                
                
                
                47
                
                
                
                1,622








December
      31, 2006As
      Previously
                  Reported
                
                
                Restatement
                  Adjustment
                
                
                As
      RestatedAccounts
      payable
                
                $
                28,798
                
                
                $
                (25,991
                )
                
                $
                2,807Floor
      plan financing
                
                
                —
                
                
                
                25,991
                
                
                
                25,991





70


The
following is a summary of the impact of the restatement on the statements of
operations for the year ended  December 31, 2008.





December
      31, 2008As
      Previously
                  Reported
                
                
                Restatement
                  Adjustment
                
                
                As
      RestatedRevenue:Products
                
                $
                213,125
                
                
                
                
                
                $
                213,125Services
                
                
                46,032
                
                
                
                
                
                
                46,032Total
      revenue
                
                
                259,157
                
                
                
                
                
                
                259,157Cost
      of goods and services:Products
                
                
                175,244
                
                
                
                
                
                
                175,244Services
                
                
                32,756
                
                
                $
                26
                
                
                
                32,782Total
      cost of goods and services
                
                
                208,000
                
                
                
                26
                
                
                
                208,026Gross
      profit
                
                
                51,157
                
                
                
                (26
                )
                
                
                51,131Selling,
      general and administrative expenses
                
                
                48,734
                
                
                
                50
                
                
                
                48,784Impairment
      charge
                
                
                13,071
                
                
                
                
                
                
                
                13,071Operating
      loss
                
                
                (10,648
                )
                
                
                (76
                )
                
                
                (10,724
                )Interest
      expense
                
                
                (330
                )
                
                
                
                
                
                
                (330
                )Interest
      income
                
                
                357
                
                
                
                
                
                
                
                357Other
      expense, net
                
                
                (43
                )
                
                
                
                
                
                
                (43
                )Loss
      from continuing operations before income taxes
                
                
                (10,664
                )
                
                
                (76
                )
                
                
                (10,740
                )Income
      tax expense (benefit)
                
                
                2,011
                
                
                
                
                
                
                
                2,011Net
      loss from continuing operations
                
                
                (12,675
                )
                
                
                (76
                )
                
                
                (12,751
                )Income
      from discontinued operations, net of taxes
                
                
                37
                
                
                
                
                
                
                
                37Net
      loss
                
                $
                (12,638
                )
                
                $
                (76
                )
                
                $
                (12,714
                )Net
      loss per share:Basic:Net
      loss from continuing operations before minority interest
                
                $
                (1.55
                )
                
                $
                (0.01
                )
                
                $
                (1.56
                )Loss
      from discontinued operations, net of taxes
                
                
                —
                
                
                
                —
                
                
                
                —Net
      loss per share
                
                $
                (1.55
                )
                
                $
                (0.01
                )
                
                $
                (1.56
                )Diluted:Net
      loss from continuing operations before minority interest
                
                $
                (1.55
                )
                
                $
                (0.01
                )
                
                $
                (1.56
                )Loss
      from discontinued operations, net of taxes
                
                
                —
                
                
                
                —
                
                
                
                —Net
      loss per share
                
                $
                (1.55
                )
                
                $
                (0.01
                )
                
                $
                (1.56
                )Shares
      used in computing net income (loss) per share:Basic
                
                
                8,133,165
                
                
                
                7,026,623
                
                
                
                8,133,165Diluted
                
                
                8,133,165
                
                
                
                8,027,286
                
                
                
                8,133,165




71


The
following is a summary of the impact of the restatement on the statements of
cash flows for the years ended  December 31, 2008, 2007, and
2006.





Year
      Ended December 31, 2008As
      Previously
                  Reported
                
                
                Restatement
                  Adjustment
                
                
                As
      RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (12,638
                )
                
                $
                (76
                )
                
                $
                (12,714
                )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Income
      from discontinued operations
                
                
                (37
                )
                
                
                
                
                
                
                (37
                )Depreciation
      and amortization
                
                
                2,667
                
                
                
                
                
                
                
                2,667Impairment
      charge
                
                
                13,071
                
                
                
                
                
                
                
                13,071Deferred
      income tax expense
                
                
                535
                
                
                
                
                
                
                
                535Share-based
      compensation expense
                
                
                1,565
                
                
                
                50
                
                
                
                1,615Excess
      tax benefits from stock option exercises
                
                
                —
                
                
                
                (1,107
                )
                
                
                (1,107
                )Bad
      debt expense
                
                
                541
                
                
                
                
                
                
                
                541Issuance
      of stock grant
                
                
                116
                
                
                
                
                
                
                
                116Loss
      on retirement of assets
                
                
                43
                
                
                
                
                
                
                
                43Tax
      expense from discontinued operations
                
                
                19
                
                
                
                
                
                
                
                19Changes
      in assets and liabilities that provided (used) cash:Accounts
      receivable, net
                
                
                (8,279
                )
                
                
                
                
                
                
                (8,279
                )Inventory
                
                
                (953
                )
                
                
                
                
                
                
                (953
                )Other
      current assets
                
                
                758
                
                
                
                
                
                
                
                758Accounts
      payable
                
                
                7,939
                
                
                
                (7,483
                )
                
                
                456Accrued
      expenses
                
                
                1,458
                
                
                
                (21
                )
                
                
                1,437Other
      current and long-term liabilities
                
                
                (502
                )
                
                
                1,107
                
                
                
                605Net
      cash provided by (used in) continuing operations
                
                
                6,303
                
                
                
                (7,530
                )
                
                
                (1,227
                )Net
      operating activities from discontinued operations
                
                
                18
                
                
                
                
                
                
                
                18Net
      cash provided by (used in) operating activities
                
                
                6,321
                
                
                
                (7,530
                )
                
                
                (1,209
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures, net of acquisitions
                
                
                (2,260
                )
                
                
                
                
                
                
                (2,260
                )Acquisition
      of Access Flow, Inc.
                
                
                (2,550
                )
                
                
                
                
                
                
                (2,550
                )Acquisition
      of NetTeks Technology Consultants, Inc.
                
                
                (1,440
                )
                
                
                
                
                
                
                (1,440
                )Acquisition
      of Select, Inc., net of $2,864 cash acquired
                
                
                153
                
                
                
                
                
                
                
                153Proceeds
      of sale of fixed assets
                
                
                1
                
                
                
                
                
                
                
                1Transaction
      costs paid for acquisitions
                
                
                (225
                )
                
                
                
                
                
                
                (225
                )Net
      cash used in investing activities
                
                
                (6,321
                )
                
                
                
                
                
                
                (6,321
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of common stock
                
                
                8,751
                
                
                
                
                
                
                
                8,751Proceeds
      from issuance of common stock under Employee Stock Purchase
      Plan
                
                
                344
                
                
                
                
                
                
                
                344Payments
      under acquisition credit facility
                
                
                (6,000
                )
                
                
                
                
                
                
                (6,000
                )Borrowings
      under floor plan financing, net
                
                
                —
                
                
                
                7,530
                
                
                
                7,530Proceeds
      from exercise of stock options
                
                
                831
                
                
                
                
                
                
                
                831Excess
      tax benefits from stock option exercises
                
                
                1,107
                
                
                
                
                
                
                
                1,107Proceeds
      from other short-term borrowings
                
                
                460
                
                
                
                
                
                
                
                460Payments
      of other short-term borrowings
                
                
                (601
                )
                
                
                
                
                
                
                (601
                )Purchase
      of treasury stock resulting from grantee election
                
                
                (61
                )
                
                
                
                
                
                
                (61
                )Purchase
      of common stock
                
                
                (3,234
                )
                
                
                
                
                
                
                (3,234
                )Net
      cash provided by financing activities
                
                
                1,597
                
                
                
                7,530
                
                
                
                9,127NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                1,597
                
                
                
                
                
                
                
                1,597CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                9,340
                
                
                
                
                
                
                
                9,340CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                10,937
                
                
                $
                —
                
                
                $
                10,937




72


Consolidated
Statement of Cash Flows for the year ended December 31, 2007:





December
      31, 2007As
      Previously
                  Reported
                
                
                Restatement
                  Adjustment
                
                
                As
      RestatedExcess
      tax benefits from stock option exercises
                
                $
                —
                
                
                $
                (160
                )
                
                $
                (160
                )Accounts
      payable
                
                
                1,653
                
                
                
                (6,528
                )
                
                
                (4,875
                )Accrued
      expenses
                
                
                (152
                )
                
                
                47
                
                
                
                (105
                )Other
      current and long-term liabilities
                
                
                (408
                )
                
                
                160
                
                
                
                (248
                )Net
      cash provided by continuing operations
                
                
                9,997
                
                
                
                (6,481
                )
                
                
                3,516Net
      cash provided by operating activities
                
                
                10,025
                
                
                
                (6,481
                )
                
                
                3,544Borrowings
      under non-interest bearing floor plan financing, net
                
                
                —
                
                
                
                6,481
                
                
                
                6,481Net
      cash provided by financing activities of continuing
    operations
                
                
                3,104
                
                
                
                6,481
                
                
                
                9,585Net
      cash provided by financing activities
                
                
                3,104
                
                
                
                6,481
                
                
                
                9,585





Consolidated
Statement of Cash Flows for the year ended December 31, 2006:





December
      31, 2006As
      Previously
                  Reported
                
                
                Restatement
                  Adjustment
                
                
                As
      RestatedAccounts
      payable
                
                $
                14,981
                
                
                $
                (15,978
                )
                
                $
                (997
                )Net
      cash used in continuing operations
                
                
                (26
                )
                
                
                (15,978
                )
                
                
                (16,004
                )Net
      cash used in operating activities
                
                
                (710
                )
                
                
                (15,978
                )
                
                
                (16,688
                )Borrowings
      under non-interest bearing floor plan financing, net
                
                
                —
                
                
                
                15,978
                
                
                
                15,978Net
      cash provided by financing activities of continuing
    operations
                
                
                2,515
                
                
                
                15,978
                
                
                
                18,493Net
      cash provided by financing activities
                
                
                2,514
                
                
                
                15,978
                
                
                
                18,492











Schedule II


Valuation
and Qualifying Accounts


For
Each of the Three Years Ended December 31, 2008


(Amounts
in Thousands)





Balance
      at
                      Beginning
                      of Year
                    
                    
                    Charges
      to
                      Costs
      and
                      Expenses
                    
                    
                    Write-offs
                    
                    
                    Recoveries
                    
                    
                    Other
                      Changes
                    
                    
                    Balance
      at
                      End of
                      YearAccumulated
      provision deducted from related assets on balance sheet Allowance for
      doubtful accounts:2006
                    
                    $
                    161
                    
                    
                    $
                    63
                    
                    
                    $
                    5
                    
                    
                    $
                    80
                    
                    
                    $
                    —
                    
                    
                    $
                    2992007
                    
                    
                    299
                    
                    
                    
                    268
                    
                    
                    
                    117
                    
                    
                    
                    —
                    
                    
                    
                    20
                    
                    
                    
                    4702008
                    
                    
                    470
                    
                    
                    
                    541
                    
                    
                    
                    276
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    735





Note: amounts are
reported for continuing operations only.








Item 9.Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure





None.




Item 9A(T).Controls and
Procedures
 
 Evaluation
of Disclosure Controls and Procedures (Restated)
 
 In our
Annual Report on Form 10-K for year ended December 31, 2008, originally filed on
March 10, 2009 (the "Original Filing"), our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
to the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were
effective as of December 31, 2008.  In connection with our decision to
restate our Annual Report on Form 10-K for the year ended December 31, 2008, as
described in Note 16 to the consolidated financial statements in this Form
10-K/A, our management, including our Chief Executive Officer and Chief
Financial Officer, performed a reevaluation and concluded that our disclosure
controls and procedures were not effective as of December 31, 2008 as a result
of material weaknesses in our internal control over financial reporting as
discussed below.


73
 
 Material
Weaknesses in Internal Control over Financial Reporting and Status of
Remediation Efforts
 
 Our
management is responsible for establishing and maintaining adequate control over
financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange
Act. Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2008. In conducting its evaluation, our
management used the criteria set forth by the framework in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
 A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company's annual or interim financial
statements will not be prevented or detected in a timely basis.
 
 We did
not maintain effective controls over the application, monitoring and reporting
of the appropriate accounting policies related to non-standard financing
contracts.  Specifically, we did not consider or validate the
significant facts and assumptions underlying our accounting conclusions related
to the floor plan financing arrangement in a timely manner  This
deficiency, which was identified during the three months ended June 30, 2009,
resulted in  an error in the classification of our amounts payable
under the floor plan financing arrangement and which resulted in a restatement
of our consolidated balance sheets as of December 31, 2008 and 2007 and the
related consolidated statements of cash flows for the three year periods ended
December 31, 2008, as more fully described in Note 16 to the consolidated
financial statements included in this Form 10-K/A for the year ended December
31, 2008.  This deficiency represents a material weakness in internal
control over financial reporting as of December 31, 2008.
 
 We did
not maintain effective controls over the approval of modified grants of stock
options and restricted stock in accordance with incentive plan provisions and
the related application, monitoring and reporting of the appropriate accounting
policies.  Specifically, we did not obtain approval of the
Compensation Committee for modified grants of stock options and restricted stock
in accordance with the requirements of the INX Incentive Plan.  We did
not properly apply generally accepted accounting principles to modified grants
of stock options and restricted stock in a timely manner.  This
deficiency, which was identified during the three months ended June 30, 2009,
resulted in an error in share-based compensation expense recognized as reflected
in the restatement of our consolidated balance sheet as of December 31, 2008 and
the related consolidated statements of operations and cash flows for the
year ended December 31, 2008, as more fully described in Note 16 to the
consolidated financial statements included in this Form 10-K/A for the year
ended December 31, 2008.  This deficiency represents a material
weakness in internal control over financial reporting as of December 31,
2008.
 
 In the
Original Filing, management concluded that our internal control over financial
reporting was effective as of December 31, 2008. As a result of these
material weaknesses, management has revised its earlier assessment and has now
concluded that our internal control over financial reporting was not effective
as of December 31, 2008 based on criteria in Internal Control - Integrated
Framework issued by the COSO.  Accordingly, management has restated
its report on internal control over financial reporting.


In light
of the material weaknesses described above, we performed additional analysis and
other post-closing procedures to ensure that our financial statements were
prepared in accordance with generally accepted accounting
principles.  Accordingly, we believe that the financial statements
included in this report fairly present in all material respects, our financial
condition, results of operations, changes in shareholder's equity and cash flows
for the periods presented.
 
 This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management’s report in this annual report.
 
 Management's
Remediation Initiatives
  To
address the aforementioned material weakness in internal control related to the
review over the application and monitoring and reporting of the appropriate
accounting policies related to non-standard financing contracts, our remediation
efforts will include, but not be limited to, the following:
 
 ·
              Consider,
      validate and document all significant facts and assumptions underlying our
      accounting conclusions related to such financing arrangement on a
      quarterly basis.
  To
address the aforementioned material weakness in internal control related to the
controls over the approval of modified grants of stock options and restricted
stock and the related application, monitoring and reporting of the appropriate
accounting policies, our remediation efforts will include, but not be limited
to, the following:
 
 ·
              Submit any
      proposed grant modifications to the Compensation Committee or its properly
      authorized designee for approval and properly apply generally accepted
      accounting principles to such modified
grants.
 
 We
anticipate these actions will improve our internal control over financial
reporting and will address the related material weaknesses
identified.  However, because the institutionalization of the internal
control process requires repeatable process execution, and because these
controls rely extensively on manual review and approval, the successful
execution of these controls, for at least several periods, may be required prior
to management being able to definitively conclude that the material weaknesses
have been fully remediated.
 
 Changes
in Internal Control over Financial Reporting
  During
the fourth quarter of 2008, there has been no change in our internal controls
over financial reporting that has materially affected, or is reasonably likely
to affect, our internal control over financial reporting.


74
 
  The
certifications of INX's Principal Executive Officer and Principal Financial
Officer attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K/A
include, in paragraph 4 of such certifications, information concerning INX's
disclosure controls and procedures and internal controls over financial
reporting. Such certifications should be read in conjunction with the
information contained in this Item 9A(T) for a more complete understanding of
the matters covered by such certifications.
  This
annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.


Item 9B.Other
Information.





None.







PART III





Certain
information required by Part III is omitted from this Report on
Form 10-K/A since we will file a definitive Proxy pursuant to
Regulation 14A of the Exchange Act (the “Proxy Statement”), not later than
120 days after the end of the fiscal year covered by this Report, and
certain information included in the Proxy Statement is incorporated herein by
reference.





Item 10.Directors, Executive
Officers, and Corporate Governance





The
information required by this item regarding the Company’s directors is
incorporated herein by reference to the sections entitled
“PROPOSAL 1 — ELECTION OF DIRECTORS”, “EXECUTIVE COMPENSATION”, and
“SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Company’s
definitive Proxy Statement for the 2009 Annual Meeting of Shareholders (“Proxy
Statement”).





We have
adopted a code of ethics that applies to the Chief Executive Officer, Chief
Financial Officer, Controller and persons performing similar functions. We have
also adopted a code of ethics applicable to all employees. We have posted a copy
of the codes of ethics on our Internet website at Internet address:
http://www.inxi.com. Copies of the codes may be obtained free of charge from the
Company’s website at the above Internet address. We intend to disclose any
amendments to, or waivers from, a provision of the code of ethics that applies
to the Chief Executive Officer, Chief Financial Officer or Controller by posting
such information on our website at the above address.





Item 11.Executive
Compensation





The
information required by this item is incorporated herein by reference to the
section entitled “EXECUTIVE COMPENSATION” in the Proxy Statement.





Item 12.Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters





The
information required by this item is incorporated herein by reference to the
sections entitled “SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS” and “EXECUTIVE COMPENSATION” in the Proxy Statement.





Item 13.Certain
Relationships and Related Transactions, and Director Independence





The
information required by this item is incorporated herein by reference to the
section entitled “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” in the Proxy
Statement.





Item 14.Principal Accountant
Fees and Services





The
information required by this item is incorporated herein by reference to the
section entitled “INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” in the Proxy
Statement.





75




PART IV





Item 15.Exhibits and Financial
Statement Schedules





(a) 1.           Financial
Statements





The Index
to Financial Statements and Financial Statement Schedule on page 43is incorporated herein by reference as the list of financial statements
required as part of this report.





2.       Financial
Statement Schedule





The Index
to Financial Statements and Financial Statement Schedule on page 43is incorporated herein by reference as the list of financial statement
schedules required as part of this report.





3.       Exhibits





The
exhibit list in the Index to Exhibits is incorporated herein by reference as the
list of exhibits required as part of this report.





76


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, September
2, 2009.





INX
      INC.(Registrant)By:
                  /s/ JAMES
      H. LONGJames
      H. LongChief
      Executive Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
                                              
                                              Capacity
                                              
                                              Date/s/JAMES H.
      LONG
                                              
                                              Chief
      Executive Officer and Chairman of the Board of Directors
                                              
                                              September
      2, 2009James
      H. Long/s/BRIAN
      FONTANA
                                              
                                              Vice
      President and Chief Financial Officer
                                              
                                              September
      2, 2009Brian
      Fontana/s/LARRY
      LAWHORN
                                              
                                              Controller
      and Chief Accounting Officer
                                              
                                              September
      2, 2009Larry
      Lawhorn/s/DONALD R.
      CHADWICK
                                              
                                              Director
                                              
                                              September
      2, 2009Donald
      R. Chadwick/s/CARY
      GROSSMAN
                                              
                                              Director
                                              
                                              September
      2, 2009Cary
      Grossman/s/JOHN B.
      CARTWRIGHT
                                              
                                              Director
                                              
                                              September
      2, 2009John
      B. Cartwright







77




EXHIBIT INDEX





ExhibitNo.
                                
                                Description
                                
                                Filed Herewith or Incorporated by Reference
      From:3.1
                                
                                Amended
      and Restated Bylaws of the Company
                                
                                Exhibit
      3.1 to Amendment 5 to Form S-1, Registration No. 333-09789, filed June 26,
      19973.2
                                
                                Certificate
      of Incorporation of the Company
                                
                                Exhibit
      3.2 to Amendment 1 to Form S-1, Registration No. 333-09789, filed
      September 19, 19963.3
                                
                                Certificate
      of Amendment to Certificate of Incorporation of Allstar Systems, Inc.,
      dated June 24, 1997
                                
                                Exhibit
      3.4 to Amendment 5 to Form S-1, Registration No. 333-09789, filed June 26,
      19973.4
                                
                                Certificate
      of Amendment to Certificate of Incorporation of Allstar Systems, Inc.,
      dated March 5, 1999
                                
                                Exhibit
      3.3 to Form 8-A, Registration No. 001-31949, filed December 29,
      20033.5
                                
                                Certificate
      of Amendment to Certificate of Incorporation of Allstar Systems, Inc.
      dated July 10, 2000
                                
                                Exhibit
      3.4 to Form 8-A, Registration No. 001-31949, filed December 29,
      20033.6
                                
                                Certificate
      of Ownership and Merger
                                
                                Exhibit
      3.1 to Form 8-K, Registration No. 001-31949, dated January 6,
      20064.1
                                
                                Specimen
      Common Stock Certificate
                                
                                Exhibit
      4.1 to Amendment 2 to Form S-1, Registration No. 333-09789, filed October
      3, 199610.1
                                
                                Amended
      & Restated Allstar Systems, Inc. 1996 Incentive Stock Plan, dated
      effective July 1, 1997
                                
                                Exhibit
      10.9 to Form 10-K Registration No. 001-31949, filed March 12,
      200410.2
                                
                                Amended
      & Restated I-Sector Corp. Stock Incentive Plan, dated effective July
      28, 2003
                                
                                Exhibit
      10.10 to Form 10-K Registration No. 001-31949, filed March 12,
      200410.3
                                
                                Amended
      & Restated Internetwork Experts, Inc., Stock Incentive Plan dated
      effective August 1, 2003
                                
                                Exhibit
      10.11 to Form 10-K Registration No. 001-31949, filed March 12,
      200410.4
                                
                                First
      Amendment to I-Sector Corporation Incentive Plan
                                
                                Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, dated January 4,
      200510.5
                                
                                Second
      Amendment to I-Sector Corporation Incentive Plan, as amended and
      restated
                                
                                Exhibit
      10.2 to Form 8-K, Registration No. 001-31949, dated March 21,
      200510.6
                                
                                Third
      Amendment to I-Sector Corporation Incentive Plan
                                
                                Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, dated May 17,
      200510.7
                                
                                Fourth
      Amendment to I-Sector Corporate Incentive Plan
                                
                                Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, filed June 6,
      200610.8
                                
                                Fifth
      Amendment to I-Sector Corporate Incentive Plan
                                
                                Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, filed May 15,
      200710.9
                                
                                Sixth
      Amendment to I-Sector Corporate Incentive Plan
                                
                                Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, filed May 13,
      200810.10
                                
                                INX
      Inc. 2008 Employee Stock Purchase Plan
                                
                                Exhibit
      10.2 to Form 8-K, Registration No. 001-31949, filed May 13,
      200810.11
                                
                                Form
      of Employment Agreement by and between the Company and certain members of
      management
                                
                                Exhibit
      10.5 to Amendment 1 to Form S-1, Registration No. 333-09789, filed
      September 19, 199610.12
                                
                                Employment
      Agreement by and between Allstar Systems, Inc. and James H. Long, dated
      August 15, 1996
                                
                                Exhibit
      10.3 to Form 10-K Registration No. 001-31949, filed March 12,
      200410.13
                                
                                Employment
      Agreement by and between I-Sector Corporation and Brian Fontana, dated
      December 20, 2004
                                
                                Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, filed December 20,
      200410.14
                                
                                Confidentiality
      Agreement by and between I-Sector Corporation and Brian Fontana, dated
      December 20, 2004
                                
                                Exhibit
      10.2 to Form 8-K, Registration No. 001-31949, filed December 20,
      200410.15
                                
                                Employment
      Agreement by and between I-Sector Corporation and Larry Lawhorn dated
      April 5, 2005
                                
                                Exhibit
      10.1 to Form 10-Q, Registration No. 001-31949, dated August 15,
      2005  78
 10.16
                                                                      
                                                                      Form
      of Change in Control Retention Agreement
                                                                      
                                                                      Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, dated December 8,
      200610.17
                                                                      
                                                                      Form
      of First Amendment to Change in Control Retention
Agreement
                                                                      
                                                                      Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, dated December 21,
      200710.18
                                                                      
                                                                      Credit
      Agreement by and among Castle Pines Capital LLC, I-Sector Corporation,
      Valerent, Inc., InterNetwork Experts, Inc., and Stratasoft, Inc. dated
      December 27, 2005
                                                                      
                                                                      Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, dated May 4,
      200710.19
                                                                      
                                                                      Credit
      Agreement by and among Castle Pines Capital LLC, INX, Inc., and Valerent,
      Inc. dated April 30, 2007
                                                                      
                                                                      Exhibit
      10.1 to Form 10-Q, Registration No. 001-31949, dated August 15,
      200510.20
                                                                      
                                                                      Acquisition
      Facility Amendment to Amended and Restated Credit Agreement by and among
      Castle Pines Capital LLC, and INX, Inc. dated August 1,
    2007
                                                                      
                                                                      Exhibit
      10.2 to Form 10-Q, Registration No. 001-31949, dated August 6,
      200710.21
                                                                      
                                                                      Amended
      and Restated Financial Covenants Amendment to Amended and Restated Credit
      Agreement by and between INX Inc. and Castle Pines Capital LLC dated
      August 31, 2007
                                                                      
                                                                      Exhibit
      10.2 to Form 8-K, Registration No. 001-31949, filed September 4,
      200710.22
                                                                      
                                                                      Amendment
      and Joinder to Credit Agreement by and among Select, Inc. and Castle Pines
      Capital LLC dated August 31, 2007
                                                                      
                                                                      Exhibit
      10.3 to Form 8-K, Registration No. 001-31949, filed September 4,
      200710.23
                                                                      
                                                                      Amendment
      to Amended and Restated Credit Agreement by and among INX Inc., Select,
      Inc., and Castle Pines Capital LLC
                                                                      
                                                                      Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, filed June 4,
      200810.24
                                                                      
                                                                      Systems
      Integrator Agreement by and between Cisco Systems, Inc. and Internetwork
      Experts, Inc., dated November 13, 2001
                                                                      
                                                                      Exhibit
      10.4 to Form 10-K, Registration No. 001-31949, dated March 12,
      200410.25
                                                                      
                                                                      Amendment
      One, dated January 28, 2002 to Systems Integrator Agreement by and between
      Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13,
      2001
                                                                      
                                                                      Exhibit
      10.5 to Form 10-K, Registration No. 001-31949, dated March 12,
      200410.26
                                                                      
                                                                      Amendment
      Two, dated November 21, 2002 to Systems Integrator Agreement by and
      between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November
      13, 2001
                                                                      
                                                                      Exhibit
      10.6 to Form 10-K, Registration No. 001-31949, dated March 12,
      200410.27
                                                                      
                                                                      Amendment
      Three, dated January 20, 2003 to Systems Integrator Agreement by and
      between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November
      13, 2001
                                                                      
                                                                      Exhibit
      10.7 to Form 10-K, Registration No. 001-31949, dated March 12,
      200410.28
                                                                      
                                                                      Amendment
      Four, dated January 16, 2004 to Systems Integrator Agreement by and
      between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November
      13, 2001
                                                                      
                                                                      Exhibit
      10.8 to Form 10-K, Registration No. 001-31949, dated March 12,
      200410.29
                                                                      
                                                                      Amendment
      Five, dated January 27, 2005 to Systems Integrator Agreement by and
      between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November
      13, 2001
                                                                      
                                                                      Exhibit
      10.23 to Form 10-K, Registration No. 001-31949, dated March 27,
      200610.30
                                                                      
                                                                      Amendment
      Six, dated April 18, 2005 to Systems Integrator Agreement by and between
      Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13,
      2001
                                                                      
                                                                      Exhibit
      10.24 to Form 10-K, Registration No. 001-31949, dated March 27,
      200610.31
                                                                      
                                                                      Amendment
      Seven, dated March 2, 2006, to Systems Integrator Agreement by and between
      Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13,
      2001
                                                                      
                                                                      Exhibit
      10.25 to Form 10-K, Registration No. 001-31949, dated March 27,
      200610.32
                                                                      
                                                                      Amendment
      Eight, dated March 20, 2006, to Systems Integrator Agreement by and
      between Cisco Systems, Inc. and INX Inc. (formerly Internetwork Experts,
      Inc.), dated November 13, 2001
                                                                      
                                                                      Exhibit
      10.26 to Form 10-K, Registration No. 001-31949, dated March 27,
      200610.33
                                                                      
                                                                      Amendment
      Nine, dated November 13, 2006, to Systems Integrator Agreement by and
      between Cisco Systems, Inc. and INX Inc. (formerly Internetwork Experts,
      Inc.), dated November 13, 2001
                                                                      
                                                                      Exhibit
      10.30 to Form 10-K, Registration No. 001-31949, dated March 7,
      2008




79




10.34
              
              Amendment
      Ten, dated January 25, 2007 to Systems Integrator Agreement by and between
      Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13,
      2001
              
              Exhibit
      10.37 to Form 10-K, Registration No. 001-31949, dated March 7,
      200810.35
              
              Amendment
      Eleven, dated April 10, 2007 to Systems Integrator Agreement by and
      between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November
      13, 2001
              
              Exhibit
      10.38 to Form 10-K, Registration No. 001-31949, dated March 7,
      200810.36
              
              Amendment
      Twelve, dated December 13, 2007 to Systems Integrator Agreement by and
      between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November
      13, 2001
              
              Exhibit
      10.39 to Form 10-K, Registration No. 001-31949, dated March 7,
      200810.37
              
              Amendment
      dated October 1, 2007, to Systems Integrator Agreement by and between
      Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13,
      2001
              
              Exhibit
      10.40 to Form 10-K, Registration No. 001-31949, dated March 7,
      200810.38
              
              Stock
      Purchase Agreement by and among The Resource Group International Limited
      and INX Inc. dated January 26, 2006
              
              Exhibit
      2.1 to Form 8-K, Registration No. 001-31949, filed January 31,
      200610.39
              
              Stock
      Purchase Agreement by and among INX Inc., Dana Zahka, and All Other
      Shareholders of Select, Inc. dated August 31, 2007
              
              Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, filed September 4,
      200710.40
              
              Asset
      Purchase Agreement by and among INX Inc., Access Flow, Inc., Steve Kaplan
      and Gary Lamb dated June 6, 2008
              
              Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, filed June 9,
      200810.41
              
              Asset
      Purchase Agreement by and among INX Inc., NetTeks Technology Consultants,
      Inc., Ethan F. Simmons, Matthew J. Field, and Michael P. DiCenzo dated
      November 14, 2008
              
              Exhibit
      10.1 to Form 8-K, Registration No. 001-31949, filed November 18,
      200821.1
              
              List
      of Subsidiaries of the Company
              
              Exhibit
      21.1 to Form 10-K, Registration No. 001-31949, dated March 10,
      200923.1
              
              Consent
      of Grant Thornton LLP
              
              Filed
      herewith31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive
      Officer
              
              Filed
      herewith31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer
              
              Filed
      herewith32.1
              
              Section
      1350 Certification of Chief Executive Officer
              
              Filed
      herewith32.2
              
              Section
      1350 Certification of Chief Financial Officer
              
              Filed
      herewith99.1
              
              Report
      of Independent Registered Public Accounting Firm
              
              Filed
      herewith


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