##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2005Oro

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
    Houston, TX

77074(Zip code)(Address of principal executive
    offices)   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

American Stock ExchangeWarrants to purchase common stock

American Stock Exchange   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2 o o þ
  Rule 12b-2 o þ
      DOCUMENTS INCORPORATED BY REFERENCE
  Form 10-K.




---



##### 



INX
    Inc.FORM 10-K
    For the Year Ended December 31, 2005
    TABLE OF CONTENTS
  PagePART IItem 1

Business


3Item 1A

Risk Factors


14Item 2

Properties


20Item 3

Legal
    Proceedings


20Item 4

Submission of
    Matters to a Vote of Security Holders


20PART IIItem 5

Market for
    Registrants Common Equity and Related Stockholder
    Matters


22Item 6

Selected Financial
    Data


24Item 7

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


24Item 7A

Quantitative and
    Qualitative Disclosures About Market Risk


42Item 8

Financial
    Statements and Supplementary Data


43Item 9

Changes In and
    Disagreements With Accountants on Accounting and Financial
    Disclosure


69Item 9A

Controls and
    Procedures


69PART IIIItem 10

Directors and
    Executive Officers of the Registrant


70Item 11

Executive
    Compensation


70Item 12

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


70Item 13

Certain
    Relationships and Related Transactions


70Item 14

Principal
    Accountant Fees and Services


70PART IVItem 15

Exhibits and
    Financial Statement Schedules


70SIGNATURES


71INDEX TO
    EXHIBITS


72Amendment Five to Systems Integrator AgreementAmendment Six to Systems Integrator AgreementAmendment Seven to Systems Integrator AgreementAmendment Eight to Systems Integrator AgreementConsent of Grant Thornton LLPRule 13a-14a/15d-14a Certification of Chairman and CEORule 13a-14a/15d-14a Certification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFOReport of Independent Certified Public Accountants




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##### Table of Contents



PART I  Item 1.
    Business  Special
    Notice Regarding Forward-Looking Statements
    General
         3




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##### Table of Contents



Industry
  IP
    Telephony and Convergence
      
    data communication has been performed using LAN/WAN IP network
    infrastructure, including the Internet;
    telephone/voice communication has been 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.      
    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;
    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.   4




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##### Table of Contents



IP-based
      endpoint-to-endpoint
    The
    Evolution to the Business Ready
    Network
      IP-based
   5




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##### Table of Contents



Converged
    Infrastructure
      e-mail,
    Pervasive
    Services
  quality-of-service
 6




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##### Table of Contents



Security
    
    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.
    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.    Storage
     7




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Voice
  e-mail, e-mail
  Wireless
        Our
    Business
     8




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Products
    tm
    Services
    Design
    and Implementation Services
  ®
   9




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##### Table of Contents



Post-Implementation
    Support Services
  IP-based ® ® state-of-the-art
  ®
  ® ® ® ® ® ® ® ® ® ® ®
  Why We
    Offer Cisco-Centric IP telephony Solutions
    Exclusively
     10




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##### Table of Contents



IP-based
    Competition
        The
    Geographic Markets We Currently Serve
    
    Los Angeles, California
    Boise, Idaho
    Metairie, Louisiana
    Albuquerque, New Mexico
    Eugene, Oregon
    Portland Oregon
    Austin, Texas
    Dallas, Texas
    El Paso, Texas
    Houston, Texas
    San Antonio, Texas
    Seattle, Washington
    Washington, DC   11




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Our Plans
    for Geographic Expansion
    start-up
      Customers
  and/or
  E-Rate
  E-Rate
 12




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Sales and
    Marketing
    Supply
    and Distribution
  and/or
  Management
    Information Systems
    Employees
    Certain
    Milestones in Our Corporate Development
     13




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##### Table of Contents



I-Sector
  General
    Information
  (713) 795-2000. Form 10-K, Form 10-Q, Form 8-K
 Item 1A.  Risk
    Factors  We have a
    history of losses and may continue to incur losses.
    Our
    success is dependent upon maintaining our relationship with
    Cisco.
   14




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Our
    success depends upon broad market acceptance of IP
    telephony.
    
    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.    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.
    Our
    business depends on the level of capital spending by enterprises
    for communications products and services.
    Our
    profitability depends on Cisco product pricing and incentive
    programs.
   15




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A
    substantial portion of our customers are based in
    Texas.
    Our
    strategy contemplates rapid geographic expansion, which we may
    be unable to achieve, and which is subject to numerous
    uncertainties.
    We may
    require additional financing to achieve expansion of our
    business operations, and failure to obtain financing may prevent
    us from carrying out our business plan.
    We may be
    unable to manage our growth effectively, which may harm our
    business.
    Our
    operating results have historically been volatile, and may
    continue to be volatile, particularly from quarter to
    quarter.
  quarter-to-quarter
  
    volume and timing of orders received during the quarter;
    amount and timing of supplier incentives received in any
    particular quarter, which can vary substantially; 16




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
    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; and
    the availability and cost of products and components from our
    suppliers.    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.
      
    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.    Business
    acquisitions, dispositions or joint ventures entail numerous
    risks and may disrupt our business, dilute stockholder value or
    distract management attention.
   17




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##### Table of Contents



and/or
  
    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.    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.
    
    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.   18




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If we
    lose key personnel we may not be able to achieve our
    objectives.
    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.
    
    hire more employees with experience developing and providing
    advanced communications products and services;
    retrain our current personnel to sell IP telephony products and
    services; and
    retain personnel to service our products.    If we are
    unable to protect our intellectual property rights, our business
    may be harmed.
    We may be
    found to infringe on third-party intellectual property
    rights.
  and/or
 19




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##### Table of Contents



Costs of
    compliance with the Sarbanes-Oxley Act of 2002 and the related
    SEC regulations may harm our results of operations.
    Item 2.
    Properties    
    Los Angeles, California
    Boise, Idaho
    Metairie, Louisiana
    Albuquerque, New Mexico
    Eugene, Oregon
    Portland Oregon
    Austin, Texas
    Dallas, Texas
    El Paso, Texas
    Houston, Texas
    San Antonio, Texas
    Seattle, Washington
    Washington, DC    Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    of Matters to a Vote of Security Holders   20




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##### Table of Contents



Executive
    Officers of the Registrant
    Name

Age

PositionJames H. Long


47


Chairman of the Board and Chief
    Executive OfficerMark T. Hilz


47


President and Chief Operating
    OfficerFrank Cano


41


President, Valerent, Inc.Brian Fontana


48


Vice President and Chief Financial
    OfficerLarry Lawhorn


53


Controller and Chief Accounting
    OfficerPaul Klotz


44


Vice President of Operations   James H. Long
  Mark T. Hilz I-Sector
  Frank Cano brother-in-law
  Brian Fontana
  Larry Lawhorn
 21




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##### Table of Contents



Paul Klotz
  Family
    Relationships
  brothers-in-law.
  PART II  Item 5.
    Market
    for Registrants Common Equity and Related Stockholder
    Matters  Issuer
    Purchases of Equity Securities
    Total Number of


Approximate DollarShares Purchased


Amount of SharesTotal Number


Average


as Part of Publicly


That May yet beof Shares


Price Paid


Announced Plans


Purchased Under thePeriod

Purchased


per Share


or Programs


Plans or ProgramsOctober 1 to October 31,
    2005


None



N/A



None



NoneNovember 1 to
    November 30, 2005


None



N/A



None



NoneDecember 1 to
    December 31, 2005


1,300


$
4.82



1,300


$
993,674Total


1,300


$
4.82



1,300   Rule 10b-18
  Market
    Information
   22




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##### Table of Contents



Common
    Stock
    High


Low2004First Quarter

$
15.87


$
6.25Second Quarter

$
9.90


$
7.61Third Quarter

$
8.36


$
6.43Fourth Quarter

$
10.12


$
6.752005First Quarter

$
7.73


$
4.94Second Quarter

$
8.14


$
5.20Third Quarter

$
8.40


$
4.45Fourth Quarter

$
5.80


$
4.04   Warrants
    High


Low2004Second Quarter

$
1.85


$
1.20Third Quarter

$
1.60


$
1.00Fourth Quarter

$
2.35


$
1.162005First Quarter

$
1.70


$
0.80Second Quarter

$
1.53


$
0.80Third Quarter

$
1.50


$
0.75Fourth Quarter

$
0.90


$
0.50   Units
    High


Low2004Second Quarter

$
19.95


$
16.15     Dividend
    Policy
   23




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##### Table of Contents



Item 6.
    Selected
    Financial Data    Year Ended
    December 31,2005(2)


2004


2003(2)


2002


2001(Dollars in thousands, except
    per share data)Operating Data(1):Revenue:Products

$
108,857


$
71,646


$
45,749


$
28,990


$
8,853Services


12,749



6,280



4,226



1,748



1,922Total

$
121,606


$
77,926


$
49,975


$
30,738


$
10,775Net income (loss) from continuing
    operations

$
(4,917
)

$
1,110


$
(147
)

$
528


$
(3,068
)Net income (loss) per share from
    continuing operations:Basic

$
(0.86
)

$
0.24


$
(0.04
)

$
0.14


$
(0.78
)Diluted

$
(0.86
)

$
0.23


$
(0.04
)

$
0.14


$
(0.78
)Income (loss) from operations
    discontinued prior to 2005(3)

$
70


$
38


$
210


$
262


$
170Income (loss) from operations
    discontinued in 2005

$
(3,037
)

$
382


$
(1,899
)

$
(1,174
)

$
(807
)Net income (loss)

$
(7,884
)

$
1,530


$
(1,836
)

$
(384
)

$
(3,705
)Balance Sheet Data:Total assets

$
41,645


$
41,139


$
19,207


$
15,751


$
13,548Interest bearing borrowings under
    Credit Facility


2,464



8,122



1,688







Long-term debt (including current
    portion) from continuing operations


243



36



72



24



35     (1)
    
    Reflects reclassification of Stratasoft and Valerent
    subsidiaries to discontinued operations for all periods
    presented as discussed further in Note 4 to consolidated
    financial statements in Part II, Item 8.(2)
    
    2005 includes the effect of the Network Architects and InfoGroup
    Northwest acquisitions and 2003 includes the effect of the
    Digital Precision acquisition as discussed further in
    Note 3 to consolidated financial statements in
    Part II, Item 8.(3)
    
    The Computer Products and Telecom divisions were discontinued in
    2000 as discussed further in Note 4 to consolidated
    financial statements in Part II, Item 8.(4)
    
    No cash dividends were declared or paid during the five years
    ended December 31, 2005.  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.
  General
   24




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
    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 utilization of our technical engineering resources used to
    perform implementation services;
    the amount of
    NetSurant®
    recurring, post-sale support services as compared to the cost of
    operating our
    NetSurant®
    support center, which costs are somewhat fixed;
    the mix between the different types of service.  ® ®
       25




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Strategy
      
    aligning ourselves with Cisco as our primary supplier for the IP
    communications technology that we offer;
    marketing our
    NetSurant®
    brand of post-sale support 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 IP communications
    solutions; and
    developing and marketing our own custom products for certain
    specialized IP communications solutions.  work-in-progress
 26




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##### Table of Contents



®
        Elimination
    of Minority Interest in Our Former InterNetwork Experts, Inc.
    Subsidiary
     27




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##### Table of Contents



Elimination
    of Holding Company Structure and Sale of Two
    Subsidiaries
    
    All outstanding Stratasoft common stock was sold for a purchase
    price of $3,000,000, reduced by:  
    $800,000 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.
    $221,000 representing a preliminary net working capital
    adjustment, as defined. The working capital adjustment is to be
    finalized by March 27, 2006.  
    We indemnified the buyer for potential losses as defined in the
    Agreement to a maximum of $1.4 million, inclusive of
    amounts placed in escrow. Excess funds held in escrow will be
    released on January 26, 2008 unless retained in escrow for
    potential indemnified losses as allowed in the Agreement under
    certain circumstances.
    We may receive additional consideration in the form of 10% of
    the outstanding Stratasoft common stock if Stratasofts
    revenue exceeds $10.0 million for any consecutive twelve
    month period within two years of closing.
    We may receive additional cash consideration if Stratasoft is
    sold by buyer to another party by January 26, 2008 for an
    amount in excess of $15.0 million.   28




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Results
    of Operations
  Overview
  Sources of Revenue.
  quarter-to-quarter E-Rate
  ® ® ® ® ® ® ®
  Gross Profit and Gross Profit Margin.
   29




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Selling, General and Administrative
    Expenses.
    Acquisitions.
 30




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Dispositions.
    Tax Loss Carryforward.
 31




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Period Comparisons.
  Year Ended
    December 31,2005


2004


2003Amount


%


Amount


%


Amount


%(Dollars in thousands)Revenue:Products

$
108,857



89.5


$
71,646



91.9


$
45,749



91.5Services


12,749



10.5



6,280



8.1



4,226



8.5Total revenue


121,606



100.0



77,926



100.0



49,975



100.0Gross profit:Products


14,855



13.6



10,844



15.1



5,689



12.4Services


3,721



29.2



2,097



33.4



1,250



29.6Total gross profit


18,576



15.3



12,941



16.6



6,939



13.9Selling, general and
    administrative expenses


22,759



18.7



11,268



14.5



7,210



14.4Operating income (loss)


(4,183
)


(3.4
)


1,673



2.1



(271
)


(0.5
)Interest and other (income)
    expense, net


236



0.2



96



0.1



(124
)


(0.2
)Income tax expense


475



0.5



350



0.4







0.0Minority interest


23



0.0



117



0.1







0.0Net income (loss) from continuing
    operations


(4,917
)


(4.1
)


1,110



1.5



(147
)


(0.3
)Income (loss) from discontinued
    operations, net of taxes


(2,967
)


(2.4
)


420



0.5



(1,689
)


(3.4
)Net income (loss)

$
(7,884
)


(6.5
)

$
1,530



2.0


$
(1,836
)


(3.7
)   Year
    Ended December 31, 2004 Compared to Year Ended
    December 31, 2005
  Total Revenue. E-Rate
  Gross Profit.
 32




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Selling, General and Administrative
    Expenses.
  
    A noncash charge of $5.7 million recorded in March 2005 for
    the remeasurement of options exchanged as part of the purchase
    of the minority interest in our former InterNetwork Experts,
    Inc. Excluding this charge, selling, general and administrative
    expenses would represent 14.0% of 2005 total revenue rather than
    18.7%.
    Expenses of businesses acquired in 2005 of $2.4 million,
    including sales and administrative compensation, rent and other
    occupancy costs, depreciation, travel, and other operating
    expenses.
    Sales compensation increases of $1.1 million, excluding
    acquired locations, as the result of hiring additional sales
    staff and increased sales commissions generated from the
    increase in gross profit dollars.
    Administrative compensation expense increases of
    $1.0 million due to the hiring of additional personnel
    exclusive of acquired locations.
    Consultant fees for Sarbanes-Oxley compliance of $168,000.
    Telephone, rent, travel, and other general office expenses
    increases of $1.1 million, exclusive of acquired locations,
    due to sales growth and increased personnel.  Operating Income.
  Interest and Other Income (Expense),
    Net.
  Income (Loss) from Discontinued
    Operations.
  Net Income.
  Year
    Ended December 31, 2003 Compared to Year Ended
    December 31, 2004  Total Revenue. E-Rate
  Gross Profit.
 33




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Selling, General and Administrative
    Expenses.
  
    Sales compensation increased $1.7 million as the result of
    hiring additional sales staff and increased sales commissions
    generated from the increase in gross profit.
    Administrative compensation expense increased $995,000 due to
    the hiring of additional personnel at INX in Houston and Dallas,
    Texas and the addition of the San Antonio, Texas office.
    Payroll tax expense increased $136,000 with the increase in
    compensation expenses.
    Legal and accounting fees increased by $306,000.
    General office expense increased $100,000 primarily from office
    and employee relocation expenses and increased printing costs.
    Depreciation expense increased $167,000 due to asset additions
    and the Digital Precision acquisition in April 2003.
    Rents increased $211,000 due to additional office space in
    Dallas and San Antonio, Texas.
    Shareholder relations expense increased $44,000 due to employing
    a shareholder relations firm, attending investor conferences and
    visiting investor groups.
    Communication expense increased $45,000 due to growth.
    Utilities expense increased $50,000 due to growth.  Operating Income.
  Interest and Other Income (Expense),
    Net.
  Income (Loss) from Discontinued
    Operations.
  Net Income.
 34




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Quarterly
    Results
    2005


2004Fourth


Third


Second


First


Fourth


Third


Second


FirstQuarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter(Dollars in thousands, except
    share and per share amounts)Revenue:Product

$
25,481


$
32,228


$
27,995


$
23,153


$
18,052


$
27,179


$
16,354


$
10,061Service


4,178



4,241



2,822



1,508



2,226



1,516



1,625



913Total revenue

$
29,659


$
36,469


$
30,817


$
24,661


$
20,278


$
28,695


$
17,979


$
10,974Gross profit:Product

$
3,932


$
4,106


$
3,480


$
3,337


$
3,323


$
3,928


$
1,914


$
1,679Service


1,072



1,349



976



324



876



417



480



324Total gross profit


5,004



5,455



4,456



3,661



4,199



4,345



2,394



2,003Selling, general and administrative
    expenses


5,160



4,545



4,044



9,010



3,045



3,515



2,619



2,089Operating income (loss)

$
(156
)

$
910


$
412


$
(5,349
)

$
1,154


$
830


$
(225
)

$
(86
)Income (loss) from continuing
    operations


(91
)


466



246



(5,538
)


748



611



(199
)


(50
)Income (loss) from discontinued
    operations


(632
)


(701
)


(664
)


(970
)


74



7



250



89Net income (loss)

$
(723
)

$
(235
)

$
(418
)

$
(6,508
)

$
822


$
618


$
51


$
39Income (loss) from continuing
    operations per share:Basic

$
(0.02
)

$
0.08


$
0.04


$
(1.06
)

$
0.14


$
0.12


$
(0.04
)

$
(0.01
)Diluted

$
(0.02
)

$
0.08


$
0.04


$
(1.06
)

$
0.13


$
0.11


$
(0.04
)

$
(0.01
)Net income (loss) per share:Basic

$
(0.12
)

$
(0.04
)

$
(0.07
)

$
(1.25
)

$
0.16


$
0.12


$
0.01


$
0.01Diluted

$
(0.12
)

$
(0.04
)

$
(0.07
)

$
(1.25
)

$
0.15


$
0.11


$
0.01


$
0.01       E-Rate
 35




---



##### Table of Contents



E-Rate
            2005


2004Third


Second


First


Fourth


Third


Second


FirstQuarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter(Dollars in thousands, except
    share and per share amounts)Reconciliation to previously
    reported revenue:Total revenue as originally reported

$
39,157


$
34,348


$
27,768


$
24,295


$
32,612


$
21,887


$
14,275Less Stratasoft and Valerent
    revenue reclassified to discontinued operations


(2,688
)


(3,531
)


(3,107
)


(4,017
)


(3,917
)


(3,908
)


(3,301
)Total revenue as reported above

$
36,469


$
30,817


$
24,661


$
20,278


$
28,695


$
17,979


$
10,974Reconciliation to previously
    reported gross profit:Total gross profit as originally
    reported

$
6,301


$
5,860


$
4,912


$
6,008


$
6,109


$
4,299


$
3,536Less Stratasoft and Valerent gross
    profit reclassified to discontinued operations


(846
)


(1,404
)


(1,251
)


(1,809
)


(1,764
)


(1,905
)


(1,533
)Total gross profit as reported above

$
5,455


$
4,456


$
3,661


$
4,199


$
4,345


$
2,394


$
2,003 36




---



##### Table of Contents



2005


2004Third


Second


First


Fourth


Third


Second


FirstQuarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter(Dollars in thousands, except
    share and per share amounts)Reconciliation to previously
    reported selling, general and administrative expense:Total SG&A expense as
    originally reported

$
6,321


$
6,347


$
10,784


$
5,063


$
5,456


$
4,236


$
3,499Less Stratasoft and Valerent
    SG&A expense reclassified to discontinued operations


(1,776
)


(2,303
)


(1,774
)


(2,018
)


(1,941
)


(1,617
)


(1,410
)Total SG&A expense as reported
    above

$
4,545


$
4,044


$
9,010


$
3,045


$
3,515


$
2,619


$
2,089Reconciliation to previously
    reported operating income (loss):Total operating income (loss) as
    originally reported

$
(20
)

$
(487
)

$
(5,872
)

$
945


$
653


$
63


$
37Less Stratasoft and Valerent
    operating income (loss) reclassified to discontinued operations


930



899



523



209



177



(288
)


(123
)Total operating income (loss) as
    reported above

$
910


$
412


$
(5,349
)

$
1,154


$
830


$
(225
)

$
(86
)Reconciliation to previously
    reported net income (loss) from continuing operations:Net income (loss) from continuing
    operations as originally reported

$
(229
)

$
(482
)

$
(5,942
)

$
785


$
618


$
38


$
51Less Stratasoft and Valerent net
    (income) loss reclassified to discontinued operations


695



728



404



(37
)


(7
)


(237
)


(101
)Net income (loss) from continuing
    operations as reported above

$
466


$
246


$
(5,538
)

$
748


$
611


$
(199
)

$
(50
)Reconciliation to previously
    reported net income (loss) from discontinued operations:Income (loss) from discontinued
    operations as originally reported

$
(6
)

$
64


$



$
37


$



$
13


$
(12
)Less Stratasoft change in
    accounting method reclassified to discontinued operations










(566
)














Less Stratasoft and Valerent net
    (income) loss reclassified to discontinued operations


(695
)


(728
)


(404
)


37



7



237



101Net income (loss) from discontinued
    operations as reported above

$
(701
)

$
(664
)

$
(970
)

$
74


$
7


$
250


$
89  37




---



##### Table of Contents



Critical
    Accounting Policies
  Revenue
    Recognition    Products Revenue.
  Services Revenue.
    Custom Project Revenue. SOP 97-2. and/or SOP 81-1. percentage-of-completion
     38




---



##### Table of Contents



Vendor
    Incentive Recognition    Liquidity
    and Capital Resources
  Sources
    of Liquidity    Accounts Receivable.
  Inventory.
 39




---



##### Table of Contents



Contractual
    Obligations    Payments Due by PeriodLess Than








AfterContractual
    Obligations

Total


1 Year


1-3 Years


4-5 Years


5 Years(Dollars in thousands)Lease obligations

$
2,290


$
999


$
1,181


$
110


$
       Credit Facility.
  
    The Agreement provides a discretionary line of credit up to a
    maximum aggregate amount of $40.0 million 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 $10.0 million.
    The working capital revolving line of credit incurs interest
    payable monthly at the rate of prime plus 0.5%,
    The Agreement contains customary covenants regarding maintenance
    of insurance coverage, maintenance of and reporting collateral,
    and submission of financial statements. The Agreement also
    contains restrictive financial covenants measured as of the end
    of each calendar quarter as detailed further below.
    The line of credit is collateralized by substantially all of our
    assets.    Total Credit Facility

$
40,000Borrowing base limitation


(19,283
)Total borrowing capacity


20,717Less interest-bearing borrowings


(2,464
)Less non-interest bearing advances


(10,013
)Total unused availability

$
8,240     60-day 30-day 60-day 30-day
   40




---



##### Table of Contents




    maintain Minimum Tangible Net Worth of $8.0 million;
    maintain a maximum Debt to Tangible Net Worth ratio of 6.0 to 1;
    maintain Minimum Working Capital of not less than
    $6.5 million;
    maintain a Current Ratio of not less than 1.10 to 1.0;    Cash Flows.
  Operating Activities.
      Investing Activities.
  Financing Activities.
  Recent
    Accounting Pronouncements
     41




---



##### Table of Contents



Item 7A.  Quantitative
    and Qualitative Disclosures About Market Risk  Interest
    Rate Risk
   42




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  INX
    INC.
  INDEX TO FINANCIAL STATEMENTS
 AND FINANCIAL STATEMENT SCHEDULE
  PageReport of
    Independent Registered Public Accounting Firm


44Consolidated
    Balance Sheets at December 31, 2005 and 2004


45Consolidated
    Statements of Operations for the years ended December 31,
    2005, 2004 and 2003


46Consolidated
    Statements of Stockholders Equity for the years ended
    December 31, 2005, 2004 and 2003


47Consolidated
    Statements of Cash Flows for the years ended December 31,
    2005, 2004 and 2003


48Notes to
    Consolidated Financial Statements


50Schedule II
    Valuation and Qualifying Accounts


68  43




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    I-Sector
          44




---



##### Table of Contents



INX INC.
    AND SUBSIDIARIES
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2005


2004(In thousands, except share and
    par value amounts)ASSETSCurrent Assets:Cash and cash equivalents

$
2,597


$
4,975Accounts
    receivable  trade, net of allowance of $161 and
    $601


24,903



26,590Inventory


79



381Other current assets


881



292Current assets of discontinued
    operations


2,564



5,794Total current assets


31,024



38,032Property and equipment, net of
    accumulated depreciation of $2,344 and $1,774


2,050



1,406Goodwill


7,121



Intangible assets, net of
    accumulated amortization of $1,007 and $630


372



374Other assets


21



Noncurrent assets of discontinued
    operations


1,057



1,327Total assets

$
41,645


$
41,139LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent Liabilities:Notes payable and current portion
    of long-term debt

$
2,707


$
8,139Accounts payable


13,825



9,950Accrued payroll and related costs


2,216



1,660Accrued expenses


1,480



1,540Other current liabilities


468



Current liabilities of
    discontinued operations


2,936



3,600Total current liabilities


23,632



24,889Long-term debt






19Long-term liabilities of
    discontinued operations


7



103Minority interest






279Commitments 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, 5,975,626 and 5,201,354 issued


60



52Additional paid-in capital


27,546



17,513Retained deficit


(9,600
)


(1,716
)Total stockholders equity


18,006



15,849Total liabilities and
    stockholders equity

$
41,645


$
41,139    45




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##### Table of Contents



INX INC.
    AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF OPERATIONS
  Year Ended
    December 31,2005


2004


2003(In thousands, except share
    andper share amounts)Revenue:Products

$
108,857


$
71,646


$
45,749Services


12,749



6,280



4,226Total revenue


121,606



77,926



49,975Cost of goods and services:Products


94,002



60,802



40,060Services


9,028



4,183



2,976Total cost of goods and services


103,030



64,985



43,036Gross profit


18,576



12,941



6,939Selling, general and
    administrative expenses


22,759



11,268



7,210Operating income (loss)


(4,183
)


1,673



(271
)Interest and other (income)
    expense, net


236



96



(124
)Income (loss) from continuing
    operations before income taxes


(4,419
)


1,577



(147
)Income tax expense


475



350



Income (loss) from continuing
    operations before minority interest


(4,894
)


1,227



(147
)Minority interest


23



117



Net income (loss) from continuing
    operations


(4,917
)


1,110



(147
)Income (loss) from discontinued
    operations, net of taxes


(2,967
)


420



(1,689
)Net income (loss)

$
(7,884
)

$
1,530


$
(1,836
)Net income (loss) per share:Basic:Net income (loss) from continuing
    operations before minority interest

$
(0.86
)

$
0.27


$
(0.04
)Minority interest






(0.03
)


Income (loss) from discontinued
    operations, net of taxes


(0.52
)


0.09



(0.46
)Net income (loss) per share

$
(1.38
)

$
0.33


$
(0.50
)Diluted:Net income (loss) from continuing
    operations before minority interest

$
(0.86
)

$
0.25


$
(0.04
)Minority interest






(0.02
)


Income (loss) from discontinued
    operations, net of taxes


(0.52
)


0.08



(0.46
)Net income (loss) per share

$
(1.38
)

$
0.31


$
(0.50
)Shares used in computing net
    income (loss) per share:Basic


5,706,323



4,569,507



3,691,052Diluted


5,706,323



5,004,393



3,691,052    46




---



##### Table of Contents



INX INC.
    AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY
   $.01 Par Value


AdditionalCommon Stock


Paid-In


Treasury


RetainedShares


Amount


Capital


Stock


Deficit


Total(In thousands, except share and
    par value amounts)Balance at January 1, 2003


4,441,325


$
44


$
10,379


$
(1,373
)

$
(1,410
)

$
7,640Issuance of options to consultants










337











337Exercise of common stock options


321,484



4



474











478Net loss


















(1,836
)


(1,836
)Balance at December 31, 2003


4,762,809



48



11,190



(1,373
)


(3,246
)


6,619Revaluation of consultant options










(199
)










(199
)Exercise of common stock options


100,345







280











280Proceeds from offering of units,
    net of offering costs of $1,145


1,150,000



12



7,536











7,548Issuance of INX common stock net
    of minority interest










71











71Retirement of treasury stock


(811,800
)


(8
)


(1,365
)


1,373







Net income


















1,530



1,530Balance at December 31, 2004


5,201,354



52



17,513







(1,716
)


15,849Exercise of common stock options


157,414



2



207











209Exchange of INX and I-Sector
    options










5,729











5,729Exchange of INX and I-Sector
    common stock


244,890



2



1,528











1,530Issuance of shares for Network
    Architects acquisition


308,166



3



1,997











2,000Issuance of shares for InfoGroup
    Northwest acquisition


65,102



1



512











513Issuance of stock options










57











57Vesting of consultant options










9











9Repurchase and retirement of
    common stock


(1,300
)






(6
)










(6
)Net loss


















(7,884
)


(7,884
)Balance at December 31, 2005


5,975,626


$
60


$
27,546


$



$
(9,600
)

$
18,006    47




---



##### Table of Contents



INX INC.
    AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended
    December 31,2005


2004


2003(In thousands)CASH FLOWS FROM OPERATING
    ACTIVITIES:Net income (loss)

$
(7,884
)

$
1,530


$
(1,836
)Adjustments to reconcile net
    income (loss) to net cash provided by (used in) operating
    activities:Minority interest


23



117



(Income) loss from discontinued
    operations


2,967



(420
)


1,689Tax benefit from discontinued
    operations


(466
)


(350
)


(75
)Depreciation and amortization


949



661



477(Gain) loss on retirement of assets


26



(4
)


(88
)Bad debt expense


9



70



40Exchange of options in merger of
    subsidiary


5,729







Issuance of stock options


66







Changes in assets and liabilities
    that provided (used) cash:Accounts receivable, net


1,678



(18,501
)


(3,018
)Inventory


302



(140
)


161Other current assets


(579
)


485



155Other assets


(21
)






6Accounts payable


3,875



3,981



1,743Accrued expenses


496



1,440



473Other current liabilities


468



317



Net cash provided by (used in)
    continuing operations


7,638



(10,814
)


(273
)Net operating activities from
    discontinued operations


412



326



(2,178
)Net cash provided by (used in)
    operating activities


8,050



(10,488
)


(2,451
)CASH FLOWS FROM INVESTING
    ACTIVITIES:Capital expenditures (net of
    effect of acquisitions)


(476
)


(846
)


(372
)Proceeds of sale of fixed assets


31



4



80Acquisition of Network Architects,
    Corp.


(2,300
)






Acquisition of InfoGroup
    Northwest, Inc.


(1,900
)






Acquisition of Digital Precision,
    Inc.










(540
)Transaction costs paid for
    acquisitions


(362
)






(26
)Net cash used in investing
    activities of continuing operations


(5,007
)


(842
)


(858
)Net investing activities of
    discontinued operations


(77
)


(89
)


(99
)Net cash used in investing
    activities


(5,084
)


(931
)


(957
)CASH FLOWS FROM FINANCING
    ACTIVITIES:Exercise of stock options


209



280



478Proceeds from unit offering, net






7,548



Borrowings of short-term interest
    bearing Castle Pines Capital Credit Facility, net


2,464







Borrowings (payments) of
    short-term interest bearing Textron Facility, net


(8,122
)


6,423



1,703Proceeds from other short-term
    borrowings


370







Payments of short and long-term
    debt


(163
)


(25
)


(30
)Purchase of common stock


(6
)






Net cash provided by (used in)
    financing activities of continuing operations


(5,248
)


14,226



2,151Net financing activities of
    discontinued operations


(96
)


(81
)


(51
)Net cash provided by (used in) in
    financing activities


(5,344
)


14,145



2,100NET INCREASE (DECREASE) IN CASH
    AND CASH EQUIVALENTS


(2,378
)


2,726



(1,308
)CASH AND CASH EQUIVALENTS AT
    BEGINNING OF PERIOD


4,975



2,249



3,557CASH AND CASH EQUIVALENTS AT END
    OF PERIOD

$
2,597


$
4,975


$
2,249     48




---



##### Table of Contents



INX INC.
    AND SUBSIDIARIES
   CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended
    December 31,2005


2004


2003(In thousands)SUPPLEMENTAL DISCLOSURES OF CASH
    FLOW INFORMATION:Cash paid for interest

$
426


$



$
29Cash paid (received) for income
    taxes

$
42


$



$
(73
)SUPPLEMENTAL NONCASH INVESTING AND
    FINANCING ACTIVITIES:Acquisition of INX minority
    interest:Common stock issued

$
1,530


$



$
Minority interest acquired


(302
)






Acquisition of Network Architects,
    Corp.:










Fair value of assets acquired


4,300







Common stock issued


(2,000
)






Acquisition of InfoGroup
    Northwest, Inc.:










Fair value of assets acquired


2,400







Common stock issued


(500
)






Recognition of additional purchase
    price on Digital Precision acquisition through issuance of INX
    common stock






234



Recognition of minority interest
    for issuance of INX common stock






(162
)


Revaluation of options granted
    consultants






(199
)


Fixed assets acquired through
    capital lease










63Options granted to consultants










337Offering costs accrued










317    49




---



##### Table of Contents



INX INC.
    AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS


For the Years Ended December 31, 2005, 2004 and
    2003


(In thousands, except share and per share amounts)






|   |                            
|-- | ---------------------------
|1. | Description
    of Business



I-Sector I-Sector




|   |                                               
|-- | ----------------------------------------------
|2. | Summary
    of Significant Accounting Policies



Basis of Presentation




Principles of Consolidation




Inventory first-in




Property and Equipment




Goodwill




Intangible Assets




Impairment of Long-Lived
    Assets




Income Taxes


50



---



##### Table of Contents



INX INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)








Use of Estimates




Revenue Recognition




Products Revenue.




Services Revenue.








Custom Project Revenue. SOP 97-2. and/or SOP 81-1. percentage-of-completion


51



---



##### Table of Contents



INX INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)








Credit Risk




Vendor Incentives




Advertising Costs




Research and Development
    Costs




Stock-Based Compensation


52



---



##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2005


2004


2003Basic:Net income (loss) as reported

$
(7,884
)

$
1,530


$
(1,836
)Deduct:Total stock-based employee
    compensation determined under fair value based method for all
    awards, net of related tax effects


(675
)


(90
)


(233
)Pro forma net income (loss)

$
(8,559
)

$
1,440


$
(2,069
)Diluted:Net income (loss) as reported

$
(7,884
)

$
1,530


$
(1,836
)Deduct:Adjustment for subsidiary dilution






(550
)


(29
)Total stock-based employee
    compensation determined under fair value based method for all
    awards, net of related tax effects


(675
)


(90
)


(233
)Pro forma net income (loss)

$
(8,559
)

$
890


$
(2,098
)Earnings (loss) per share:Basic  as reported

$
(1.38
)

$
0.33


$
(0.50
)Basic  pro forma

$
(1.50
)

$
0.32


$
(0.56
)Diluted  as
    reported

$
(1.38
)

$
0.31


$
(0.50
)Diluted  pro forma

$
(1.50
)

$
0.18


$
(0.57
)   Earnings Per Share
  Fair Value of Financial
    Instruments
  Recent Accounting Pronouncements
   53




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##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          EITF
    Issue 03-13 Issue 03-13, Issue 03-13 Issue 03-13. Issue 03-13
  Reclassifications
  3.
    Acquisitions   54




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##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Network
    Architects, Corp.
      InfoGroup
    Northwest, Inc.
      Digital
    Precision, Inc.
   55




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##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Network


InfoGroup


DigitalArchitects,


Northwest,


Precision,Corp.


Inc.


Inc.Allocated acquisition cost:Intangibles  customer
    relationships and noncompete agreements amortized over
    3 years

$
241


$
134


$
376Inventory










101Fixed assets


500



297



63Security deposits


4



6



Transaction costs


65



123



26Goodwill


3,555



1,963



Total acquisition cost

$
4,365


$
2,523


$
566   Pro
    Forma Summary (Unaudited)
    Year Ended
    December 31,2005


2004Revenues

$
135,528


$
106,884Net income (loss) from continuing
    operations

$
(4,351
)

$
2,214Net income (loss) from continuing
    operations:Basic

$
(0.76
)

$
0.45Diluted

$
(0.76
)

$
0.41Weighted average shares used in
    calculation:Basic


5,706,323



4,941,189Diluted


5,706,323



5,376,075   4.
    Discontinued
    Operations  Telecom
    and Computer Products Divisions
   56




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##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Stratasoft
    and Valerent Subsidiaries
    
    All outstanding Stratasoft common stock was sold for a purchase
    price of $3,000, reduced by:
    $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.
    $221 representing a preliminary net working capital adjustment,
    as defined. The working capital adjustment is to be finalized by
    March 27, 2006.
    The Company indemnified the buyer for potential losses as
    defined in the Agreement to a maximum of $1,400, inclusive of
    amounts placed in escrow. Excess funds held in escrow will be
    released on January 26, 2008 unless retained in escrow for
    potential indemnified losses as allowed in the Agreement under
    certain circumstances.
    The Company may receive additional consideration in the form of
    10% of the outstanding Stratasoft common stock if revenue
    exceeds $10,000 for any consecutive twelve month period within
    two years of closing.
    The Company may receive additional cash consideration if
    Stratasoft is sold by the buyer to another party for an amount
    in excess of $15,000.      Year Ended
    December 31,2005


2004


2003Revenues:Stratasoft

$
5,277


$
8,201


$
7,101Valerent


6,662



6,942



5,076Total

$
11,939


$
15,143


$
12,177Income (loss) from operations of
    discontinued subsidiaries:Stratasoft

$
(2,734
)

$
(265
)

$
(1,360
)Valerent


(239
)


279



(720
)Total


(2,973
)


14



(2,080
)Gain on disposal of discontinued
    operations:Telecom and Computer Products
    Divisions


106



57



319Cumulative effect of change in
    accounting method at Stratasoft


(566
)






Income tax benefit


466



349



72Income (loss) from discontinued
    operations, net of taxes

$
(2,967
)

$
420


$
(1,689
)  57




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##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     December 31,2005


2004Current assets of discontinued
    operations:Accounts receivable, net

$
1,533


$
2,307Inventory


592



778Costs and earnings in excess of
    billings


266



1,653Notes receivable and other current
    assets


173



1,056Total

$
2,564


$
5,794Noncurrent assets of discontinued
    operations:Property and equipment, net

$
392


$
380Patents, net


653



739Other noncurrent assets


12



208Total

$
1,057


$
1,327Current liabilities of
    discontinued operations:Accounts payable

$
620


$
723Billings in excess of costs and
    earnings


201



63Accrued expenses


1,376



1,599Deferred revenue


644



1,135Current portion of long-term debt


95



80Total

$
2,936


$
3,600Long-term liabilities of
    discontinued operations:Long-term debt

$
7


$
103      58




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##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   5.
    Property
    and Equipment    December 31,2005


2004Equipment

$
287


$
265Computer equipment


2,220



1,889Furniture and fixtures


1,074



262Leasehold improvements


708



659Vehicles


105



1054,394



3,180Accumulated depreciation and
    amortization


(2,344
)


(1,774
)Total

$
2,050


$
1,406     6.
    Intangible
    Assets  December 31,


December 31,2005


2004Gross





Gross





WeightedCarrying


Accumulated


Carrying


Accumulated


AmortizationAmount


Amortization


Amount


Amortization


YearsAmortized intangible assets:Customer lists

$
1,051


$
793


$
836


$
492



3.38Other


328



214



168



138



4.02Total

$
1,379


$
1,007


$
1,004


$
630     2006


1912007


1252008


56Total

$
372   7.
    Earnings
    Per Share     59




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##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     December 31,2005


2004


2003Numerator for basic earnings per
    share:Net income (loss) from continuing
    operations before minority interest

$
(4,894
)

$
1,227


$
(147
)Minority interest


(23
)


(117
)


Income (loss) from discontinued
    operations, net of taxes


(2,967
)


420



(1,689
)Net income (loss)

$
(7,884
)

$
1,530


$
(1,836
)Numerator for diluted earnings per
    share:Net income (loss) from continuing
    operations before minority interest

$
(4,894
)

$
1,227


$
(147
)Minority interest


(23
)


(117
)


INX income attributable to
    potential minority interest net income (loss) from continuing
    operations used in computing loss per share






(550
)


(29
)Net income (loss) from continuing
    operations used in computing income (loss) per share


(4,917
)


560



(176
)Income (loss) from discontinued
    operations, net of taxes


(2,967
)


420



(1,689
)Net income (loss)

$
(7,884
)

$
980


$
(1,865
)Denominator for basic earnings per
    share  weighted-average shares outstanding


5,706,323



4,569,507



3,691,052Effect of dilutive securities:Shares issuable from assumed
    conversion of common stock options and restricted stock






434,886



Denominator for diluted earnings
    per share  weighted-average shares outstanding


5,706,323



5,004,393



3,691,052    60




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##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   8.
    Notes Payable
    and Long-Term Debt    December 31,2005


2004Revolving credit facility bearing
    interest of prime plus .5%

$
2,464


$
8,122Notes payable bearing interest of
    5.25% with monthly payments of $38 due July 2006


222



Obligation under capital lease,
    imputed interest of 10% maturing November 2006


21



36Total


2,707



8,158Less current portion


(2,707
)


(8,139
)Long-term portion

$



$
19     
    The Agreement provides a discretionary line of credit up to a
    maximum aggregate amount of $40,000 to purchase inventory from
    CPC approved vendors.
    The Agreement provides a working capital revolving line of
    credit under the above line of credit with an aggregate
    outstanding sublimit of $10,000.
    The working capital revolving line of credit incurs interest
    payable monthly at the rate of prime plus .5%.
    The Agreement contains customary covenants regarding maintenance
    of insurance coverage, maintenance of and reporting collateral,
    and submission of financial statements. The Agreement also
    contains restrictive financial covenants measured as of the end
    of each calendar quarter covering current ratio, tangible net
    worth, minimum working capital, and total liabilities to
    tangible net worth ratio as defined.
    The line of credit is collaterized by substantially all assets
    of the Company.     61




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##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   9.
    Income
    Taxes    Year Ended
    December 31,2005


2004


2003Current provision:Federal

$
475


$
591


$
(35
)State










Total current provision


475



591



(35
)Deferred benefit






(241
)


35Total expense from continuing
    operations


475



350



Total benefit from discontinued
    operations


(466
)


(350
)


(73
)Total

$
9


$



$
(73
)     Year Ended
    December 31,2005


2004


2003Federal income tax at statutory
    rate

$
(1,502
)

$
536


$
(50
)Minority interest


1,956



40



Non-deductible expenses


21



20



15Other






(5
)


Valuation allowance






(241
)


35Total expense from continuing
    operations

$
475


$
350


$
     December 31,2005


2004Net deferred tax assets
    (liabilities):Accounts and notes receivable

$
334


$
169Closing and severance costs


194



212Deferred service revenue


126



Amortization of intangibles






(9
)Other


141



Depreciation


(148
)


(27
)Net operating loss carryforward


1,494



663Total


2,141



1,008Less: Valuation allowance


(2,141
)


(1,008
)Total

$



$
    62




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##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       10.
    Stockholders
    Equity  Stock
    Option Plans
     63




---



##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended
    December 31,2005


2004


2003Weighted





Weighted





WeightedAverage





Average





AverageExercise





Exercise





ExerciseShares


Price


Shares


Price


Shares


PriceOptions outstanding at beginning
    of the period


516,821


$
3.70



501,966


$
2.85



396,042


$
1.47Granted during the period


1,470,603



2.15



95,000



7.52



338,760



3.58Exercised during the period


(157,414
)


1.31



(58,665
)


3.47



(222,736
)


1.44Canceled during the period


(21,500
)


6.20



(21,480
)


2.13



(10,100
)


1.36Options outstanding at end of
    period


1,808,510


$
2.70



516,821


$
3.70



501,966


$
2.85Options exercisable at end of
    period


1,449,177


$
1.89



357,287


$
2.83



259,406


$
1.81Options outstanding price range

$
0.01






$
0.82






$
0.82to $
7.76






to $
8.06






to $
8.06Weighted average fair value of
    options granted during the period

$
2.15






$
7.52






$
2.55Options weighted average remaining
    life


7.06 Years







7.77 Years







8.39 Years   Employee and DirectorOutstandingWeighted





ExercisableAverage


Weighted





WeightedRemaining


Average





AverageOutstanding


Contractual


Exercise


Exercisable


ExerciseShares


Life


Price


Shares


Price$0.01 to $ .99


98,747



5.09


$
.10



98,747


$
.10$1.00 to $1.99


1,052,230



6.24



1.28



1,038,997



1.28$2.00 to $2.99


90,600



7.29



2.63



90,600



2.63$3.00 to $3.99


















$4.00 to $4.99


344,933



8.77



4.63



179,166



4.76$5.00 to $7.76


222,000



9.03



7.59



41,667



7.55Total


1,808,510



7.06


$
2.70



1,449,177


$
1.89    64




---



##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended
    December 31,2005


2004


2003Weighted





Weighted





WeightedAverage





Average





AverageExercise





Exercise





ExerciseShares


Price


Shares


Price


Shares


PriceOptions outstanding at beginning
    of the period


136,100


$
2.11



187,532


$
1.92



168,280


$
1.43Exercised during the period










(41,680
)


1.83



(98,748
)


1.56Grants during the period


















118,000



2.32Canceled during the period










(9,752
)


1.54







Options outstanding at end of
    period


136,100


$
2.11



136,100


$
2.11



187,532


$
1.92Options exercisable at end of
    period


136,100


$
2.11



136,100


$
2.11



165,492


$
1.62Options outstanding price range

$
1.06






$
1.06






$
1.06to $
4.14






to $
4.14






to $
4.14Options weighted average remaining
    life


6.59 Years







7.59 Years







5.33 Years   Non-EmployeeOutstandingWeighted





ExercisableAverage


Weighted





WeightedRemaining


Average





AverageOutstanding


Contractual


Exercise


Exercisable


ExerciseShares


Life


Price


Shares


Price$0.82 to $1.99


113,500



6.55


$
1.82



113,500


$
1.82$2.00 to $2.99


6,600



4.33



2.25



6,600



2.25$3.00 to $3.99


















$4.00 to $4.99


16,000



7.76



4.14



16,000



4.14$5.00 to $6.00


















Total


136,100



6.59


$
2.11



136,100


$
2.11   Capital Stock
  Common Stock Repurchase Plan Rule 10b-18
 65




---



##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Completion of Public Offering
  Warrants
      11.
    Elimination
    of Minority Interest in InterNetwork Experts, Inc.  paid-in-capital paid-in-capital
  12.
    Major
    Customers  E-Rate
  13.
    Related
    Party Transactions   66




---



##### Table of Contents



INX INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   14.
    Commitments
    and Contingencies  Litigation I-Sector
    Leases
  401(k) Plan
  15.
    Subsequent
    Event         67




---



##### Table of Contents



Schedule II
    Valuation and Qualifying AccountsFor Each of the Three Years Ended December 31, 2005
    (Amounts in Thousands) Balance at


Charges to











Balance atBeginning


Costs and








Other


End ofof Year


Expenses


Write-offs


Recoveries


Changes


YearAccumulated provision deducted
    from related assets on balance sheetAllowance for doubtful accounts:2003

$
1,074


$
41


$
746


$



$



$
3692004


369



70



37



199







6012005


601



9



449











161   Note:
 68




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Rules 13a-15(e) 15d-15(e)
  Form 10-Q, Form 10-Q,
      Form 10-K
 69




---



##### Table of Contents



PART III   Item 10.
    Directors
    and Executive Officers of the Registrant    
   Item 11.
    Executive
    Compensation     Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters     Item 13.
    Certain
    Relationships and Related Transactions     Item 14.
    Principal
    Accountant Fees and Services    PART IV   Item 15.
    Exhibits
    and Financial Statement Schedules      2.
    Financial Statement Schedule    3.
    Exhibits   70




---



##### Table of Contents



SIGNATURES           Chief Executive Officer
    Signature

Capacity

Date/s/  JAMES H. LONGJames
    H. Long

Chief Executive Officer and
    Chairman of the Board of Directors

March 24, 2006/s/  BRIAN FONTANABrian
    Fontana

Vice President and Chief Financial
    Officer

March 24, 2006/s/  LARRY LAWHORNLarry
    Lawhorn

Controller and Chief Accounting
    Officer

March 24, 2006/s/  DONALD R.
    CHADWICKDonald
    R. Chadwick

Director

March 24, 2006/s/  CARY GROSSMANCary
    Grossman

Director

March 24, 2006/s/  JOHN B.
    CARTWRIGHTJohn
    B. Cartwright

Director

March 24, 2006  71




---



##### Table of Contents



EXHIBIT INDEX  ExhibitNo.

Description

Filed Herewith or Incorporated
    by Reference From:2
.1

Asset Purchase Agreement, dated
    May 25, 2005, by and among Network Architects, Corp.,
    Michael S. French, Theodore J. Bonnell, Klaus C. Mueller and
    I-Sector Corporation

Exhibit 2.1 to
    Form 8-K,
    Registration
    No. 001-31949,
    dated May 25, 20052
.2

Asset Purchase Agreement, dated
    June 29, 2005, by and among InfoGroup Northwest, Inc.,
    Duane Daggett and I-Sector Corporation

Exhibit 2.1 to
    Form 8-K,
    Registration
    No. 001-31949,
    dated June 30, 20053
.1

Bylaws of the Company.

Exhibit 3.1 to
    Form S-1,
    Registration
    No. 333-09789,
    filed August 8, 19963
.2

Certificate of Incorporation of
    the Company.

Exhibit 3.2 to Amendment 1 to
    Form S-1,
    Registration
    No. 333-09789,
    filed August 8, 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 August 8, 19963
.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 August 8, 199610
.1

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 August 8, 199610
.2

Employment Agreement by and
    between Stratasoft, Inc. and William R. Hennessy, dated
    September 7, 1995.

Exhibit 10.6 to
    Form S-1,
    Registration
    No. 333-09789,
    filed August 8, 199610
.3

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
.4

Amended & Restated
    Allstar Systems, Inc. 1996 Incentive Stock Plan, dated effective
    July 1, 1997.

Exhibit 10.10 to
    Form 10-K
    Registration
    No. 001-31949,
    filed March 12, 200410
.5

Amended & Restated
    I-Sector
    Corp. Stock Incentive Plan, dated effective July 28, 2003.

Exhibit 10.11 to
    Form 10-K
    Registration
    No. 001-31949,
    filed March 12, 200410
.6

Amended & Restated
    Internetwork Experts, Inc., Stock Incentive Plan dated effective
    August 1, 2003.

Exhibit 10.12 to
    Form 10-K
    Registration
    No. 001-31949,
    filed March 12, 200410
.7

Lease Agreement by and between
    Allstar Equities, Inc. and I-Sector Corporation, dated
    February 1, 2002.

Exhibit 10.32 to
    Form 10-K,
    Registration
    No. 000-21479,
    filed March 28, 200210
.8

Asset Purchase Agreement, by and
    between Digital Precision, Inc. and Internetwork Experts, Inc.,
    dated April 4, 2003.

Exhibit 10.17 to
    Form 10-K
    Registration
    No. 001-31949,
    filed March 12, 2004 72




---



##### Table of Contents



ExhibitNo.

Description

Filed Herewith or Incorporated
    by Reference From:10
.9

Lease Agreement by and between
    Whitehall-Midway Park North, Ltd. and Allstar Systems, Inc.
    dated July 31, 2000.

Exhibit 10.37 to
    Form 10-K,
    Registration
    No. 000-21479,
    filed March 24, 200110
.10

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
.11

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
.12

First Amendment to
    I-Sector
    Corporation Incentive Plan

Exhibit 10.1 to
    Form 8-K,
    Registration
    No. 001-31949,
    dated January 4, 200510
.13

Plan and Agreement of merger among
    I-Sector
    Corporation, INX Merger Sub, Inc. and InterNetwork Experts, Inc.
    dated as of February 1, 2005

Exhibit 10.1 to
    Form 8-K,
    Registration
    No. 001-31949,
    dated February 7, 200510
.14

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
.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, 200510
.16

Third Amendment to
    I-Sector
    Corporation Incentive Plan

Exhibit 10.1 to
    Form 8-K,
    Registration
    No. 001-31949,
    dated May 17, 200510
.17

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 December 30, 200510
.18

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
.19

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 10.6 to
    Form 10-K,
    Registration
    No. 001-31949,
    dated March 12, 200410
.20

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
.21

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 10.8 to
    Form 10-K,
    Registration
    No. 001-31949,
    dated March 12, 200410
.22

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 10.9 to
    Form 10-K,
    Registration
    No. 001-31949,
    dated March 12, 200410
.23

Amendment Five, dated
    January 27, 2005 to Systems Integrator Agreement by and
    between Cisco Systems, Inc. and Internetwork Experts, Inc.,
    dated November 13, 2001

Filed herewith 73




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##### Table of Contents



ExhibitNo.

Description

Filed Herewith or Incorporated
    by Reference From:10
.24

Amendment Six, dated
    April 18, 2005 to Systems Integrator Agreement by and
    between Cisco Systems, Inc. and Internetwork Experts, Inc.,
    dated November 13, 2001

Filed herewith10
.25

Amendment Seven, dated
    March 2, 2006, to Systems Integrator Agreement by and
    between Cisco Systems, Inc. and Internetwork Experts, Inc.,
    dated November 13, 2001

Filed herewith10
.26

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

Filed herewith18
.1

Grant Thornton Letter Re:  Change
    in Accounting Principle

Exhibit 18.1 to
    Form 10-Q,
    Registration
    No. 001-31949,
    dated May 16, 200521
.1

List of Subsidiaries of the Company

Exhibit 21.1 to
    Form 10-K,
    Registration
    No. 000-21479,
    filed March 31, 200323
.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 Certified
    Public Accountants

Filed herewith  74