<PAGE>
                                                                               .
                                                                               .
                                                                               .

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

<Table>
<C>        <S>
   [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934

           FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

                                  OR


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

           FOR THE TRANSITION PERIOD FROM           TO
</Table>

                        COMMISSION FILE NUMBER: 1-31949

                              I-SECTOR CORPORATION
             (Exact name of Registrant as specified in its charter)

<Table>
<S>                                              <C>
                    DELAWARE                                        76-0515249
            (State of Incorporation)                             (I.R.S. Employer
                                                               Identification No.)

             6401 SOUTHWEST FREEWAY
                  HOUSTON, TX                                         77074
    (Address of principal executive offices)                        (Zip code)
</Table>

       REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (713) 795-2000

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<Table>
<Caption>
              TITLE OF EACH CLASS                   NAME OF EACH EXCHANGE ON WHICH REGISTERED
              -------------------                   -----------------------------------------
<S>                                              <C>
         Common stock, par value $.01                        American Stock Exchange
</Table>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                      NONE
                                (Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]     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 or any amendment to this
Form 10-K.  [ ]

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  [ ] Yes     [X] No

     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,
2003 as reported on the NASDAQ Small Cap Market was approximately $3,629,681.

     The number of shares of common stock, $.01 par value, outstanding as of
March 11, 2004 was 3,988,294.

                      DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

     This report contains forward-looking statements within the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. All
statements included in this annual report, other than statements that are purely
historical, are forward-looking statements. Forward-looking statements 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. These forward-looking
statements are subject to known and unknown risks and uncertainties. Numerous
factors, including factors over which we have little or no control, may cause
actual results to differ materially from those expressed in the forward-looking
statements contained in this report. In evaluating such statements, we urge you
to consider the various factors identified in this annual report on Form 10-K,
including matters set forth in "-- Risks Related to Our Business," which could
cause actual events, performance or results to differ materially from those
indicated by our forward-looking statements.

GENERAL

     We are a leading regional provider of network infrastructure and IP
telephony solutions including related implementation and support services for
enterprises. The network and IP telephony solutions we offer are
"Cisco-centric," meaning they are based on the products and technology of Cisco
Systems, Inc., which we refer to as "Cisco." These solutions include design,
implementation and support of IP telephony, LAN/WAN routing and switching,
virtual private networks, voice over IP, network security, and wireless
networks. Because of our substantial experience and technical expertise in the
design, implementation and support of IP telephony solutions, we believe we are
well-positioned to take advantage of what we believe to be the growing trend of
implementation by enterprises of IP telephony in general and, in particular, the
pure, packet-switched IP telephony solutions of Cisco. We also develop and
market our own computer telephony integration software and provide remote
information technology services. Our operations are managed from offices in
Houston, Dallas and Austin, Texas. Our long term goal is to become one of the
leading national providers of Cisco-centric networks and IP telephony solutions
for enterprises.

     I-Sector Corporation is a holding company, and we operate each of our three
business segments through separate subsidiaries. We sometimes refer to our
business segments in this report by referring to the name of the subsidiary that
operates that business segment. We operate our IP telephony and network
infrastructure business through our Internetwork Experts, Inc. subsidiary, which
we refer to as "INX." Our computer telephony business is conducted through our
subsidiary Stratasoft, Inc., which we refer to as "Stratasoft." Our remote
information technology management business is operated by our subsidiary
Valerent, Inc., which we refer to as "Valerent."

     Each of our three business segments derives revenues from sales of both
products and services. As a percentage of revenue, our largest business segment
is INX, our IP telephony and network infrastructure business. INX provided
approximately 80% of our revenues in 2003. Computer telephony software provided
by Stratasoft accounted for approximately 12% of our revenues in 2003. The third
and smallest business segment is our remote information technology management
business of Valerent, which provided approximately 8% of our revenues in 2003.

FUTURE MINORITY INTEREST IN INX

     Each of INX, Stratasoft and Valerent is currently a wholly-owned
subsidiary. Beginning in April 2004, however, we expect that INX will cease to
be a wholly-owned subsidiary as the result of anticipated issuances of INX
common stock to Digital Precision, Inc., which we refer to as "Digital
Precision," who sold their business to INX in April 2003. In connection with
that acquisition, we agreed to issue to the seller 1.8 million shares of INX
common stock as additional purchase consideration for its business if certain
employees remain
                                        1
<PAGE>

employed through April 4, 2004, the first anniversary of the acquisition. When
that occurs, we anticipate that our ownership percentage of INX's common stock
then outstanding will be approximately 92.4%.

     We have also granted 8,290,692 stock options to employees of INX to acquire
INX common stock pursuant to a stock option plan for INX employees. We refer to
these options as the "INX options." The exercise prices for the INX options
range from $0.01 to $0.25 with a weighted average of $0.16. I-Sector Corporation
also holds a warrant to acquire 1.2 million additional shares of INX common
stock, which we refer to as the "I-Sector Warrant," at an exercise price of
$0.25 per share. We estimate that our ownership in INX would be reduced to
69.5%, assuming that the INX stock is issued in April 2004 as we expect, all INX
options become fully vested and are exercised, and the I-Sector Warrant is
exercised. If the I-Sector warrant is not exercised, we estimate that our
ownership in INX would be reduced to 68.4% assuming the INX stock is issued in
April 2004 and all INX options become fully vested and are exercised.

     We do not intend to issue any additional shares of INX common stock to
persons other than I-Sector, except to the holders of presently outstanding INX
options if those options become vested and are exercised. We also do not intend
to grant any additional INX options and have amended the INX stock option plan
to so provide. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Future Minority Interest in INX."

IP TELEPHONY INDUSTRY BACKGROUND

  TERMINOLOGY

     IP telephony is a general term for an existing and rapidly expanding
technology that uses Internet Protocol, or "IP," for exchanging voice
communications, faxes, and other types of information that have traditionally
been carried by conventional private, branch exchange ("PBX") telephone systems
used by enterprises and by the public switched telephone network ("PSTN"). The
term IP telephony generally encompasses a narrower term frequently used in our
industry called "VoIP," or voice over Internet Protocol. We refer to VoIP as
including only the exchange of voice communication by means of IP technology,
while we refer to IP telephony as including not only VoIP but also the broader
range of voice and other communications over IP-based networks, and the systems
that enable those communications.

     Internet Protocol, or IP, is a set of industry standard procedures that are
used to:

     - format large volumes of data into smaller, discrete units or "packets";

     - give each packet both the sender's and the recipient's network address;
       and

     - send those packets over the Internet or through the enterprise's own
       network to the recipient's address.

Sometimes the packets are sent by different routes and arrive out of proper
sequence. At their destination, the multiple packets are reassembled into their
correct order by another protocol known as Transmission Control Protocol, or
TCP, to produce a coherent communication.

     IP telephony uses "packet-switched" connections, instead of using the
conventional "circuit-switched" connections traditionally employed by PBXs and
PSTNs. Because IP telephony uses packet-switching, multiple users can share the
same path for voice, data and other communications. In contrast, conventional
circuit-switched telephony is carried over a circuit dedicated only to the use
of the specific senders and recipients that are a part of the communication then
in progress.

     IP telephony uses network infrastructure, such as a local area network (a
"LAN") or a wide area network (a "WAN"), employing IP technology to either
enhance the telephony functions performed by the enterprise's existing PBX
telephone system or to replace the existing PBX entirely. We refer to IP
telephony systems that incorporate and augment an enterprise's existing PBX as a
"hybrid" system, and to the PBX retained by the enterprise as a "legacy PBX." We
refer to a "pure" or "packet-switched" IP telephony system as one in which
network infrastructure totally supplants the enterprise's existing PBX with a
packet-switched solution.

                                        2
<PAGE>

     In addition to offering potential long-term cost savings, implementation of
IP telephony allows enterprises to reap the benefits of participating in a
growing trend in communications technology called "convergence."

  CONVERGENCE TREND

     We believe the market for enterprise communications is moving from the
"traditional model" to what industry observers sometimes term the "converged
model." IP telephony is expected to be an important part of the trend toward
convergence.

     In the traditional enterprise communications model, different types of
communication are conducted by different means:

     - data communication is performed using LAN/WAN network infrastructure,
       including the Internet;

     - telephone/voice communication is carried over traditional
       circuit-switched PBX systems and PSTNs; and

     - video communications are often accomplished using stand-alone video
       conferencing systems using either multiple circuit-switched telephone
       lines or network communications.

     In contrast, the converged communications model will enable voice, video
and data to be carried by a single, unified IP-based network. IP telephony and
data communication over IP-based network infrastructures is already being used
by many enterprises. We believe that technology to enable video teleconferencing
over IP-based networks is rapidly developing, and that it will become available
for commercial implementation in the near future.

     Today, implementation of converged IP telephony and data communications
networks can offer both significant long-term cost savings and increased
productivity to enterprises. Among the potential long-term savings that an
enterprise might experience are:

     - 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.

     Later, as convergence progresses, we expect it to further improve the
productivity and cost savings of enterprises. We believe that much of these
long-term productivity enhancements and cost savings will come from yet-to-be
created applications designed to take full advantage of convergence technology.

  COMPETING IP TELEPHONY SOLUTIONS

     We believe there are two primary technologies competing for enterprise IP
telephony market share. One is offered primarily by Cisco, the leading
manufacturer of network routing and switching equipment. Cisco promotes the use
of a network server running its call management software, also called a "soft
switch," which enables its system to perform IP telephony functions without the
use of a PBX. This approach is often referred to as a "packet-switched"
solution. While other manufacturers are moving toward this technology, we
believe

                                        3
<PAGE>

that Cisco has established an early competitive advantage in the market for
packet-switched telephony solutions.

     The competing technology is promoted by manufacturers of conventional
circuit-switched PBX systems, such as Avaya Inc. and Nortel Networks Corp. These
manufacturers have many customers with traditional circuit-switched PBX
telephone systems. Consequently, their current products generally feature hybrid
IP telephony solutions that promote retaining and upgrading their customers'
legacy PBXs to make them "IP enabled," thus avoiding the immediate obsolescence
of their older PBX telephone systems.

     IP telephony is a comparatively new communication technology that we
believe is rapidly gaining acceptance by enterprises. There are, however,
barriers to its immediate acceptance by many enterprises. We believe one of the
most common barriers is the cash expense to an enterprise of upgrading or
replacing existing network infrastructure and legacy PBX systems. A related
concern of some enterprises is the non-cash expense associated with writing off
the undepreciated cost of their legacy PBX system, particularly when substantial
undepreciated costs of that system remain on an enterprise's balance sheet.
Additionally, doubts about the perceived quality of service offered by an
IP-based telephony system are a barrier to some enterprises. In our experience,
these concerns generally focus on features such as audio quality, reliability,
privacy and security.

     IP telephony as implemented by most enterprises typically requires upgraded
or new network infrastructure, regardless of whether the enterprise chooses a
hybrid or pure IP telephony solution. Most networks designed solely for data
communications are inadequate to accommodate IP telephony functions featuring
the quality of telephony service demanded by most customers. For example, most
customers demand that voice communications be given priority over data
communication in the allocation of their network's available resources. To do
this, the enterprise's network infrastructure must be able to distinguish
between data communication and voice communication. It must also be capable of
prioritizing and allocating the use of system resources between voice and data
to achieve the enterprise's quality-of-service expectations.

     We believe that the many complexities associated with IP telephony networks
require specialized knowledge and skills not generally available to service
providers experienced only in data networks or traditional telephone systems.
The optimal design, implementation and support of IP telephony requires a
service provider that is experienced and proficient in many different
technologies, including data networking, telephony, and various industry
protocols, as well as the software and hardware needed to integrate those
technologies.

OUR IP TELEPHONY AND NETWORK INFRASTRUCTURE BUSINESS

     We offer a complete range of products and services for Cisco-centric IP
telephony solutions through our INX subsidiary. Until recently, most IP
telephony solutions work we did involved our customer testing the technology
rather than full-scale implementation of IP telephony. As the market for IP
telephony solutions for enterprises matures from testing to full-scale
deployment, we believe that offering a comprehensive range of products and
services to our customers will be critical in differentiating us from our
competitors. Because services typically provide higher margins than the sale of
products, we plan to emphasize recurring support services in our marketing
strategy.

  NETWORK INFRASTRUCTURE PRODUCTS

     Our products consist principally of network infrastructure components
manufactured by Cisco, including switching and routing equipment, and related
Cisco software, including Cisco Call Manager IP Telephony Software. We also
offer software products to augment Cisco technology that are available from
vendors other than Cisco, including our own software products.

  DESIGN AND IMPLEMENTATION SERVICES

     We design and implement Cisco-centric IP telephony solutions. To provide
these services, we employ highly trained network engineering staff, who are
trained and experienced in both large, complex network

                                        4
<PAGE>

infrastructure technology and Cisco IP telephony technology. Our technical and
engineering staffs are also experienced in essential related technology such as
network security. We have developed not only expertise in the area of enterprise
IP telephony solutions and converged communications, but also methodologies for
designing and implementing large, complex, converged communications
infrastructures for enterprises.

     During 2001 and 2002, as the move toward IP telephony technology by
enterprises began to develop, the majority of our customer engagements were
limited to the installation of pilot projects in which our customers tested the
technology. These types of projects required long selling cycles, substantial
pre-sale involvement by skilled engineers and significant IP network design and
upgrade services. Our IP telephony implementation services were a comparatively
small component of the total services we provided in these pilot projects
because our customers were implementing only relatively small "test" sites.
These projects were characterized by sporadic service revenue and generally
depressed gross margins for our services. Additionally, our engineering staff
was often not fully utilized between projects. We expect to be able to more
fully employ our engineering staff if we begin to perform more large-scale
implementations as IP telephony gains greater acceptance by enterprises. This
increased demand should improve our service revenue and service margin if we
properly manage these larger installations.

     We have installed many trial IP telephony solutions for enterprises, and we
believe that many of these enterprise customers will eventually choose to adopt
a Cisco-centric IP telephony solution for their entire organization. If they do,
we believe we will have a competitive advantage when those customers select a
provider to design and implement their new system.

  POST-IMPLEMENTATION SUPPORT SERVICES

     In our view, there are two main support models for IP telephony: the
current model used to support traditional PBX systems and the model used to
support computer networks. We believe that neither the traditional PBX telephone
support model nor the existing computer network support model best suits the
needs of customers operating a converged communications infrastructure. We have
created a specialized support model for supporting Cisco-centric converged
communications systems, which we have branded under the Netsurant name. These
services include remote monitoring and management of the customer's IP telephony
and related IP network infrastructure, using specialized toolsets and a network
support center with technical staff who are specifically trained and experienced
in the area of Cisco IP telephony and complex, state-of-the-art IP network
infrastructure. Customers are notified of system problems and we solve the
detected problems either remotely or onsite.

     Until recently, when most customers were interested only in testing IP
telephony technology, post-implementation support services were not a high
priority for those customers. But as customers make the decision to fully
implement this relatively new technology, we believe that post-implementation
support will become a higher priority. Additionally, we believe that the quality
of support services is likely to become among the more substantial concerns of
enterprises when they are choosing a service provider. We believe we will be
positioned to provide support services that the customers require.

  WHY WE OFFER CISCO-CENTRIC IP TELEPHONY SOLUTIONS EXCLUSIVELY

     We offer only Cisco-centric network infrastructure solutions and
Cisco-centric IP telephony solutions. We do this because we believe it enables
us to compete more effectively for large Cisco-centric IP telephony projects.
Our sales force works closely with Cisco's sales organization to identify and
close IP telephony projects. By deliberately refraining from selling products
that are competitive with Cisco's products, we believe our relationship with
Cisco is enhanced, and our sales staff and sales management are more focused and
knowledgeable about the products that we sell.

     We believe that most sales of Cisco IP telephony systems are market share
gains by Cisco and the packet-switched IP telephony technology it promotes over
PBX manufacturers and their hybrid solution. This is because Cisco recently
entered the voice communications market and does not have a large traditional
PBX telephone systems customer base to protect against encroachment by
competitors. Because IP telephony systems sold to enterprises will be largely
systems replacing existing traditional PBX telephone systems, the
                                        5
<PAGE>

traditional PBX manufacturers will be seeking to retain their existing customers
while each system sold by Cisco will be a new customer for Cisco at the expense
of a competitor, resulting in market share gains by Cisco.

     The majority of the IP-based routing and switching equipment installed
today is manufactured by Cisco. For that reason, we believe Cisco has a
competitive advantage with respect to implementing pure, packet-switched IP
telephony solutions. According to Infotech's April 2003 report on enterprise IP
telephony titled "Enterprise Convergence -- The Race for IP Telephony
Supremacy," Cisco had over a 50% share of the installed IP telephony handsets,
but less than a 2% market share of all enterprise handsets installed, including
traditional circuit-switched systems. Because of this, we believe Cisco has the
potential to gain market share from its competitors as the move toward full
adoption of IP telephony technology by enterprises accelerates. If we are able
to grow to become a national rather than a regional provider of Cisco-centric
network infrastructure, and if, as we expect, Cisco gains market share, we
believe that we will be able to substantially increase our revenues and our
significance to Cisco.

     Because the IP telephony and network infrastructure solutions we offer are
based on the IP telephony products and technology of Cisco, it is critical to
our business that we maintain a good working relationship with Cisco. We believe
that because of our focus on Cisco's products, and our commitment to their
strategy, our relationship with Cisco is excellent. Cisco awarded us its
Regional Direct Value Added Reseller for its Southern Region for 2002, and its
Regional Direct Value Added Reseller for the entire United States for 2003.

     We are an authorized reseller of Cisco products and have been awarded its
"Gold" level status, which enables us to obtain the best published pricing
discounts on the Cisco products that we sell, which in turn enables us to be
competitive with other large Cisco product resellers.

  GEOGRAPHIC EXPANSION AND ACQUISITIONS

     We have grown to be what we believe is the leading regional Cisco-centric
IP telephony solutions provider for Texas, with offices in Houston, Dallas and
Austin, Texas. With full adoption of IP telephony technology by enterprises just
now beginning to occur, we intend to expand nationally, establishing offices in
other major U.S. markets in order to rapidly create a national presence. We
intend to do this, when feasible, by acquiring select Cisco-centric network
infrastructure solutions companies in major markets, and adjusting the focus of
those companies toward the opportunities created by the trend toward full
adoption of IP telephony technology.

OUR COMPUTER TELEPHONY SOFTWARE BUSINESS

  EXISTING PRODUCTS

     We develop and market computer telephony software through our Stratasoft
subsidiary. This software is used by professional contact centers and other
complex, high volume telephony environments and is marketed under the trade name
"Stratasoft." Our current complete contact center product offering allows our
customers to rapidly customize our software to their business applications. Our
Stratasoft products provide telephony functionality essential to contact center
operations including:

     - outbound predictive dialing;

     - inbound automatic call distribution;

     - call blending between inbound and outbound activity;

     - voice mail and auto attendant applications;

     - text-to-speech capabilities;

     - Web-based text chatting;

     - fax on demand;

                                        6
<PAGE>

     - interactive voice response; and

     - rapid application development.

     The open architecture design of our Stratasoft products allows for
integration with the customer's existing systems and software applications, thus
minimizing implementation expenses. Stratasoft's products have been awarded
numerous awards by industry trade journals, including Call Centers Editors
Choice Award for 1998, Call Center Solutions Product of the Year Award for 1998,
Customer Interaction Solutions Product of the Year Award for both 2001 and for
2002, and Communications Solutions Product of the Year Award for 2002. Recently,
Technology Marketing Corporation's TMC Labs presented Stratasoft its Innovation
Award for 2003.

     Stratasoft's products are currently being used primarily to operate call
centers internationally, including centers in the United States, Canada, the
United Kingdom, Germany, Greece, India, Egypt, the Philippines and Granada.

  CONVERGENCE SOFTWARE RESEARCH AND DEVELOPMENT

     We intend to use our computer telephony software development expertise to
create and market new software products that augment and enhance Cisco-centric
IP telephony solutions. We believe that IP telephony and convergence will create
an environment where there will be an opportunity to create new software
applications to integrate voice, video and data into a customer's business
process and traditional business applications in ways that could not have been
possible before. These software applications are often called "convergence
applications." We believe our extensive experience in developing and marketing
complex computer telephony software applications positions us to take advantage
of this opportunity.

REMOTE INFORMATION TECHNOLOGY MANAGEMENT

     Through Valerent we offer a variety of services related to cost reduction
and performance improvement of information technology through Internet-based
remote service and support of that technology. These services include the
following:

     - remote end user and server management;

     - data and network management; and

     - security and internet services.

CUSTOMERS

     We had no single customer that represented 10% or more of our total
continuing revenue during the years ended December 31, 2001, 2002 or 2003. In
2001, however, end-user customers that purchased our Stratasoft software through
a single reseller of our computer telephony software products collectively
represented 10% of our total consolidated revenue in 2001.

  IP TELEPHONY AND NETWORK INFRASTRUCTURE

     Customers for our Cisco-centric IP telephony and other network solutions
are typically large corporate organizations, schools and governmental agencies
that use large network infrastructures, a majority of which are located, or make
significant network infrastructure decisions in Texas. They include private
enterprises in various industries such as healthcare, legal, banking, energy and
utilities, hospitality, transportation, manufacturing and entertainment. In
addition to its direct sales model, INX also provides technical consulting and
project management services as a subcontractor for companies such as EDS, IBM
and Sprint. Although our customers are generally based in Texas, we have
performed work at their locations in other parts of the United States and, on
occasion, internationally.

     During 2003, we performed an increasing amount of business with educational
and governmental customers, including schools that receive funding for network
infrastructure under a federal program,

                                        7
<PAGE>

commonly referred to as the "e-Rate" program. These customers typically pay more
slowly than our commercial customers, and to the extent a greater portion of our
revenue is derived from these customers, our business cycle and collections
cycle are extended and our working capital requirements are increased, relative
to revenue.

  COMPUTER TELEPHONY SOFTWARE

     Customers for our computer telephony software are typically contact centers
or companies or organizations that operate contact centers, including political
and non-profit organizations. Most of our customers have historically been
located in the United States, but we have increasingly sold and installed call
center systems internationally. In 2001, 2002 and 2003, approximately 42.9%,
28.2% and 42.2%, respectively, of Stratasoft's revenue and 13.2%, 4.4% and 5.1%,
respectively, of our consolidated revenue, were with customers outside the
United States, including customers in India, Egypt, the United Kingdom, Canada,
Japan, Germany, Greece and the Philippines.

     We believe that Stratasoft's typical customers may change in the future due
to changes in the contact industry that are occurring as a result of the
"National Do Not Call" legislation. This may occur because the new legislation
created unintended incentives for large companies or organizations that have
large numbers of customers to enter the contact center industry. We believe the
new legislation created these incentives because the new legislation permits
companies to contact their own customers for the purpose of marketing. If this
trend develops as we expect, our typical customer could become a larger
enterprise rather than a smaller contact center business.

  REMOTE INFORMATION TECHNOLOGY MANAGEMENT

     Customers for our remote information technology management consist
primarily of commercial businesses as well as state and local governmental
organizations, primarily in Houston and Dallas.

SALES AND MARKETING

     We market our products and services primarily through sales personnel,
including account managers and customer service representatives. These sales
personnel are partially compensated, and in some cases are solely compensated,
on either the revenue or the profitability of sales that they participate in
developing. In addition, Stratasoft markets its computer telephony software
applications through a network of value added resellers, which often integrate
their products and services with Stratasoft's software products. We also promote
our products and services through general and trade advertising, and
participation in trade shows. INX's sales organization works closely with the
Cisco sales organization to identify opportunities for IP telephony and network
infrastructure solutions.

     Potential customers for our IP telephony and network infrastructure
business, particularly governmental and educational customers, sometimes specify
that bid and performance bonds must be provided in order to be considered for
the award of their projects, particularly in the case of larger projects. We
have been unable to obtain bid bonds or performance bonds requested by potential
customers in connection with some large potential transactions. In some cases,
we have lost business because of this. In other cases, we were able to obtain
only a smaller portion of the overall project by acting as a subcontractor, to a
larger, better financed organization that was able to obtain the necessary
bonding.

     Our difficulty in obtaining bonds is caused principally by two factors. The
first is that we have not been financially capable of providing a bonding
company with the necessary collateral to issue bonds on larger projects. We
believe that the proceeds of this offering will partially alleviate, but not
eliminate entirely, this problem, provided that our financial condition does not
deteriorate.

     We have also had difficulty establishing a relationship with bonding
companies because we believe there are fewer bonding companies today than there
were in the past and that the current bonding companies prefer to bond only
their larger, existing customers.

                                        8
<PAGE>

SUPPLY AND DISTRIBUTION

     We purchase equipment that is sold in conjunction with Stratasoft's
software products and by INX as part of network infrastructure and/or IP
telephony solutions. INX purchases the majority of the Cisco products that it
resells directly from Cisco. We also purchase some of our products through
various distribution channels when product is not available directly from Cisco.
In addition, Valerent and INX purchase or exchange service parts typically with
the product manufacturer or its authorized parts distributor. Also, Stratasoft
sometimes uses resellers to distribute its software products. We attempt to keep
minimal inventory on hand and attempt to purchase inventory only as needed to
fulfill orders.

COMPETITION

     The market for communications systems, including network infrastructure, IP
telephony solutions and computer telephony software for contact centers, is
evolving rapidly, highly competitive and subject to rapid technological change.
Many of our competitors are substantially larger than we are and have
significantly 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. Our competition varies by
business segment.

     For Cisco-centric IP telephony solutions and network infrastructure
solutions, we compete with large, well established Cisco equipment integrators
and solution providers, including most of the major national and international
solution providers such as EDS, IBM, SBC and others. Our competition for IP
telephony and network infrastructure solutions is highly fragmented, and we
compete with numerous large and small competitors.

     With regard to our computer telephony software applications for contact
centers, we compete primarily with manufacturers of specialized contact center
systems, such as Avaya Inc., Concerto Software, Inc., Interactive Intelligence,
Inc., and others. If we are successful in developing other software applications
to augment and enhance Cisco-centric IP telephony solutions, we expect to face
competition from numerous early stage companies focused in this area as well as
many large, well-established software companies and telephone systems
manufacturers.

     For our remote managed services business, we compete with numerous large,
well established IT services and support organizations, large IT equipment
manufacturers, and numerous smaller IT services and support organizations.

     We believe that the principal competitive factor in all segments of our
business is price. Other important factors include technical competence, the
perception of the customer regarding our financial and operational ability to
manage a project, and the quality of our relationship with Cisco. In our
computer telephony software business, the array of features offered by our
software products as compared to those of our competitors is also an important
competitive factor. Additionally, the IP telephony products we offer compete
with hybrid systems.

MANAGEMENT INFORMATION SYSTEMS

     We use an internally developed, highly customized management information
system ("MIS") to manage most aspects of our business. All of our subsidiaries
use our MIS, which is customized to their specific needs. 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, and project management. Reporting can
be generated for project profitability, contract and customer analysis, parts
and inventory tracking and employee time tracking. The system provides for
separate company accounting and also for consolidation of all subsidiary company
financial information.

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EMPLOYEES

     At February 27, 2004 we employed approximately 189 people. Of these,
approximately 54 were employed in sales, marketing and customer service; 87 were
employed in engineering and technical positions; and 48 were employed in
administration, finance and MIS. Our management, sales management and sales
staff work closely with Cisco representatives to plan and execute sales and
marketing strategies. We believe that 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 that our relations with our
employees are good.

HISTORY

     We started business as a computer reseller and service provider in 1983. We
added a traditional PBX telephone systems business unit in 1994 and founded
Stratasoft 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.

     In 2000, we sold both our computer products reselling business and our
traditional PBX telephone systems business, which together accounted for
approximately 90% of our total revenue at that time, and reposition our company
to take advantage of what we then believed would become a significant
opportunity in the area of converged communications using network
infrastructure. We closed the sale of these two business units by mid-2000 and
started the process of building our current Cisco-centric network infrastructure
solutions organization with a significant focus on IP telephony technology in
the enterprise market.

GENERAL INFORMATION

     Our corporate 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, our quarterly reports on Form 10-Q, current reports on Form 8-K and
all amendments to those reports are available without charge from us on our
website at http://www.I-Sector.com, as soon as reasonably practicable following
the time they are filed with or furnished to the SEC. Information on our website
is not part of this document.

RISKS RELATED TO OUR BUSINESS

  WE HAVE A HISTORY OF LOSSES AND MAY CONTINUE TO INCUR LOSSES.

     We have incurred a net loss in each fiscal year since 1998. As of December
31, 2003, our accumulated deficit was $3.2 million. Our loss in 2003 was $1.8
million, and we cannot assure you when we will be profitable, if at all. In
order to achieve profitability, we will have to improve operating margins. Those
improvements could result from increases in revenue without comparable increases
in expense, from changes in the mix of product and services we sell favoring
higher margin services, or from other factors. Although our revenues from 2003
increased by approximately 47.9% from 2002, our operating margins did not
improve significantly in 2003, and we cannot assure you that they will do so in
the future. Whether we are able to be profitable in the future will depend on
many factors, but primarily upon the commercial acceptance of IP telephony
products and services, specifically those developed and marketed by Cisco.

  OUR SUCCESS DEPENDS LARGELY ON THE MAINTENANCE OF OUR RELATIONSHIP WITH CISCO.

     Approximately 80.4% of our revenue for the year ended December 31, 2003 was
derived from the sale of Cisco products, network products and related services.
We anticipate that these products and related services will account for a
significant 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

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<PAGE>

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, maintain our status as an authorized
reseller of Cisco network products and expand our relationship with Cisco, our
business could be significantly harmed. If we are unable to purchase Cisco
products from other sources on terms that we feel are commercially reasonable,
our business would be harmed and our operating results and financial condition
would be materially and adversely affected.

  OUR SUCCESS DEPENDS ON BROAD MARKET ACCEPTANCE OF IP TELEPHONY.

     The market for IP telephony products and services has begun to develop only
recently 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 could be adversely affected.

  ALTHOUGH OUR SUCCESS IS GENERALLY DEPENDENT ON 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 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 that could render our Cisco-centric products
and services unmarketable or obsolete. To compete successfully, the
Cisco-centric IP telephony products we offer must achieve broad market
acceptance and we must continually enhance our related software and customer
services in a timely and cost-effective manner. If the Cisco-centric IP
telephony products we offer fail to achieve broad market acceptance, or if we do
not adapt our existing services to customer demands or evolving industry
standards, our business, financial condition and results of operation could be
significantly harmed.

  OUR BUSINESS DEPENDS ON THE LEVEL OF CAPITAL SPENDING BY ENTERPRISES FOR
  COMMUNICATIONS PRODUCTS AND SERVICES.

     As a supplier of IP telephony products, applications and services for
enterprises, our business depends on the level of capital spending for
communications products and services by enterprises in our markets. We believe
that an enterprise's investment in communications systems and related products
and 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 communications products and services may continue to grow at a modest
rate or not at all. If the level of spending by our customers on communications
systems and related products and services decreases, our revenue and operating
results may be adversely affected.

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<PAGE>

  A MAJORITY OF OUR CUSTOMERS ARE BASED IN TEXAS.

     We offer our IP telephony products and services primarily to businesses in
Texas. Because a majority of the enterprises that we offer our IP telephony
products to are geographically concentrated in Texas, our customers' level of
spending on communication products may be affected by economic condition in
Texas, in addition to general economic conditions in the United States. If
demand for IP telephony products by enterprises decreases our business,
financial condition and results of operations could be significantly harmed.

  OUR STRATEGY CONTEMPLATES RAPID GEOGRAPHIC EXPANSION, WHICH WE MAY BE UNABLE
  TO ACHIEVE, AND WHICH IS SUBJECT TO NUMEROUS UNCERTAINTIES.

     A component of our strategy is to become one of the leading national
providers of Cisco-centric IP telephony products. To achieve this objective, we
must either acquire existing businesses or hire qualified personnel in various
locations throughout the country, fund a rapid increase in operations and
implement corporate governance and management systems that will enable us to
function efficiently on a national basis. Identifying and acquiring existing
businesses is a time-consuming process and is subject to numerous risks.
Qualified personnel are in demand, and we expect the demand to increase as the
market for IP telephony 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 beyond Texas or achieving our goal of becoming a national provider.
An unsuccessful expansion effort would consume capital and human resources
without achieving the desired benefit and would have an adverse affect on our
business.

  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 need additional capital to grow our business.  Our business plan
calls for the expansion of sales of our IP telephony products to enterprises in
geographical markets where we currently do not operate. 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 find financing if required. Our
ability to obtain additional financing would be subject to a number of factors,
including general market conditions, investor acceptance of our business plan
and investor sentiment. These factors may affect the timing, amount, terms or
conditions of additional financing available to us.

  WE MAY BE UNABLE TO ACHIEVE OR 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, integrate new employees into our operations and 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 revenue for the third quarter of 2003 increased by approximately 32%
from the second quarter, and it increased over 81% from the third quarter of
2002. Our revenue for the fourth quarter of 2003 decreased by approximately 27%
from the third quarter of 2003, but increased over 39% from the fourth quarter
of 2002. 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;
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<PAGE>

     - 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; and

     - the availability and cost of products and components from our suppliers.

     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.

  ANTICIPATED ISSUANCES OF INX COMMON STOCK TO EMPLOYEES AND OTHERS WILL
  MATERIALLY REDUCE OUR INTEREST IN INX AND WILL MATERIALLY AFFECT OUR FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS.

     INX is obligated to issue shares of INX common stock representing up to an
approximate 31.6% post-issuance interest in INX to certain employees upon
vesting and exercise of options and to others upon the fulfillment of certain
conditions that we expect will be fulfilled. We expect that many of the INX
options may be considered to be in the money, based on the relatively low
exercise price of the options. We also expect that the other outstanding INX
options may become in the money assuming that our expectations for INX's
business growth are met. It is not a certainty, however, that all of the INX
Options will be exercised because the stock of INX is not publicly traded and is
therefore relatively illiquid and because vesting of some of the options may not
occur. If INX issues common stock in satisfaction of the INX options and INX's
other obligations to issue INX stock, those issuances will materially reduce our
ownership interest in INX and will materially reduce our participation in any
earnings that INX may produce. The possible effect of these issuances on our
financial condition and results of operations is more fully discussed in "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Future Minority Interest in INX."

  THE EXISTENCE OF A MINORITY INTEREST IN INX MAY LIMIT OUR MANAGEMENT
  FLEXIBILITY, SUBJECT US TO LITIGATION AND OTHERWISE INCREASE OUR COSTS.

     The existence of a minority interest in INX will create potential conflict
of interest issues between I-Sector and the INX minority stockholders. Such
conflicts of interest may arise in connection with intercompany financing or
other transactions, INX dividend payments, allocation of business or combined
company resources among the various subsidiaries, or other reasons. The need to
respond appropriately to actual and potential conflict of interest situations
can be expected to reduce management flexibility and increase the time and cost
required to engage in transactions in which such conflicts arise. If the INX
minority stockholders disagree with I-Sector's resolution of any conflict issue,
they could bring a lawsuit against I-Sector that could be costly and
time-consuming and could further limit management's flexibility. Any such events
could materially and adversely affect I-Sector's financial condition and results
of operations.

  WE MAY, IN THE FUTURE, ELECT TO EXCHANGE MINORITY SHARES IN INX OR INX OPTIONS
  FOR I-SECTOR STOCK OR OPTIONS, WHICH MAY RESULT IN MATERIAL DILUTION TO
  I-SECTOR STOCKHOLDERS.

     To resolve the conflict of interest issues described above and to provide
liquidity to the INX minority stockholders, I-Sector and the INX minority
stockholders may, in the future, agree to exchange the minority INX stock or
options for I-Sector stock, stock options, cash or any combination of those.
I-Sector
                                        13
<PAGE>

management has discussed the possibility of such an exchange with Mark Hilz, who
is the President and Chief Operating Officer of I-Sector, the President of INX,
and the largest holder of INX options. No specific proposal has been made or
agreed to with respect to any such future exchange.

     If a future exchange transaction does occur, the value of the consideration
for the INX minority stock and stock options would be determined by negotiations
between a committee of I-Sector's board of directors (the "Board"), composed of
disinterested, independent members of the Board and the principal INX minority
stockholders and option holders. We cannot predict the outcome of those future
negotiations, if any, and thus cannot predict the financial impact on us or our
stockholders of any future exchange transaction. We expect, however, that any
such negotiations would involve negotiating the value at the time of the
exchange, of INX and, in the case of consideration in the form of I-Sector
equity, the negotiated value at the time of the exchange of I-Sector equity
securities. Because INX's financial significance to us is currently high, and we
expect it to remain so, any future exchange transaction could result in
significant dilution to existing I-Sector stockholders.

  IF IN THE FUTURE WE EXCHANGE OR CONVERT INX STOCK OR INX OPTIONS FOR I-SECTOR
  STOCK OR STOCK OPTIONS, WE COULD BE REQUIRED TO RECORD SUBSTANTIAL NON-CASH
  EXPENSES IN CONNECTION WITH THE TRANSACTION, THE AMOUNT OF WHICH WE CANNOT
  QUANTIFY.

     If we choose to exchange or convert INX stock or INX options into I-Sector
stock or stock options, we may be required by generally accepted accounting
principles to record substantial non-cash expenses. We are not now able to
determine the amount or timing of any such charges. This is because those
charges would largely depend upon the timing and terms on which any future
exchange or conversion would occur, particularly the exchange or conversion
ratio used. Based on the presently high financial significance to us of INX
relative to our other business segments, and our expectation that its
significance to us will remain high, we believe that any resulting non-cash
expense charges could be substantial. Any such future non-cash expenses charges
could materially and adversely affect our financial results of operations.

  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 our IP telephony products and services are extremely
competitive and subject to rapid change. Substantial growth in demand for IP
telephony solutions has been predicted, and we expect competition to increase as
existing competitors enhance and expand their products and services and as new
participants enter the IP telephony market. IP telephony involves the
application of traditional computer-based technology to voice communication, and
the hardware component of the solution is readily available. Accordingly, there
are relatively few barriers to entry to companies with computer and network
experience. A rapid increase in competition could negatively affect the amount
of business that we get and the prices that we can 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.

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<PAGE>

     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.

  BUSINESS ACQUISITIONS, DISPOSITIONS OR JOINT VENTURES ENTAIL NUMEROUS RISKS
  AND MAY DISRUPT OUR BUSINESS, DILUTE SHAREHOLDER VALUE OR DISTRACT MANAGEMENT
  ATTENTION.

     As part of our business strategy, we plan 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;

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

     - difficulties in maintaining customer relationships, in particular when 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 additional revenue or provide
any benefit to our business, and we may not achieve a satisfactory return on our
investment in any acquired businesses.

  OUR INTERNATIONAL OPERATIONS, WHICH WE PLAN TO EXPAND, WILL SUBJECT US TO
  ADDITIONAL RISKS THAT MAY ADVERSELY AFFECT OUR OPERATING RESULTS DUE TO
  INCREASED COSTS.

     Our revenue generated outside the United States, as a percentage of our
total revenue, was 4.4% and 5.1% for the years ended December 31, 2002 and 2003,
respectively. 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;

     - 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;

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<PAGE>

     - adverse tax consequences; and

     - political and economic instability.

     Any of these factors could prevent us from increasing our revenue and
otherwise 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 H. Long, and our
President and Chief Operating Officer, Mark T. Hilz. If for any reason, our
senior executives 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 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 products. 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 IP
telephony, we will need to:

     - 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.

     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.

  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 have in the past and 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
                                        16
<PAGE>

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 costs of
compliance with the Sarbanes-Oxley Act are uncertain due to several factors, we
expect that our general and administrative expenses will increase. Furthermore,
the American Stock Exchange has adopted amendments to its listing standards that
will impose additional corporate governance requirements. We are a "controlled
company" and are only required to comply with certain of the American Stock
Exchange's recently adopted corporate governance requirements. We may not always
qualify as a "controlled company." If we cease to qualify as a "controlled
company," we will have to comply with all of the American Stock Exchange's
corporate governance requirements, which may cause us to incur additional
expense. Although we expect to comply with these corporate governance listing
requirements, if we are unable to comply in a timely manner, we may incur
penalties or fines, and our securities may be delisted from the American Stock
Exchange, which could limit our ability to access the capital markets, having a
negative impact on our financial condition and results of operations.

ITEM 2.  PROPERTIES

     We do not own any real property and currently lease all of our existing
facilities. We lease our Houston office that is housed in a freestanding
building of approximately 48,000 square feet. On November 30, 1999, the building
was acquired by a corporation owned by our Chairman and Chief Executive Officer.
A new lease at reduced rental rates was signed on February 1, 2002, which
expires on January 31, 2007. Our Dallas office is a space of approximately 8,960
square feet. The Dallas facility lease term began July 2000 and expired in July
2003 and is currently leased on a month-to-month basis. Our Austin office is a
space of approximately 2,845 square feet. The Austin facility lease was acquired
in conjunction with our acquisition of Digital Precision in April 2003 and
expires October 31, 2006.

ITEM 3.  LEGAL PROCEEDINGS

     We are party to litigation and claims that management believes are normal
in the course of our operations; while the results of such litigation and claims
cannot be predicted with certainty, we believe the final outcome of such matters
will not have a material adverse effect on our results of operations or
financial position.

     In August 2002, Inacom Corp. filed a lawsuit in the District Court of
Douglas County, Nebraska styled Inacom Corp. v. I-Sector Corporation, f/k/a
Allstar Systems, Inc., claiming that we owed the sum of approximately $570,000
to Inacom Corp. ("Inacom") as a result of Inacom's termination of a Vendor
Purchase Agreement between Inacom and us. We believe that the lawsuit is without
merit, and we intend to vigorously contest it.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.

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<PAGE>

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE FOR COMMON STOCK

     On Monday, December 29, 2003, we listed our common stock on the American
Stock Exchange under the ticker symbol ISR. Prior to December 29, 2003 and since
the change of the corporate name on July 11, 2000, our common stock was traded
on the NASDAQ Small Cap Market under the symbol "ISEC." Prior to July 11, 2000,
our shares traded under the symbol "ALLS." Below are ranges of the stock trading
price:

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   -----
<S>                                                           <C>      <C>
2002
  First Quarter.............................................  $ 0.97   $0.67
  Second Quarter............................................  $ 2.14   $0.66
  Third Quarter.............................................  $ 2.29   $1.33
  Fourth Quarter............................................  $ 2.00   $1.05
2003
  First Quarter.............................................  $ 2.06   $1.64
  Second Quarter............................................  $ 2.40   $1.75
  Third Quarter.............................................  $ 4.40   $2.60
  Fourth Quarter............................................  $15.97   $4.14
</Table>

     As of March 10, 2004, we had 38 stockholders of record. On March 11, 2004,
the closing sales price of our common stock as reported by the American Stock
Exchange was $12.65 per share.

DIVIDEND POLICY

     We have never declared or paid any cash dividends on our common stock and
do not anticipate declaring or paying dividends on our common stock in the
foreseeable future. Any future determination as to the payment of dividends will
be made at the discretion of the Board and will depend on our operating results,
financial condition, capital requirements, general business conditions and such
other factors as the Board deems relevant.

                                        18
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following sets forth the selected data of the company for the five
years ended December 31, 2003.

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                               -----------------------------------------------
                                                1999      2000      2001      2002      2003
                                               -------   -------   -------   -------   -------
                                                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                            <C>       <C>       <C>       <C>       <C>
OPERATING DATA:
Revenue:
  Products...................................  $   780   $ 1,670   $ 9,925   $29,805   $46,900
  Services...................................   13,137     8,757     6,477     5,647     7,725
  Custom projects............................    4,067     6,660     7,218     6,569     7,527
                                               -------   -------   -------   -------   -------
     Total revenue...........................   17,984    17,087    23,620    42,021    62,152
Cost of sales and services:
  Products...................................    1,235     2,104     8,685    26,437    41,060
  Services...................................    8,445     7,291     5,322     4,395     5,383
  Custom projects............................    2,126     3,573     3,318     2,920     2,982
                                               -------   -------   -------   -------   -------
     Total cost of sales and services........   11,806    12,968    17,325    33,752    49,425
Gross profit:
  Products...................................     (455)     (434)    1,240     3,368     5,840
  Services...................................    4,692     1,466     1,155     1,252     2,342
  Custom projects............................    1,941     3,087     3,900     3,649     4,545
                                               -------   -------   -------   -------   -------
     Total gross profit......................    6,178     4,119     6,295     8,269    12,727
Selling, general and administrative
  expenses...................................    6,207     9,479    10,573    10,625    15,061
                                               -------   -------   -------   -------   -------
     Operating loss..........................      (29)   (5,360)   (4,278)   (2,356)   (2,334)
Interest and other income, net...............       23       239       316       115       107
                                               -------   -------   -------   -------   -------
Loss from continuing operations before income
  taxes......................................       (6)   (5,121)   (3,962)   (2,241)   (2,227)
Tax benefit (expense)........................      (20)    1,493        87     1,595       181
                                               -------   -------   -------   -------   -------
Net loss from continuing operations..........      (26)   (3,628)   (3,875)     (646)   (2,046)
Discontinued operations:
Net income (loss) from discontinued
  operations, net of taxes...................      319       195      (167)       --        --
Gain (loss) on disposal, net of taxes........   (1,138)    3,390       337       262       210
                                               -------   -------   -------   -------   -------
     Net loss................................  $  (845)  $   (43)  $(3,705)  $  (384)  $(1,836)
                                               =======   =======   =======   =======   =======
Net loss per share:
  Basic:
     Net loss from continuing operations.....  $ (0.01)  $ (0.90)  $ (0.99)  $ (0.17)  $ (0.55)
     Net gain (loss) from discontinued
       operations............................     0.08      0.05     (0.04)       --        --
     Gain (loss) on disposal.................    (0.27)     0.84      0.08      0.07      0.06
                                               -------   -------   -------   -------   -------
     Net loss per share......................  $ (0.20)  $ (0.01)  $ (0.95)  $ (0.10)  $ (0.49)
                                               =======   =======   =======   =======   =======
  Diluted:
     Net loss from continuing operations.....  $ (0.01)  $ (0.90)  $ (0.99)  $ (0.17)  $ (0.56)
     Net gain (loss) from discontinued
       operations............................     0.08      0.05     (0.04)       --        --
     Gain (loss) on disposal.................    (0.27)     0.84      0.08      0.07      0.06
                                               -------   -------   -------   -------   -------
     Net loss per share......................  $ (0.20)  $ (0.01)  $ (0.95)  $ (0.10)  $ (0.50)
                                               =======   =======   =======   =======   =======
</Table>



                                                   (continued on following page)

                                        19
<PAGE>

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                               -----------------------------------------------
                                                1999      2000      2001      2002      2003
                                               -------   -------   -------   -------   -------
                                                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                            <C>       <C>       <C>       <C>       <C>
BALANCE SHEET DATA:
Working capital..............................  $ 9,567   $10,098   $ 5,983   $ 5,540   $ 3,724
Total assets.................................   54,531    17,142    13,548    15,751    19,207
Current portion of long-term debt............   15,869        --       213       157     1,784
Long-term debt...............................       --        --       410       247       229
Stockholders' equity.........................  $11,830   $11,912   $ 8,015   $ 7,640   $ 6,619
</Table>

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 1. Business -- Risks Related to Our Business" and
elsewhere in this report.

GENERAL

     We are a leading regional provider of network infrastructure and IP
telephony solutions including related implementation and support services. The
IP telephony industry is characterized by rapidly evolving and competing
technologies. Our three principal offices are located in Texas, and we primarily
market to potential customers headquartered in, or making purchasing decisions
from, Texas. Our long-term goal, however, is to become one of the leading
national providers of Cisco-centric network and IP telephony solutions to
enterprises.

     We begin Management's Discussion and Analysis of Financial Condition and
Results of Operations with an overview of our strategies for achieving this goal
and becoming profitable. From a financial perspective, these operating
strategies have a number of important implications for our results of operations
and financial condition.

STRATEGY

     We plan to become profitable in 2004 by implementing the strategies
discussed below. We believe that our strategies will allow us to continue to
increase total revenues in 2004. Importantly, we also believe our strategies
will enable us to improve our gross profit in 2004 by improving our gross
margins on INX revenue. At the same time, we will seek to contain the relatively
fixed components of our selling, general and administrative expenses so that
those components become a relatively smaller percentage of total revenues.
Although selling expenses can generally be expected to increase as our revenues
increase, we believe that if we are successful in implementing our strategies,
many general and administrative expenses (such as management salaries,
administrative wages and professional expenses) will decrease as a percentage of
our total revenues.

     Our key operating strategies are as follows:

     - seeking larger, full-scale IP telephony implementation projects, as
       opposed to smaller pilot projects;

     - increasing the gross revenues from our higher gross margin operations,
       such as INX services and Stratasoft custom projects, as opposed to
       product sales, which typically produce lower gross margins;

     - aligning ourselves with Cisco as our exclusive supplier for the network
       and IP telephony equipment and technology that we offer;

     - expanding geographically by acquiring complementary businesses and by
       opening our own offices; and

                                        20
<PAGE>

     - developing and marketing our own computer telephony software that
       operates with and augments Cisco-centric IP telephony products.

     If we are successful in obtaining larger, full-scale IP telephony
implementation projects, we expect that our gross revenues from both products
and services will increase because these projects, by their nature, typically
require a substantially higher level of our services and more products than do
smaller projects. Larger projects, however, can strain our financial resources.
For example, a potential customer for a major IP telephony project may require
that we post a bid bond or performance bond in order for us to be awarded the
project. This often occurs on competitive bids. Because of our financial
condition, bonding companies typically require that we provide security to
collateralize the issuance of its bond. We have been financially unable to
provide sufficient collateral in some instances, and as a result have not been
able to obtain the bond. We believe we have occasionally lost business that we
might have otherwise been awarded because we were unable to obtain the bond
required by the potential customer. We compete with larger and better financed
entities that do not face the same difficulties obtaining bonds.

     Increases in the size and volume of IP telephony projects we undertake can
also challenge our cash management. For example, larger projects can reduce our
available cash by causing us to carry higher levels of inventory. Larger
projects can also require us to invest our available cash in labor costs. This
is because, in some cases, we do not receive payments from our customers for
extended periods of time. Until they pay us, all the cash we previously invested
in labor and products on the project remains tied up. We expect that greater
amounts of our cash will become invested in accounts receivable in the future if
we are successful in growing our business as we intend.

     To meet our cash requirements to support this 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 assets.
We also expect to raise capital through a public offering of our equity
securities.

     Although over 75% of our revenue in 2003 was attributable to product sales,
the gross profit margins on sales of our services have been substantially higher
than those for sales of products, with the exception of sales of our proprietary
Stratasoft software products. In 2003, for example, the gross profit margin on
sales of products by INX was 12.4%, while the gross profit margin on sales of
services by INX for that year was 29.6%. We therefore plan to increase revenue
from services, particularly our post-implementation services for IP telephony.
The success of this aspect of our strategy largely depends on our ability to
attract and retain highly skilled and experienced employees.

     For the last three years, the largest component of our total cost of sales
and service has been purchases of Cisco-centric IP telephony products by INX.
The majority of those purchases were directly from Cisco. We typically purchase
from various wholesale distributors only when we cannot timely purchase products
directly from Cisco. Our reliance on Cisco as the primary supplier for the
network and IP telephony equipment and technology we offer means that our
results of operations from period to period depend substantially on the terms
that 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 growing 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
the incentives that Cisco offers.

     We plan to also grow our business in other geographic areas through
strategic acquisition 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 of a geographic expansion in an area may well
exceed the revenues attributable to a new business or office for some time, even
if it performs as we expect. Additionally, it is possible that our acquisition
activities may require that we record substantial amounts of goodwill if the
purchase consideration paid for an acquisition exceeds the estimated fair value
of the net identified tangible and intangible assets acquired. To the extent an
acquisition results in goodwill, we will reevaluate the realizability of that
goodwill at least annually and adjust it as appropriate. The resulting
adjustment could result in significant charges to earnings in future periods.
                                        21
<PAGE>

     Developing new or substantially improved computer telephony software
products will likely require us to expend cash and record software development
expenses. Software development costs will likely be expensed as incurred because
we expect to incur substantially all costs prior to achieving technological
feasibility in developing a new or substantially improved software product.

FUTURE MINORITY INTEREST IN INX

     Since its formation in 2000, INX has been our wholly-owned subsidiary.
Beginning in April 2004, however, we expect INX will cease to be a wholly-owned
subsidiary as the result of the anticipated issuance of INX common stock to
Digital Precision, which INX acquired in April 2003. In connection with that
acquisition, we agreed to issue to the seller 1.8 million shares of INX common
stock as additional purchase consideration for its business if certain employees
remain employed through April 4, 2004, the first anniversary of the acquisition.
We expect that these conditions will be met and that the INX stock will be
issued in April 2004. When that occurs, we anticipate that our ownership
percentage of INX's common stock then outstanding will decline to approximately
92.4%.

     INX has also granted 8,290,692 stock options to employees of INX to acquire
INX common stock pursuant to a stock option plan for INX employees. The exercise
prices for the INX options range from $0.01 to $0.25 with a weighted average of
$0.16. Additionally, the I-Sector Warrant entitles us to acquire an additional
1.2 million shares of INX common stock at an exercise price of $0.25 per share.
We estimate that I-Sector's ownership in INX could be reduced to 69.5%, assuming
that all of the INX options are exercised, we exercise the I-Sector Warrant and
there are no other changes in INX's equity. If the I-Sector Warrant is not
exercised, we estimate that our ownership in INX would be reduced to 68.4%
assuming the INX stock is issued in April 2004 and all INX options are
exercised. The terms of the INX options and the I-Sector Warrant are discussed
further in Note 14 to the Consolidated Financial Statements and in "Executive
Compensation."

     While the existence of the unexercised INX options and the contingent
obligation to issue INX stock do not result in a minority interest for
accounting purposes, the actual issuance of INX stock in April 2004 will result
in a minority interest. Because I-Sector will own less than all of INX's stock,
its interest in INX's future profits and losses will be reduced. Under U.S.
generally accepted accounting principles, we expect that I-Sector's consolidated
financial statements will reflect a minority interest adjustment of the
otherwise reportable profits and losses of INX by the percentage of minority
ownership in INX during the period covered by the financial statements.
I-Sector's percentage share of any cash dividends or other distributions paid by
INX to its stockholders will likewise be reduced by the percentage of minority
ownership in INX. Additionally, if the percentage of minority ownership of INX's
stock grows as a result of future exercises of INX options, that increase will
cause a corresponding decrease in the reportable share of INX's profits and
losses included in our consolidated financial statements, and our share of cash
dividends and other distributions from INX.

     The following table summarizes the pro forma effect on our consolidated net
loss for 2003 if, as of January 1, 2003, we exercised the I-Sector Warrant, all
INX options were exercised and all the INX shares we expect to issue in
connection with the Digital Precision acquisition were issued:

<Table>
<Caption>
                                                              DECEMBER 31, 2003
                                                              -----------------
                                                               (IN THOUSANDS)
<S>                                                           <C>
Net loss as reported........................................       $(1,836)
Assumed minority interest in INX income.....................          (189)
Adjusted pro forma net loss.................................       $(2,025)
</Table>

As a result of the adjustment to net income, our pro forma consolidated balance
sheet would include a liability entitled "Minority Interest" of $559,000 and our
stockholders' equity would be reduced by $559,000.

     Unlike the boards of directors of our wholly-owned subsidiaries, the board
of directors of INX will be required to be mindful of the interests of INX's
minority stockholders, in addition to our interests, when considering whether to
approve business and financing transactions involving INX. For example, we may
be

                                        22
<PAGE>

unable to cause the assets of INX to be pledged as collateral security for
indebtedness if the proceeds of that indebtedness disproportionately benefit us
or our wholly-owned subsidiaries in relation to INX. Conflicts of interest may
reduce our flexibility in structuring business and financing transactions
beneficial to us and our wholly-owned subsidiaries.

     Contributions of capital to INX by us, in the form of stock purchases,
which may be necessary to fund INX's growth, could increase our percentage
ownership of INX but would use capital. Because of the potential minority
interest in INX, we will be required to make capital contributions to INX on a
basis that is, in the good-faith judgment of our board of directors, fair to us
and the holders of the minority interest.

     Minority stock ownership in INX could also subject us to lawsuits from its
minority stockholders complaining of our actions with respect to INX and its
minority stockholders, even if the actions complained of are ultimately
determined to have been proper. For example, if we choose to cause INX to merge
with, or sell all or substantially all of its assets to, another entity, the
minority stockholders of INX may bring lawsuits seeking to block the transaction
or seeking to exercise statutory dissenters' rights with respect to the
transaction. Whether or not successful, any such actions would cause us to incur
litigation costs and potentially reduce the benefit of any such transaction to
us.

     The stock of INX is not publicly traded. Accordingly, any shares of INX
stock issued, including those issued to the former owners of Digital Precision
upon exercise of INX options, are, and will be for the foreseeable future,
relatively illiquid. For this reason, and to eliminate the other consequences of
having a minority interest in a subsidiary, we believe that in the future we
will offer to exchange INX stock and stock options for common stock or stock
options to acquire our common stock. If we conclude such a transaction, the
aggregate ownership percentage of our common stock by our stockholders
immediately before the conversion or exchange transaction will be reduced by the
percentage of post-transaction ownership acquired by the former minority
stockholders of INX. Their post-transaction ownership may be further reduced by
subsequent exercises of I-Sector stock options that we may choose to exchange
for INX stock options.

     We cannot predict the percentage of ownership reduction to our stockholders
that may result from any future exchange or conversion of INX stock and INX
options. The ownership reduction resulting from any such transaction may,
however, be significant. We believe this may be the case principally because:

     - we expect that the total number of shares of our common stock that we
       would be required to issue in any such transaction would be approximately
       equivalent in value, as determined at a future date, to the value of the
       INX stock and INX options to be exchanged at the same future date;

     - the historical financial effect of INX on our business is significant, as
       compared with our other subsidiaries; and

     - we expect INX will continue to generate most of our revenue.

     If in the future we propose to exchange or convert INX stock and INX
options into I-Sector common stock or options, we intend to appoint a special
committee of our independent directors to negotiate any exchange ratio for the
transaction with the principal INX minority stockholders and option holders. The
facts and circumstances that the special committee may choose to consider and
the relative weights to be accorded them in negotiating the relative values of
our common stock and INX stock and in negotiating the exchange ratio for any
future transaction are matters that we intend to delegate to the discretion of
the special committee. Accordingly, presently we cannot quantify the amount of
any future ownership reduction that our stockholders may experience in an
exchange transaction with INX stockholders and option holders.

     Under some circumstances, we may be required by generally accepted
accounting principles to record substantial non-cash expenses if we choose to
exchange INX stock or INX options into our common stock or options. We are not
now able to determine the amount or timing of any such charges. This is because
those matters will largely depend upon the timing and terms on which any future
exchange would occur, particularly the exchange ratio negotiated at the time.
Because most of our revenues in 2003 were generated by INX and our expectation
is that this will continue for the foreseeable future, we believe that any
resulting non-cash

                                        23
<PAGE>

charges could be substantial. Any such future non-cash charges could materially
and adversely affect our financial results.

     If we determine to undertake a transaction to exchange INX stock or INX
options into our common stock or stock options, we also plan to submit any such
transaction to our stockholders for their approval, even if not required by
Delaware law or the rules of the American Stock Exchange. Even if we believe
that such transaction is in our best interest, our stockholders may refuse to
approve it. If that were to occur, it could disappoint the expectations of those
INX minority stockholders and INX option holders in favor of the transaction,
some of who are currently, and are expected to remain, key employees. This could
cause employee morale and retention problems for us.

RESULTS OF OPERATIONS

  OVERVIEW

     Sources of Revenue.  Our revenue is derived from three segments represented
by our three operating subsidiaries, which are INX, Stratasoft and Valerent.
During the year ended December 31, 2003, INX, Stratasoft and Valerent accounted
for 80.4%, 12.1% and 8.2%, respectively, of total consolidated revenue, and
(0.7)% of subsidiary revenue was eliminated in consolidation due to intercompany
transactions.

     INX revenue consists of product and service revenue. Product revenue
consists of reselling Cisco products and limited amounts of complementary
products by other manufacturers. Service revenue is generated by fees from a
variety of implementation and support services. Product prices for INX are set
by the market for Cisco products, and provide our lowest gross margins. Service
revenue for INX has recently provided a higher gross margin that has generally
improved over the past several years as the cost of INX's technical resources,
which are reflected as a cost of service, has decreased as a percentage of
service revenue. Also, certain fixed and flat fee service contracts that extend
over three months or more are accounted for using the percentage of completion
method of accounting.

     Historically, the majority of INX's service revenue has been generated from
implementation services, which is project oriented and tends to be volatile as
projects are completed and new projects commence. As the number, frequency and
size of INX projects has grown, INX has achieved better utilization of its
engineering resources resulting in improved services gross margins. The normal
sales cycles for corporate customers typically ranges from three to six months
depending on the nature, scope and size of the deal involved. But our direct
experience with school districts involved in the e-Rate program (a governmental
funding program for schools) indicates that the sales lead time is generally
about six to 12 months. In mid-2003, INX introduced Netsurant, its branded
support service that consists primarily of customer service personnel and a
support center that we believe could further improve overall services gross
margins. Through 2003, Netsurant service revenue was not significant.

     Stratasoft revenue consists primarily of custom project revenue from the
sale of proprietary computer-telephony software. Our Stratasoft revenue is
reported as custom project revenue in our financial statements, because it
consists of product and services which cannot be accounted for separately.
Stratasoft has traditionally provided our highest gross margin since it is
primarily sales of our proprietary computer-telephony software. Our cost of
goods sold for Stratasoft's custom project revenue includes the cost of
developing our computer-telephony software products, installation costs, and the
cost of hardware and other equipment bundled with our software applications and
included in a sale to a customer. Stratasoft revenue also includes sales to
resellers. The sales to resellers are recorded when the sale becomes fixed or
determinable; otherwise revenue from resellers is recorded when payments become
due.

     Valerent revenue consists of both product revenue and service revenue.
Product revenue consists of reselling primarily software products and, to a
lesser degree, hardware products that facilitate Valerent's managed services,
including remote management software products from Altiris, Inc., and security
software products from Network Associates, Inc. Product sales prices for
Valerent are set by the market for these products, and Valerent's product sales
have typically provided lower gross profit margins than its service revenue.
Valerent's service revenue consists of remote and onsite technical assistance to
its customers.

                                        24
<PAGE>

Valerent's gross margin on service revenue, much like INX's implementation
service revenue, is subject to variability based upon the utilization of
Valerent's billable technical resources. Recurring service agreements exist with
some customers, but usually with varying terms and conditions that conform to
their year-over-year business changes and specific needs. These agreements
provide predictable and stable sources of revenue, the loss of a recurring
agreement could disrupt the stability of that revenue stream for Valerent.

     Gross Profit and Gross Profit Margin.  The mix of our various revenue
components, each of which has substantially different gross margin, materially
influences our overall gross profit and gross margin in any particular quarter.
In periods in which service revenue or Stratasoft custom project revenue is
high, as compared to INX and Valerent 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 and the mix of large revenue product contracts, which typically have lower
gross margin, as compared to smaller revenue product contracts, which typically
have a higher gross margin.

     In addition, our quarterly gross profit and gross margin can be materially
affected by vendor incentives received in certain quarterly periods, most of
which are Cisco incentives received by INX. The incentive programs sponsored by
Cisco currently enable us to qualify for cash rebates or product pricing
discounts. These incentives are generally earned based on sales volume, sales
growth and, in some cases, customer satisfaction levels. The amounts earned
under these programs are recorded as a reduction of cost of goods and can vary
significantly between periods. Currently, incentives by Cisco are paid
semiannually, and are typically paid in the first and third quarters of each
calendar year. Incentives are recognized when we receive payment from the
supplier or when we have earned and can reasonably estimate the amount due from
the supplier.

     Expenses.  A significant portion of our cost of services for each of our
service businesses is composed of labor. Labor cost related to permanent
employees is generally fixed in the short-term so that higher levels of service
revenue produce higher gross margins while lower levels of service revenue
produce lower gross margins. 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 therefore important in order to prevent erosion of
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.

     Selling, General and Administrative Expenses.  Our selling, general and
administrative expenses include both fixed and variable expenses. Relatively
fixed expenses in selling, general and administrative expenses include rent,
utilities, promotion and advertising, and administrative wages. Variable
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 deal and the mix of associated products and services with our
overall gross profit. Bad debt expense generally fluctuates somewhat in
proportion to increases or decreases in revenue levels, although not always in
the same periods as increases or decreases in revenue. Legal expense varies
based on legal issue activity, which can vary substantially from period to
period. The remainder of selling, general and administrative expenses are
relatively fixed and do not vary in direct proportion to increases or decreases
in revenue.

     Acquisition and Disposition.  In the second quarter of 2003, INX acquired
the fixed assets, inventory, intellectual property, customer lists, trademarks,
trade names service marks, contract rights and other intangibles of Digital
Precision. In connection with that acquisition we also assumed leases for
equipment and office space. Our results of operations include those attributable
to Digital Precision on and after April 4, 2003. The purchase price for Digital
Precision was $540,000 in cash and 1.8 million shares of INX common stock
                                        25
<PAGE>

that we agreed to issue if certain employees remain employed through April 4,
2004, the first anniversary of the acquisition. We did not recognize goodwill at
the time of the acquisition of Digital Precision, but we may recognize goodwill
in connection with the anticipated issuance of the 1.8 million shares of INX
stock in April 2004.

     The sale of our computer reselling and PBX telephone systems reselling
business in early 2000 and the sale of our IT Staffing business in 2001 resulted
in a gain on disposal. Since the sale of these businesses, we have realized, in
various periods, income and expense from discontinued operations that have been
primarily a result of litigation expenses and settlement of litigation related
to our discontinued operations. We expect the income and expense from
discontinued operations to decrease over time and to eventually be eliminated
after these matters are fully resolved.

     Tax Loss Carryforward.  Because of our operating losses in 2003, we have
accumulated a net operating loss carryforward for federal income tax purposes
that, as of December 31, 2003, was approximately $2.4 million and is available
to offset future federal and state taxable income. This carryforward expires in
2023. In addition to potential expiration, there are several factors that could
limit or eliminate our ability to use these carryforwards. For example, under
Section 382 of the Internal Revenue Code of 1986, as amended, use of prior net
operating loss carryforwards is limited after an ownership change. This type of
change could result from an offering that we are contemplating, either alone or
in combination with other prior or subsequent offerings of equity securities. If
we achieve sustained profitability, which may not happen, 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
and reduced earnings due to such tax expense.

     Period Comparisons.  The following table sets 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 each individual segment's cost of sales and services, gross
profit, selling, general and administrative expenses, and operating income,
which are percentages of the respective segment's revenue, and the product and
service components of the INX and Valerent segments' cost of goods sold and
gross profit, which are percentages of such segment's respective product and
service revenue.

<Table>
                                                               YEAR ENDED DECEMBER 31,
                                                 ----------------------------------------------------
                                                       2001              2002              2003
                                                 ----------------   ---------------   ---------------
                                                 AMOUNT      %      AMOUNT      %     AMOUNT      %
                                                 -------   ------   -------   -----   -------   -----
                                                                (DOLLARS IN THOUSANDS)
<S>                                              <C>       <C>      <C>       <C>     <C>       <C>
Revenue:
  INX product..................................  $ 8,853     37.5   $28,990    69.0   $45,749    73.6
  INX service..................................    1,922      8.1     1,748     4.1     4,226     6.8
                                                 -------   ------   -------   -----   -------   -----
       Total INX revenue.......................   10,775     45.6    30,738    73.1    49,975    80.4
                                                 -------   ------   -------   -----   -------   -----
  Stratasoft -- custom projects................    7,257     30.7     6,569    15.6     7,527    12.1
  Valerent product.............................    1,113      4.7     1,092     2.6     1,573     2.5
  Valerent service.............................    4,555     19.3     3,900     9.3     3,503     5.6
                                                 -------   ------   -------   -----   -------   -----
       Total Valerent revenue..................    5,668     24.0     4,992    11.9     5,076     8.2
  Corporate revenue............................       (6)     0.0        --     0.0        --     0.0
     Eliminations revenue......................      (74)    (0.3)     (278)   (0.6)     (426)   (0.7)
                                                 -------   ------   -------   -----   -------   -----
          Total revenue........................   23,620    100.0    42,021   100.0    62,152   100.0
</Table>

                                                   (continued on following page)
                                        26
<PAGE>

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                                 ----------------------------------------------------
                                                       2001              2002              2003
                                                 ----------------   ---------------   ---------------
                                                 AMOUNT      %      AMOUNT      %     AMOUNT      %
                                                 -------   ------   -------   -----   -------   -----
                                                                (DOLLARS IN THOUSANDS)
<S>                                              <C>       <C>      <C>       <C>     <C>       <C>
Cost of sales and service:
  INX product..................................    7,707     87.1    25,659    88.5    40,060    87.6
  INX service..................................    1,956    101.8     1,658    94.9     2,976    70.4
                                                 -------   ------   -------   -----   -------   -----
       Total INX cost of sales and service.....    9,663     89.7    27,317    88.9    43,036    86.1
  Stratasoft -- custom projects................    3,318     45.7     2,920    44.5     2,982    39.6
  Valerent product.............................    1,026     92.2     1,055    96.6     1,421    90.3
  Valerent service.............................    3,377     74.1     2,738    70.2     2,412    68.9
                                                 -------   ------   -------   -----   -------   -----
       Total Valerent cost of sales and
          service..............................    4,403     77.7     3,793    76.0     3,833    75.5
     Corporate of cost of sales and service....      (13)   216.7        --     0.0        --     0.0
     Eliminations of cost of sales and
       service.................................      (46)   (62.2)     (278)  100.0      (426)  100.0
                                                 -------   ------   -------   -----   -------   -----
          Total cost of sales and service......   17,371     73.5    33,752    80.3    49,425    79.5
Gross profit:
     INX product...............................    1,146     12.9     3,331    11.5     5,689    12.4
     INX service...............................      (34)    (1.8)       90     5.1     1,250    29.6
                                                 -------   ------   -------   -----   -------   -----
       Total INX gross profit..................    1,112     10.3     3,421    11.1     6,939    13.9
  Stratasoft -- custom projects................    3,939     54.3     3,649    55.5     4,545    60.4
  Valerent product.............................       87      7.8        37     3.4       152     9.7
  Valerent service.............................    1,178     25.9     1,162    29.8     1,091    31.1
                                                 -------   ------   -------   -----   -------   -----
       Total Valerent gross profit.............    1,265     22.3     1,199    24.0     1,243    24.5
     Corporate gross profit....................        7   (116.7)       --     0.0        --     0.0
     Eliminations gross profit.................      (28)    37.8        --     0.0        --     0.0
                                                 -------   ------   -------   -----   -------   -----
          Total gross profit...................    6,295     26.7     8,269    19.7    12,727    20.5
Selling, general and administrative expenses:
  INX..........................................    3,103     28.8     3,545    11.5     6,045    12.1
  Stratasoft...................................    3,021     41.6     3,922    59.7     5,888    78.2
  Valerent.....................................    3,077     54.3     2,236    44.8     1,963    38.7
  Corporate....................................    1,400      (NA)      922     (NA)    1,165     (NA)
  Eliminations.................................      (28)    37.8        --     0.0        --     0.0
                                                 -------   ------   -------   -----   -------   -----
Total selling, general and administrative
  expenses.....................................   10,573     44.8    10,625    25.3    15,061    24.2
Operating loss:
  INX..........................................   (1,991)   (18.5)     (124)   (0.4)      894     1.8
  Stratasoft...................................      918     12.6      (273)   (4.2)   (1,343)  (17.8)
  Valerent.....................................   (1,812)   (32.0)   (1,037)  (20.8)     (720)  (14.2)
  Corporate....................................   (1,393)     (NA)     (922)    (NA)   (1,165)    (NA)
  Eliminations.................................       --      (NA)       --     (NA)       --     0.0
                                                 -------   ------   -------   -----   -------   -----
       Total operating loss....................   (4,278)   (18.1)   (2,356)   (5.6)   (2,334)   (3.8)
Interest and other income (expense), net.......      316      1.3       115     0.3       107     0.2
                                                 -------   ------   -------   -----   -------   -----
Loss from continuing operations before benefit
  for income taxes.............................   (3,962)   (16.8)   (2,241)   (5.3)   (2,227)   (3.6)
Benefit for income taxes.......................       87      0.4     1,595     3.8       181     0.3
                                                 -------   ------   -------   -----   -------   -----
Net loss from continuing operations............   (3,875)   (16.4)     (646)   (1.5)   (2,046)   (3.3)
Discontinued operations:
Loss from discontinued operations, net of
  taxes........................................     (167)    (0.7)       --     0.0        --     0.0
Gain on disposal, net of taxes.................      337      1.4       262     0.6       210     0.3
                                                 -------   ------   -------   -----   -------   -----
Net loss.......................................  $(3,705)   (15.7)  $  (384)   (0.9)  $(1,836)   (3.0)
                                                 =======   ======   =======   =====   =======   =====
</Table>

                                                   (continued on following page)
                                        27
<PAGE>

  YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2003

     Revenue.  Our total revenue, net of intercompany eliminations, increased by
$20.1 million, or 47.9%, from $42.0 million to $62.2 million.

     INX revenue increased by $19.2 million, or 62.6%, from $30.7 million to
$50.0 million. As a percentage of total revenue, INX revenue increased from
73.1% to 80.4%. Of the increase, $10.8 million was attributed to the Houston
office, $4.6 million was attributed to a new office in Austin, $1.1 million was
attributed to government sector sales and $2.8 million was attributed to the
Dallas office. The increase in revenue attributable to the Digital Precision
acquisition, including the $4.6 million of revenue of the acquired Austin
office, was $8.5 million. INX's revenue grew rapidly primarily due to large
sales to four school districts totaling $14.3 million and due to synergy of $8.5
million resulting from its acquisition of Digital Precision. The sales to the
school districts are one-time competitive bid events fostered by the e-Rate
program that provides schools with 90% of their funding for Internet-related
expenditures, and there can be no assurance as to the level of revenue provided,
if any, in future periods from school districts.

     Stratasoft revenue increased by $958,000, or 14.6%, from $6.6 million to
$7.5 million. As a percentage of total revenue, Stratasoft revenue decreased
from 15.6% to 12.1%. Stratasoft's increased revenue was primarily the result of
two large international custom projects in 2003, as compared to no individually
large custom projects initiated during 2002. This was slightly offset by
deferred revenue for certain custom projects that included fees that were
determined to not be fixed and determinable in 2003. Stratasoft's international
sales accounted for 42.2% of Stratasoft's revenue as compared to 28.2% in 2002.
Stratasoft has it own internally managed sales force, but it also utilizes
dealer agreements from time to time with certain established resellers in
domestic and international markets that do not require the continued involvement
of our personnel. Stratasoft derived $929,000 or 12.3% of its revenue from sales
to resellers in 2003 which compares with $614,000 or 9.3% of revenue in 2002.
Sales to resellers are included in revenue when the fees are fixed and
determinable; otherwise revenue from resellers is deferred and recognized when
the payment becomes due.

     Valerent revenue increased by $84,000, or 1.7%, from $5.0 million to $5.1
million. As a percentage of total revenue, Valerent revenue decreased from 11.9%
to 8.2%. The increase in Valerent revenue was primarily attributable to
decreased service revenue of $397,000 offset by increased product sales of
$481,000. The decrease in service revenue is primarily attributable to the loss
of revenue from certain customers of $355,000, which was primarily related to
Valerent making changes to its business model so that it no longer pursued
certain non-strategic sources of service revenue. Valerent's business model now
focuses on identifying and developing markets with enterprise customers and we
expect that the redirection will provide generally improved margins in the
future.

     Gross Profit.  Our total gross profit increased by $4.4 million, or 53.9%,
from $8.3 million to $12.7 million. Gross margin increased from 19.7% to 20.5%,
primarily because of the increase in gross margin in our INX and Stratasoft
subsidiaries as discussed below.

     INX gross profit increased $3.5 million, or 102.8%, from $3.4 million to
$6.9 million. INX's gross margin increased from 11.1% to 13.9%. INX's gross
profit on its product sales component increased $2.4 million or 70.8%, from $3.3
million to $5.7 million due to increased product sales revenue and a vendor
rebate of $313,000. INX's gross profit on its service component increased $1.2
million, from $90,000 to $1.3 million, and service gross margin improved from
5.1% to 29.6%, as a result of significantly increased service revenue of $2.5
million with a somewhat fixed cost of service component due to improved
utilization of technical personnel.

     Stratasoft gross profit increased by $896,000, or 24.6%, from $3.6 million
to $4.5 million. Stratasoft's gross margin increased from 55.5% to 60.4%.
Stratasoft gross profit was impacted by the mix of sales between "systems
sales," which include a hardware component, as compared to "software only"
sales, which do not have a hardware component. Stratasoft's increased gross
profit is primarily due to an increased "software only" component relative to
the "systems sales" component of total Stratasoft sales. "Software only" sales
primarily relate to reseller customers and do not require the continuing
involvement of our personnel.

                                        28
<PAGE>

     Valerent gross profit increased by $44,000, or 3.7%. Valerent's gross
margin increased from 24.0% to 24.5%. Valerent's cost of service consists
primarily of fixed labor cost that does not fluctuate directly with changes in
revenue. Valerent improved its utilization of its labor pool by reducing the
number of technicians employed and lowering its fixed cost, which contributed to
improved gross profits.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased by $4.4 million, or 41.8% from $10.6 million
to $15.1 million. As a percentage of total revenue, these expenses decreased
1.1%, from 25.3% to 24.2%. Sales compensation increased $919,000 due to
corresponding increase in sales. Legal and professional fees increased $629,000
due to an Equal Employment Opportunity Commission claim, collection efforts, and
commercial disputes in the ordinary course of business. Administrative
compensation expense increased $580,000 due to hiring additional INX and
Stratasoft personnel in Houston, Dallas, Canada and India. Payroll tax expense
increased $109,000 correspondingly with compensation expenses. Contract labor
expense increased $147,000 to supplement technical service labor need to fulfill
contractual obligations. Travel expense increased $312,000 primarily due to
Stratasoft international travel and INX travel for technical staff and
management. General office expenses increased $354,000 due to printing and
general growth. Insurance expense increased $64,000 because of rate increases
and volume increases. Stockholder relations expense increased $209,000, due to
employing a shareholder relations firm, attending investor conferences and
visiting investor groups. Depreciation expense increased $163,000 due to asset
additions and the Digital Precision acquisition in April 2003. Rents increased
$172,000 due to additional office space in Austin and Dallas. Other corporate
expenses increased $198,000 due to our overall growth.

     Operating Loss.  Operating loss decreased $22,000, or 0.9%, from $2.4
million to $2.3 million, primarily due to the $4.5 million increase in gross
profit being offset by the $4.4 million increase in selling, general and
administrative expenses. INX's operating profit increased $1.0 million, or
821.0%, from a loss of $124,000 to a profit of $894,000. Stratasoft's operating
loss increased $1.1 million, or 391.9%, from a loss of $273,000 to a loss of
$1.3 million. Valerent's operating loss decreased $317,000, or 30.6%, from $1.0
million to $720,000. The operating loss for the Corporate Segment increased
$243,000, or 26.4%, from a loss of $922,000 to an operating loss of $1.2
million.

     Interest and Other Income, Net.  Interest and other income, net, decreased
by $8,000, or 7.0%, from $115,000 to $107,000, primarily due to a decrease in
interest income of $102,000, or 57.6%, from $177,000 to $75,000 which is
attributable to interest on the settlement of a past-due customer account in
2002. The decrease in interest income was also affected by an increase in
interest expense of $41,000, or 136.6%, from $30,000 to $71,000 due to increased
borrowings used to finance inventory purchases to supply the increased business
activity. Our borrowings under the Textron credit facility increased from $3.2
million to $7.6 million while the interest-bearing portion of our borrowings
increased from $0 at December 31, 2002 to $1.7 million at December 31, 2003.
Foreign exchange loss increased $13,000 from $0 to a loss of $13,000. Other
income increased $148,000, or 461.0%, from a loss of $32,000 to $116,000.

     Net Loss.  The net loss increased $1.5 million, or 378.1%, from $384,000 to
$1.8 million. The benefit for income taxes decreased $1.4 million, or 88.7%,
from $1.6 million to $181,000. Because the Job Creation and Worker Assistance
Act of 2002 provided for the carryback of net operating losses for any taxable
year ending during 2001 or 2002 to each of the five tax years preceding the loss
year, we were able to use our net operating loss carryback. The benefit in 2003
includes amounts related to additional carryback benefits for 2002 not
previously recorded.

     Discontinued Operations.  During 1999, we discontinued our Telecom Systems
business. On March 16, 2000 we entered into an agreement to sell certain assets
of, and the ongoing operation of, our Computer Products Division. The sale
transaction closed on May 19, 2000. On December 31, 2000, we sold our IT
Staffing business. As a consequence of these events, the operations of these
businesses are reported as discontinued operations. For the year ended December
31, 2002, the gain on disposal related to these three businesses was $171,000,
$104,000 and $(13,000), net of taxes of $88,000, $53,000 and $(7,000), for a net
total of $262,000. For the year ended December 31, 2003 the gain on disposal
related to these three businesses was $80,000, $104,000 and $26,000, net of
taxes of $41,000, $53,000 and $14,000, for a total gain of $210,000.

                                        29
<PAGE>

The gains and/or losses on disposal related to these discontinued operations are
primarily related to collections of accounts receivables retained when these
businesses were sold.

  YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002

     Revenue.  Total revenue increased $18.4 million, or 77.9%, from $23.6
million to $42.0 million. International sales accounted for $1.9 million, or
4.4%, of consolidated revenue as compared to 13.2%, and were primarily derived
from the Stratasoft segment.

     INX revenue increased $20.0 million, or 185.3%, from $11.0 million to $31.0
million. As a percentage of total revenue, INX revenue increased from 45.6% to
73.1%. INX's growth in revenue related to products primarily in the Houston
market, where its revenue increased by $13.5 million, and in the Dallas market,
where its revenue expanded by $6.5 million. During November 2001, INX achieved
gold status with Cisco, its primary product line manufacturer, which allows INX
to purchase directly from Cisco at lower pricing levels and enhances INX's
relationship with Cisco in the areas of lead generation, joint marketing and
technical support.

     Stratasoft revenue decreased $688,000, or 9.5%, from $7.3 million to $6.6
million. As a percentage of total revenue, Stratasoft revenue decreased from
30.7% to 15.6%. A large portion of orders in the fourth quarter of 2002 were
booked late in the quarter, resulting in less progress toward completion and
lower recognized revenue in that quarter in the current year. Additionally, 2001
included eight large international projects that were substantially completed
during 2001 and were not replicated. Stratasoft's international revenue
decreased $1.2 million, or 38.7% from $3.1 million (42.9% of its total revenue)
to $1.9 million (28.2% of its total revenue).

     Valerent revenue decreased $676,000, or 11.9%, from $5.7 million to $5.0
million. As a percentage of total revenue, revenue decreased from 24.0% to
11.9%. The decrease in revenue is attributable to the loss of service revenue
from certain customers of $666,000 and a decision not to participate in the
National Service Network, a network of information technology organizations that
provide service and support for regional and national customers through the
certified services professionals employed by its participants, resulting in
decreased revenue of $63,000.

     Gross Profit.  Gross profit increased $2.0 million, or 31.4%, from $6.3
million to $8.3 million. Gross margin decreased from 26.7% to 19.7%. The primary
reason for the decrease in gross margin is the rapid growth in the INX segment
that experiences lower gross margin because of a high proportion of its revenue
being derived from product sales.

     INX gross profit increased $2.3 million, or 207.6%, from $1.1 million to
$3.4 million. INX's gross margin increased from 10.3% to 11.1%. INX's product
gross profit increased $2.2 million from $1.1 million to $3.3 million due to the
sales volume increase offset by gross margin decreases from 12.9% to 11.5%.
INX's gross profit on its service component improved $124,000, or 364.7%, from
$(34,000) to $90,000 due to better utilization of technical personnel. The
overall increase in gross profit is consistent with an increase in revenue of
$20.0 million, and with better pricing from Cisco after achieving Cisco Gold
levels, along with higher levels of service revenue.

     Stratasoft gross profit decreased $290,000, or 7.4%, from $3.9 million to
$3.6 million. Stratasoft's gross margin increased from 54.3% to 55.5%. The
decreased gross profit is consistent with a decrease in revenue of $688,000. As
discussed above, Stratasoft's revenue, and consequently its gross profit,
suffered from a large portion of its orders for the fourth quarter being booked
late in the quarter, resulting in lower recognized revenue and gross profit for
both the fourth quarter and the current year. Stratasoft's gross margin is
impacted by the mix of sales between "systems sales," which include a hardware
component, as compared to "software only" sales, which do not have a hardware
cost of goods component.

     Valerent gross profit decreased $66,000, or 5.2%, from $1.3 million to $1.2
million. Valerent's gross margin increased from 22.3% to 24.0%. Valerent's cost
of service consists primarily of labor cost, which has a more fixed nature. In
periods when service revenue decreases, it becomes more important to manage
labor cost in order to prevent erosion of gross margin. Valerent discontinued
its relationship with the National Service

                                        30
<PAGE>

Network in the first quarter of 2002 because it could not realize high enough
margin on the work directed its way by that network.

     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased $52,000, or 0.1% to $10.6 million. As a
percentage of total revenue, selling, general and administrative expenses for
continuing operations decreased 19.5% from 44.8% to 25.3%.

     INX selling, general and administrative expenses increased $442,000, or
14.2% from $3.1 million to $3.5 million primarily due to increased sales
compensation that is consistent with increased revenue of $20.0 million.
Stratasoft's selling, general and administrative expenses increased $901,000, or
30% from $3.0 million to $3.9 million primarily due to increased bad-debt
expense and to Stratasoft's lower legal expense due to settlement of the eshare
lawsuit resulting in an insurance reimbursement of legal fees incurred in the
defense and recorded prior to 2001. Other factors contributing to Stratasoft's
increase include increases in rent, promotion and advertising and insurance.
Corporate selling, general and administrative expenses decreased by $478,000, or
34.1% from $1.4 million to $932,000, primarily due to administrative staff
reductions. Valerent selling, general and administrative expenses decreased
$841,000, or 27.3%, from $3.1 million to $2.2 million, primarily due to sales
and administrative staff reductions, as well as reduced bad-debt expense. Other
contributing factors in the corporate decrease are decreases in legal expense,
bad-debt expense, general office expenses and utilities.

     Operating Loss.  Operating loss decreased $1.9 million, or 44.2%, from $4.3
million to $2.4 million, primarily due to the increase in gross profit of $2.0
million and the increase in selling, general and administrative expenses of
$52,000. INX's operating loss decreased $1.9 million, or 93.7%, from $2.0
million to a loss of $124,000. Stratasoft's operating loss increased $1.2
million, or 129.7%, from income of $918,000 to a loss of $273,000. Valerent's
operating loss decreased $775,000, or 42.8%, from $1.8 million to $1.0 million.
The operating loss for the corporate segment decreased $471,000, or 33.8%, from
a loss of $1.4 million to an operating loss of $922,000.

     Interest and Other Income, Net.  Interest and other income, net decreased
$201,000, or 63.6%, from $316,000 to $115,000. During 2001 and continuing
through 2002, interest rates decreased steadily due to attempts by the national
government to stimulate the economy. In addition to the decrease in interest
rates, while the cash balances at year end are comparable, average cash balances
encompassing the entire year were higher. Interest income was also increased by
the recognition of other income of $65,000 relating to an insurance
reimbursement in September 2001.

     Net Loss.  Net loss from continuing operations decreased $3.3 million, or
84.6%, from $3.9 million to $646,000. A valuation allowance against deferred tax
assets eliminated the income tax benefit. In March 2002, President Bush signed
into law the Job Creation and Worker Assistance Act of 2002. Under the new law,
which provided for the carryback of net operating losses for any taxable year
ending during 2001 or 2002 to each of the five tax years preceding the loss
year, we were able to record $1.6 million in tax benefit. A valuation allowance
has been recorded against remaining income tax benefits generated.

     Discontinued Operations.  In connection with the sale of IT Staffing, we
recognized a loss from discontinued operations of $167,000 (net of taxes of
$85,000) on the operations before the measurement date of November 7, 2001 and
we recognized a loss on disposal of $9,000 and $13,000 (net of taxes of $5,000
and $7,000). During 2001 we recognized additional gain on the sale of the
Computer Products Division of $346,000 (net of taxes of $179,000) and we
recognized additional gain on the sale of the Computer Products Division of
$104,000 (net of taxes of $53,000). We recognized additional gain related to the
disposal of the Telecom Division of $171,000 (net of taxes of $88,000).

                                        31
<PAGE>

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.

<Table>
                                                   2002                                                2003
                             -------------------------------------------------   -------------------------------------------------
                               FIRST        SECOND       THIRD        FOURTH       FIRST        SECOND       THIRD        FOURTH
                              QUARTER      QUARTER      QUARTER      QUARTER      QUARTER      QUARTER      QUARTER      QUARTER
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                                  (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S>                          <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Revenue
  INX product..............  $    5,336   $    7,177   $    8,034   $    8,443   $    6,661   $   12,253   $   15,954   $   10,881
  INX service..............         377          253          550          568          477          782        1,392        1,575
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Total INX revenue..........       5,713        7,430        8,584        9,011        7,138       13,035       17,346       12,456
Stratasoft custom
  project..................       2,171        1,657        1,743          998        2,069        1,511        2,415        1,532
  Valerent product.........         371          265          303          153          193          509          515          356
  Valerent service.........       1.094          962          988          856          812          874          877          940
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Total Valerent revenue.....       1,465        1,227        1,291        1,009        1,005        1,383        1,392        1,296
Eliminations...............        (141)         (54)         (11)         (72)        (132)         (59)        (172)         (63)
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Total revenue..............       9,208       10,260       11,607       10,946       10,080       15,870       20,981       15,221
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Cost of sales and services:
  INX product..............       4,647        6,472        7,150        7,390        5,844       10,846       13,758        9,612
  INX service..............         481          350          377          450          516          757          795          908
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Total INX cost of sales and
  service..................       5,128        6,822        7,527        7,840        6,360       11,603       14,553       10,520
Stratasoft custom
  project..................         837          871          781          431          801          574          728          879
  Valerent product.........         377          227          296          155          192          424          474          331
  Valerent service.........         773          687          687          591          584          599          606          623
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Total Valerent cost of
  sales and service........       1,150          914          983          746          776        1,023        1,080          954
  Eliminations.............        (141)         (54)         (11)         (72)        (132)         (59)        (171)         (64)
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Total cost of sales and
  services.................       6,974        8,553        9,280        8,945        7,805       13,141       16,190       12,289
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Gross profit:
  INX product..............         689          705          884        1,053          817        1,407        2,196        1,269
  INX service..............        (104)         (97)         173          118          (39)          25          597          667
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Total INX gross profit.....         585          608        1,057        1,171          778        1,432        2,793        1,936
Stratasoft custom
  project..................       1,334          786          962          567        1,268          937        1,687          653
  Valerent product.........          (6)          38            7           (2)           1           85           41           25
  Valerent service.........         321          275          301          265          228          275          271          317
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Total Valerent gross
  profit...................         315          313          308          263          229          360          312          342
  Eliminations.............          --           --           --           --           --           --           (1)           1
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Total gross profit.........       2,234        1,707        2,327        2,001        2,275        2,729        4,791        2,932
                             ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
</Table>

                                                   (continued on following page)
                                        32
<PAGE>

<Table>
<Caption>
                                                  2002                                                2003
                            -------------------------------------------------   -------------------------------------------------
                              FIRST        SECOND       THIRD        FOURTH       FIRST        SECOND       THIRD        FOURTH
                             QUARTER      QUARTER      QUARTER      QUARTER      QUARTER      QUARTER      QUARTER      QUARTER
                            ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                                 (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S>                         <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Selling, general and
  administrative expenses:
  INX.....................         789          691          966        1,099          945        1,448        2,126        1,526
  Stratasoft..............       1,011          675          914        1,322        1,596        1,344        1,754        1,194
  Valerent................         653          501          569          513          560          536          455          412
  Corporate...............         169          147          170          436          275          234          287          369
  Eliminations............          --           --           --           --           --           --           (1)           1
                            ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Total selling, general and
  administrative
  expenses................       2,622        2,014        2,619        3,370        3,376        3,562        4,621        3,502
Operating income (loss)
  INX.....................        (204)         (83)          91           72         (167)         (16)         667          410
  Stratasoft..............         323          111           48         (755)        (328)        (407)         (67)        (541)
  Valerent................        (338)        (188)        (261)        (250)        (331)        (176)        (143)         (70)
  Corporate...............        (169)        (147)        (170)        (436)        (275)        (234)        (287)        (369)
  Eliminations............          --           --           --           --           --           --           --           --
                            ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
  Total operating income
    (loss)................        (388)        (307)        (292)      (1,369)      (1,101)        (833)         170         (570)
Interest (income) and
  other income, net.......          (5)           7           (3)        (114)         (10)         (96)          11          (12)
                            ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Income (loss) before
  benefit for income
  taxes...................        (383)        (314)        (289)      (1,255)      (1,091)        (737)         159         (558)
Benefit for income
  taxes...................       1,182            7           --          406           --           81           12           88
                            ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Net income (loss) from
  continuing operations...         799         (307)        (289)        (849)      (1,091)        (656)         171         (470)
Discontinued operations
  gain (loss) on
  disposal................           6           12           (1)         245           --           16           23          171
                            ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Net income (loss).........  $      805   $     (295)  $     (290)  $     (604)  $   (1,091)  $     (640)  $      194   $     (299)
                            ==========   ==========   ==========   ==========   ==========   ==========   ==========   ==========
Net income (loss) per
  share:
  Basic:
Continuing operations.....  $     0.21   $    (0.08)  $    (0.08)  $    (0.23)  $    (0.30)  $    (0.19)  $     0.04   $    (0.12)
Gain on disposal..........          --           --           --         0.06           --         0.01         0.01         0.04
                            ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Net income (loss) per
  share...................  $     0.21   $    (0.08)  $    (0.08)  $    (0.17)  $    (0.30)  $    (0.18)  $     0.05   $    (0.08)
                            ==========   ==========   ==========   ==========   ==========   ==========   ==========   ==========
  Diluted:
Continuing operations.....  $     0.21   $    (0.08)  $    (0.08)  $    (0.23)  $    (0.30)  $    (0.19)  $     0.03   $    (0.12)
Gain on disposal..........          --           --           --         0.06           --         0.01         0.01         0.04
                            ----------   ----------   ----------   ----------   ----------   ----------   ----------   ----------
Net income (loss) per
  share...................  $     0.21   $    (0.08)  $    (0.08)  $    (0.17)  $    (0.30)  $    (0.18)  $     0.04   $    (0.08)
                            ==========   ==========   ==========   ==========   ==========   ==========   ==========   ==========
Weighted average number of
  shares outstanding:
  Basic...................   3,849,525    3,733,481    3,629,525    3,629,525    3,630,285    3,636,441    3,703,206    3,874,730
  Diluted.................   3,849,525    3,733,481    3,629,525    3,629,525    3,630,285    3,636,441    3,974,298    3,874,730
</Table>

     For the quarter ended September 30, 2003, we saw unusually strong revenue,
partially due to larger contracts, which we believe was partially attributable
to a rebound in the economy and consumer confidence following the Iraq war, and
partially attributable to customers moving forward with projects that they had
put on hold pending the outcome of the Iraq war. For the fourth quarter ended
December 31, 2003, our revenue, as expected, decreased as compared to the
exceptionally strong third quarter, but increased 39% as compared to the fourth
quarter of 2002.

     Our gross profit has fluctuated between quarters primarily due to changes
in our revenue mix between service revenues in INX and Valerent and our
Stratasoft custom project revenue, which have generally generated higher
margins, and the lower margin components of our business including product sales
in INX and Stratasoft. While INX service gross margin increased significantly
and Valerent service gross margin increased by a small amount for the fiscal
year ended December 31, 2003 as compared to the fiscal year ended December 31,
2002, quarter-to-quarter gross margin levels have 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

                                        33
<PAGE>

period and result in varying levels of gross margin. While product gross profit
also increased for both INX and Valerent for the fiscal year ended December 31,
2003, as compared to the fiscal year ended December 31, 2002, the levels of
gross margin have also varied, although to a lesser extent, between quarters
based on the type of product sold and the mix of large revenue product
contracts, which typically have a lower gross margin, as compared with smaller
revenue product contracts, which typically have a higher gross margin.

     Our third quarter 2003 gross margin improved in comparison to both the
prior quarter and the third quarter of 2002. The improved gross margin was the
result of higher service revenue from INX, INX vendor incentives and revenue
growth in Stratasoft, which produces our highest gross margin. Our fourth
quarter 2003 gross margin declined in comparison to the third quarter but
improved in comparison to the fourth quarter of 2002. The decline in gross
profit in comparison to the third quarter resulted from smaller vendor
incentives and lower revenue in Stratasoft offset by an increase in the
percentage of revenue from higher profit margin services.

     In the third quarter of 2003 our selling, general and administrative
expenses increased as compared to previous quarters due to increases in sales
commissions resulting from higher revenue and gross profit and unanticipated
increases in bad-debt and settlement of litigation. Our selling, general and
administrative expenses decreased substantially as compared to the third quarter
primarily because of decreased expenses from lower sales commissions related to
the decreased level of sales and gross profits during the quarter, lower
bad-debt expense and lower legal expense as compared to the third quarter 2003.

CRITICAL ACCOUNTING POLICIES

  REVENUE RECOGNITION

     We have a number of different revenue sources, which vary among our three
reportable segments. Each reportable segment has more than one revenue source,
and revenue is recognized differently for each component (or "stream") of
revenue earned by segment. The material revenue streams earned by us, some of
which are earned by more than one segment, and some by only one segment, are:

          Products Revenue.  All three of our operating segments earn revenue
     from product shipments. Product shipment revenue occurs when products
     manufactured by other parties are purchased and resold to a customer and
     such products are contracted for independently of material services. We
     recognize revenue from product shipments when there are binding contracts
     or purchase orders, the price is fixed or determinable, the product is
     shipped or delivered to the customer and collectibility is reasonably
     assured.

          Services Revenue.  All of our operating segments earn revenue from
     providing stand-alone service revenue. This revenue consists of billings
     for engineering and technician time, 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, and are
     recognized when the service is performed and when collection is reasonably
     assured. Two of our segments sometimes earn agency fee revenue from various
     sources, the primary source of which is referring customers to other
     organizations for which an agency fee is received. Revenue is recognized at
     the earlier of when payment is received or when notification of amounts
     being due is received from the entity paying such agency fee and
     collectibility is reasonably assured.

          Certain fixed and flat fee contracts that extend over three months or
     more are accounted for on the percentage of completion method of
     accounting. The percentage of revenue recognized in any particular period
     is determined on the basis of the relationship of the actual hours worked
     to estimated total hours to complete the contract. Revisions of the
     estimated hours to complete are reflected in the period in which the facts
     necessitating the revisions become known. When a contract indicates a loss,
     a provision is made for the total anticipated loss.

          Custom Project Revenue.  Stratasoft earns revenue from projects that
     are recognized using the percentage of completion method of accounting for
     such revenue. The majority of Stratasoft's revenue consists of systems
     sales in which it bundles its proprietary software, along with third-party
     hardware products and related software customization services,
     installation, training services, warranty services and

                                        34
<PAGE>

     incidental post contract services ("PCS") together under a single contract
     with the customer. PCS is insignificant on such contracts for one year or
     less, and therefore, we have determined that the value of such PCS should
     not be unbundled from the project revenue as set forth in paragraph 59 of
     SOP 97-2. Accordingly, PCS revenue is recognized together with the project
     revenue, and the estimated cost to provide the PCS is accrued. The software
     customization, together with the hardware customization and integration,
     represent a significant modification, customization and/or production of
     the product and therefore the entire arrangement is required to be
     accounted for using the percentage-of-completion method of accounting
     pursuant to SOP 81-1. The percentage of revenue recognized in any
     particular period is determined principally on the basis of the
     relationship of the cost of work performed on the contract to estimated
     total costs. The percentage-of-completion method relies on estimates of
     total expected contract revenue and costs. We follow this method since
     reasonably dependable estimates of the revenue and costs applicable to
     various stages of a contract can be made. Revisions of estimates are
     reflected in the period in which the facts necessitating the revisions
     become known. When a contract indicates a loss, a provision is made for the
     total anticipated loss.

          We have risk to the extent that this group of customers has not paid
     or issued contractual letters of credit up to the level of cost and
     earnings recognized. On our projects in South Asia we typically require a
     cash payment or letter of credit from the customer prior to shipping the
     product. Additionally, Stratasoft has had revenue derived from Africa, the
     United Kingdom, and Canada.

     We maintain allowances for doubtful accounts and notes 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 may be required.

  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 collectibility 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.

LIQUIDITY AND CAPITAL RESOURCES

  SOURCES OF LIQUIDITY

     Our principal sources of liquidity are collections from our accounts and
notes receivable, and our credit facility with Textron Financial Corporation
(the "Textron Facility"). We use the Textron Facility to finance the majority of
our purchases of inventory, and to provide working capital when our cash flow
from operations is insufficient. In 2003, we experienced negative cash flow from
operating activities of $2.5 million. Our working capital was $5.5 million and
$3.7 million at December 31, 2002 and 2003, respectively.

     Accounts and Notes Receivable.  The timing of our collection of accounts
and notes receivable and payments of our accounts payable is one of the
principal influences 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.

     We had accounts receivable, net of allowance for doubtful accounts, of $6.5
million and $9.8 million at December 31, 2002 and 2003, respectively.

                                        35
<PAGE>

     Our Stratasoft subsidiary has accepted customer notes receivable as part of
its consideration for certain of its custom projects sales. At December 31, 2002
and December 31, 2003, Stratasoft had net notes receivable of $962,000 and
$928,000, respectively. The current portion of those notes receivable is
reflected on our balance sheets as current portion of notes receivable, net, and
the long-term portion of the notes receivable is reflected on our balance sheets
as Other assets. The following table shows the breakdown of the total notes
receivable:

<Table>
<Caption>
                                                               DECEMBER 31,
                                                              ---------------
                                                               2002     2003
                                                              ------   ------
                                                                (DOLLARS IN
                                                                THOUSANDS)
<S>                                                           <C>      <C>
Current portion of notes receivable, gross..................  $1,236   $1,049
Allowance for doubtful notes................................    (338)    (373)
                                                              ------   ------
Current portion of notes receivable, net....................     898      676
                                                              ------   ------
Long term portion of notes receivable, gross................      87      502
Allowance for doubtful notes................................     (23)    (250)
                                                              ------   ------
Long-term portion of notes receivable, net..................      64      252
                                                              ------   ------
Total notes receivable, net.................................  $  962   $  928
                                                              ======   ======
</Table>

     Alternatively, our Stratasoft subsidiary also has other sales that require
payment to occur more than 90 days but less than 12 months from the date of the
sale. Those outstanding balances are classified as accounts receivable on the
accompanying balance sheets.

     Inventory.  We had inventory of $781,000 and $1.0 million at December 31,
2002 and 2003, respectively. 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 Textron Facility
to finance our inventory purchases.

     Textron Facility.  On January 31, 2002, we entered into the Textron
Facility to provide financing for our inventory purchases. As of December 31,
2003, we owed $7.6 million under the Textron Facility and had an additional $2.4
million available. The Textron Facility is collateralized by substantially all
of our assets other than our patent licenses.

     In November 2003, Textron agreed to increase the Textron Facility from $7.5
million to $10.0 million. Textron also agreed to increase the facility to $15.0
million subject to the execution of syndication loan documents and an activation
of syndication for $5.0 million with Silicon Valley Bank. In March 2004, the
syndication loan documents were executed, and the credit line was increased to
$15.0 million. The Textron Facility is generally subject to borrowing base
limitations of 80% of eligible accounts receivable, 90% of identifiable
inventory purchased under the Textron Facility, and 40% of all other inventory.
The borrowing base limitations disallow any account that has more than 25% of
the total balance over 90 days old.

     We use the Textron 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
Textron Facility that are within those respective 60-day and 30-day periods (the
"Free Finance Period") do not accrue interest and are classified as accounts
payable in our balance sheet. We refer to non-interest bearing balances as
"inventory floor plan borrowings."

     To the extent that we can borrow under the Textron 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. These extended payment balances under the
Textron Facility accrue interest at the prime rate (4.0% at December 31, 2003)
plus 2.5%. Because payment cycles of sales to school districts under the e-Rate
program extend beyond 60 days, we expect we will continue to carry extended
payment balances under the Textron Facility during 2004. The total outstanding
balance under the

                                        36
<PAGE>

Textron Facility at December 31, 2003 was $7.6 million. Approximately $5.9
million of that was within the Free Finance Period and therefore is reflected as
accounts payable on our balance sheet at December 31, 2003 and approximately
$1.7 million consisted of extended payment balances and therefore is reflected
as notes payable on our balance sheet at December 31, 2003.

     The Textron Facility contains restrictive covenants that are measured at
each quarter end. These covenants require us to:

     - maintain Minimum Tangible Capital Funds of $2.2 million, which is defined
       to be the sum of cash, trade accounts receivable, inventory and fixed net
       assets, minus subordinated liabilities minus total liabilities, with
       total liabilities being defined as accounts payable, accrued expenses and
       short- and long-term notes payable; and

     - maintain a maximum Debt to Tangible Capital Funds ratio of 6.0 to 1.

     Additionally, effective at March 31, 2004, we must be able to achieve a
fixed charge coverage ratio of no less than 1.1 to 1.0, the fixed charge
coverage ratio being defined as (a) quarterly net income plus interest expense,
taxes, and lease and rental expense divided by (b) the sum of (1) quarterly
interest expense and lease and rental expense, and (2) quarterly current
maturities of long-term debt divided by 1 minus the current tax rate.

     At December 31, 2003, we were in compliance with the loan covenants, and we
anticipate that we will be able to comply with the loan covenants during 2004.
If we violate the loan covenants, we would be required to seek waivers from
Textron and Silicon Valley Bank for those non-compliance events. If Textron or
Silicon Valley Bank refused to give us waivers, the amount due under the Textron
Facility would be accelerated and we would be required to seek other sources of
financing.

  CONTRACTUAL OBLIGATIONS

     The following table summarizes certain of our contractual cash obligations
and related payments due as of December 31, 2003:

<Table>
<Caption>
                                                       PAYMENTS DUE BY PERIOD
                                        ----------------------------------------------------
                                                 LESS THAN                            AFTER
CONTRACTUAL OBLIGATIONS                 TOTAL     1 YEAR     1-3 YEARS   4-5 YEARS   5 YEARS
-----------------------                 ------   ---------   ---------   ---------   -------
                                                       (DOLLARS IN THOUSANDS)
<S>                                     <C>      <C>         <C>         <C>         <C>
Lease obligations.....................  $1,865    $  641      $1,224       $  --      $  --
Textron, interest bearing debt........   1,688     1,688          --          --         --
Other debt obligations................     325        96         229          --         --
                                        ------    ------      ------       -----      -----
Total contractual cash obligations....  $3,878    $2,425      $1,453       $  --      $  --
                                        ======    ======      ======       =====      =====
</Table>

     We do not have any material contractual purchase obligations. We purchase
inventory to fulfill in-hand orders from customers and we try to minimize the
amount of inventory on hand to reduce 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.

     We expect to be able to meet our contractual cash payment obligations by
their due dates through cash generated from operations, augmented, if needed, by
borrowings under the Textron Facility, and through the proceeds from this
offering.

     Cash Flows.  During 2003, our cash decreased by $1.3 million. Operating
activities used $2.5 million, investing activities used $885,000 and financing
activities provided $2.0 million.

     Operating Activities.  Operating activities used $2.5 million in 2003 as
compared to providing cash of $809,000 in 2002 and using cash of $4.5 million in
2001. The use of cash in 2003 was primarily related to the net loss of $1.8
million. Adjustments to the net loss for non-cash-related items for 2003
included $764,000 for depreciation and amortization and a $210,000 gain on
disposal of discontinued operations, net of tax, due to collection of
discontinued receivables previously reserved against as uncollectable.
Adjustments to the net loss

                                        37
<PAGE>

for non-cash expenses in 2003 included bad-debt expense of $769,000, which is
attributable to allowances for uncollectable receivables.

     Changes in asset and liability accounts used $1.7 million. The most
significant use related to an increase in accounts receivable of $3.7 million,
which was related primarily to increased revenue. Days sales outstanding stayed
consistent at 57 days for both years. Net working capital used for contracts in
progress increased $556,000 due to an increase in cost and estimated earnings in
excess of billings of $743,000, which was primarily related to an increase in
the Stratasoft custom projects in process at year-end. In addition, notes
receivable increased $287,000 due to more notes receivables being accepted from
Stratasoft customers, particularly in the first half of 2003. These uses of cash
were partially offset by an increase in accounts payable of $1.7 million, which
related primarily to increased purchases of Cisco products for sales by our INX
subsidiary, an increase in accrued expenses of $556,000, primarily due to
increases in sales commissions and other payroll costs of $560,000 due to
increased levels of revenue, a decrease in income tax receivable of $488,000
related to collection of an income tax refund in 2003, and an increase of
$475,000 in deferred revenue related to a sale of software to resellers.

     Investing Activities.  Investing activities used $885,000 in 2003 compared
to a use of $347,000 for 2002 and a use of $206,000 for 2001. 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. Investing activities related to cash paid for
acquisitions increased in 2003 due to the acquisition of Digital Precision by
INX. During the next 12 months, we do not expect to incur significant capital
expenditures requiring cash, except possibly for acquisitions, of which we
cannot predict the certainty or magnitude.

     Financing Activities.  Financing activities provided $2.0 million in 2003
as compared to using $405,000 and $253,000, respectively, in 2002 and 2001. In
2003, our stock price increased substantially, resulting in stock option holders
exercising stock options, which provided $478,000. No options were exercised
during the previous two years. During December 2003, $1.7 million of debt under
the Textron Facility became interest-bearing debt and was classified as notes
payable rather than accounts payable.

FUTURE TRENDS

     We expect revenue to continue to increase through 2004 for our three
subsidiaries. We expect INX will grow the most, but that INX's growth rate for
2004 will be less than its growth rate for 2003. We expect Cisco-centric systems
will continue to gain market share, and we expect our revenue growth in 2004
will be primarily the result of prior investments in increased sales and
marketing programs. If we are successful at raising additional equity capital
early in 2004, we also anticipate making one or more acquisitions in the latter
half of 2004, which we expect would add revenue growth.

     For 2004 we expect our business to be positively impacted by a slight
improvement in the somewhat depressed general market conditions that we
experienced in 2003, particularly during the first half of 2003, which we expect
will result from an upswing in the cyclical buying patterns of customers for
technology products as well as the lack of the Iraq war, which we believe
depressed activity in the first half of 2003.

     We expect to be able to contain the growth in selling, general and
administrative expenses somewhat relative to revenue growth, as revenue
continues to grow due to of previous investments in sales and marketing, without
a further commensurate increase in sales and marketing expenses, and as the
increases in revenue are spread over a somewhat fixed corporate administration
expense base.

     We have experienced no material impact of inflation and changing prices on
net sales and income from continuing operations in the last three years.

RELATED PARTY TRANSACTIONS

     We lease office space from Allstar Equities, Inc., a Texas corporation
("Equities"), a company wholly owned by James H. Long, our chief executive
officer. On December 1, 1999 Equities purchased our corporate office building
and executed a direct lease with us with an expiration date of December 31,
2004. In

                                        38
<PAGE>

conjunction with Equities obtaining new financing on the building, a new lease
was executed with us on February 1, 2002 with an expiration date of January 31,
2007. The new lease has a rental rate of $37,192 per month.

     From time to time, we make short-term loans and travel advances to our
non-executive employees. The balance of approximately $16,000 relating to these
loans and advances is included on our balance sheet and reported as part of
Accounts receivable -- other at December 31, 2003.

OFF-BALANCE SHEET ARRANGEMENTS

     We had no off-balance sheet arrangements at December 31, 2003.

ACCOUNTING PRONOUNCEMENTS

     In April 2002, the Financial Accounting Standards Board, which we refer to
as FASB, issued Statement of Financial Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS No. 145, among other things, amends
SFAS No. 4 and SFAS No. 64 to require that gains and losses from the
extinguishments of debt generally be classified within continuing operations.
The provisions of SFAS No. 145 are effective for fiscal years beginning after
May 15, 2002 and early application is encouraged. We adopted SFAS No. 145 on
January 1, 2003. The adoption of this statement had no impact on our financial
statements.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." This
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. We adopted SFAS No. 146 on January 1, 2003. The adoption
of this statement had no impact on our financial statements.

     In February 2003, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation: Transition and Disclosure -- An Amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair-value-based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based compensation. The statement also amends APB Opinion
No. 28, "Interim Financial Reporting," to require disclosure about those effects
in interim financial information. We have chosen not to voluntarily change to
the fair value based methods of accounting for stock-based employee
compensation, but we have adopted the disclosure rules of SFAS No. 148.

     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies when a derivative contains a financing component that warrants special
reporting in the statement of cash flows and amends certain other existing
pronouncements, resulting in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003. We do not believe that the adoption of SFAS No.
149 will have a material impact on our financial statements.

     In January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities -- An Interpretation of ARB No.
51." FIN 46 addresses consolidation by business enterprises of variable interest
entities. This interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. On December 17, 2003, the FASB issued FIN 46R,
providing a deferral of the application of FIN 46 for interests held by public
entities in a variable interest entity or potential variable interest entity
until fiscal periods ending after March 15, 2004. We have not fully assessed the
impact of FIN 46 on our financial statements,

                                        39
<PAGE>

particularly our relationship with Allstar Equities, Inc., but the adoption of
this statement is not expected to have a material impact on our financial
statements.

     In November 2002, the EITF reached a consensus on EITF Issue 00-21,
"Revenue Arrangements with Multiple Deliverables". EITF 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. EITF Issue 00-21 is effective
for revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF 00-21 did not have a material impact on our financial
statements.

     In August 2003, the EITF reached a consensus on EITF 03-05, "Applicability
of AICPA Statement of Position 97-2 to Non-Software Deliverables in an
Arrangement Containing More-Than-Incidental Software." EITF 03-05 requires
revenue recognition under SOP 97-2 for all arrangements in which the software
sold is essential to the functionality of the hardware. The adoption of the EITF
03-05 had no impact on our financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

     We attempt to manage our borrowings under the Textron Facility to minimize
interest expense. The interest rate of the Textron Facility is the prime rate
plus 2.5% (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources"). During the year
ended December 31, 2003, the interest rates of borrowings under the Textron
Facility ranged from 6.5% to 10.3%. A 1% change in variable interest rates will
not have a material impact on our financial condition.

                                        40
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              I-SECTOR CORPORATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Certified Public Accountants for the
  year ended December 31, 2003..............................   42
Independent Auditors' Report for the years ended December
  31, 2001 and 2002.........................................   43
Consolidated Balance Sheets at December 31, 2002 and 2003...   44
Consolidated Statements of Operations for the years ended
  December 31, 2001, 2002 and 2003..........................   45
Consolidated Statements of Stockholders' Equity the years
  ended December 31, 2001, 2002 and 2003....................   46
Consolidated Statements of Cash Flows for the years ended
  December 31, 2001, 2002 and 2003..........................   47
Notes to Consolidated Financial Statements..................   48
</Table>

                                        41
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders of I-Sector Corporation:

We have audited the accompanying consolidated balance sheet of I-Sector
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2003,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 2003. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 I-Sector Corporation
and subsidiaries as of December 31, 2003, and the results of their operations
and their cash flows for the year ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Houston, Texas
February 6, 2004

                                        42
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Stockholders of I-Sector Corporation.:

We have audited the accompanying consolidated balance sheet of I-Sector
Corporation and subsidiaries ("I-Sector") as of December 31, 2002, and the
related statements of operations, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 2002. These financial
statements are the responsibility of I-Sector's management. Our responsibility
is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, such consolidated financial statements present fairly, in all
material respects, the financial position of I-Sector as of December 31, 2002,
and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Houston, Texas
March 21, 2003

                                        43
<PAGE>

                     I-SECTOR CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2002        2003
                                                              ---------   ---------
                                                              (IN THOUSANDS, EXCEPT
                                                               SHARE AND PAR VALUE
                                                                    AMOUNTS)
<S>                                                           <C>         <C>
                                      ASSETS
Current Assets:
  Cash and cash equivalents.................................   $ 3,491     $ 2,172
  Accounts receivable -- trade, net of allowance of $928 and
     $612...................................................     6,525       9,757
  Accounts receivable -- affiliates.........................        99          16
  Accounts receivable -- other..............................        57          29
  Notes receivable, net of allowance of $338 and $373.......       898         676
  Inventory.................................................       781       1,038
  Cost and estimated earnings in excess of billings.........       709       1,452
  Income taxes receivable...................................       488          --
  Other current assets......................................       356         943
                                                               -------     -------
          Total current assets..............................    13,404      16,083
Property and equipment, net of accumulated depreciation of
  $1,988 and $1,887.........................................     1,115       1,271
Notes receivable, long-term, net of allowance of $23 and
  $250......................................................        64         252
Patent license rights, net of accumulated amortization of
  $148 and $265.............................................       955         849
Deferred offering costs.....................................        --         317
Other intangible assets, net of accumulated amortization of
  $160 and $335.............................................       207         435
Other assets................................................         6          --
                                                               -------     -------
          Total Assets......................................   $15,751     $19,207
                                                               =======     =======

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Notes payable and current portion of long-term debt.......   $   157     $ 1,784
  Accounts payable..........................................     4,844       6,524
  Billings in excess of cost and estimated earnings.........        75         262
  Accrued expenses..........................................     1,803       2,676
  Liabilities related to discontinued operations............       904         557
  Deferred revenue..........................................        81         556
                                                               -------     -------
          Total current liabilities.........................     7,864      12,359
                                                               -------     -------
Long-term debt..............................................       247         229
Commitments and Contingencies
Stockholders' Equity:
  Preferred stock, $.01 par value, 5,000,000 shares
     authorized, no shares issued...........................        --          --
  Common stock, $.01 par value, 15,000,000 shares
     authorized, 4,441,325 and 4,762,809 issued.............        44          48
  Additional paid in capital................................    10,379      10,853
  Additional paid in capital -- other.......................        --         337
  Treasury stock, at cost 811,800 and 811,800 shares........    (1,373)     (1,373)
  Retained deficit..........................................    (1,410)     (3,246)
                                                               -------     -------
          Total stockholders' equity........................     7,640       6,619
                                                               -------     -------
          Total Liabilities and Stockholders' Equity........   $15,751     $19,207
                                                               =======     =======
</Table>

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

                                        44
<PAGE>

                     I-SECTOR CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                           ------------------------------------
                                                              2001         2002         2003
                                                           ----------   ----------   ----------
                                                             (IN THOUSANDS, EXCEPT SHARE AND
                                                                    PER SHARE AMOUNTS)
<S>                                                        <C>          <C>          <C>
Revenue:
  Products...............................................  $    9,925   $   29,805   $   46,900
  Services...............................................       6,477        5,647        7,725
  Custom projects........................................       7,218        6,569        7,527
                                                           ----------   ----------   ----------
  Total revenue..........................................      23,620       42,021       62,152
                                                           ----------   ----------   ----------
Cost of goods and services:
  Products...............................................       8,685       26,437       41,060
  Services...............................................       5,322        4,395        5,383
  Custom projects........................................       3,318        2,920        2,982
                                                           ----------   ----------   ----------
  Total cost of goods and services.......................      17,325       33,752       49,425
                                                           ----------   ----------   ----------
     Gross profit........................................       6,295        8,269       12,727
Selling, general and administrative expenses.............      10,573       10,625       15,061
                                                           ----------   ----------   ----------
Operating loss...........................................      (4,278)      (2,356)      (2,334)
Interest and other income, net...........................         316          115          107
                                                           ----------   ----------   ----------
Loss from continuing operations before benefit for income
  taxes..................................................      (3,962)      (2,241)      (2,227)
Benefit for income taxes.................................          87        1,595          181
                                                           ----------   ----------   ----------
Net loss from continuing operations......................      (3,875)        (646)      (2,046)
Discontinued operations:
Net loss from discontinued operations, net of taxes......        (167)          --           --
Gain on disposal of discontinued operations, net of
  taxes..................................................         337          262          210
                                                           ----------   ----------   ----------
Net loss.................................................  $   (3,705)  $     (384)  $   (1,836)
                                                           ==========   ==========   ==========
Net loss per share:
Basic:
Net loss from continuing operations......................  $    (0.99)  $    (0.17)  $    (0.55)
Net loss from discontinued operations, net of taxes......       (0.04)          --           --
Gain on disposal of discontinued operations net of
  taxes..................................................        0.08         0.07         0.06
                                                           ----------   ----------   ----------
Net loss per share.......................................  $    (0.95)  $    (0.10)  $    (0.49)
                                                           ==========   ==========   ==========
Diluted:
Net loss from continuing operations......................  $    (0.99)  $    (0.17)  $    (0.56)
Net loss from discontinued operations, net of taxes......       (0.04)          --           --
Gain on disposal of discontinued operations, net of
  taxes..................................................        0.08         0.07         0.06
                                                           ----------   ----------   ----------
Net loss per share.......................................  $    (0.95)  $    (0.10)  $    (0.50)
                                                           ==========   ==========   ==========
Shares used in computing net loss per share:
Basic and diluted........................................   3,911,019    3,709,689    3,691,052
                                                           ==========   ==========   ==========
</Table>

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

                                        45
<PAGE>

                     I-SECTOR CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<Table>
<Caption>
                                   $.01 PAR VALUE
                                    COMMON STOCK      ADDITIONAL      ADDITIONAL
                                 ------------------    PAID-IN         PAID-IN        TREASURY   RETAINED
                                  SHARES     AMOUNT    CAPITAL     CAPITAL -- OTHER    STOCK     EARNINGS    TOTAL
                                 ---------   ------   ----------   ----------------   --------   --------   -------
                                                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S>                              <C>         <C>      <C>          <C>                <C>        <C>        <C>
Balance at beginning of January
  1, 2001......................  4,441,325    $44      $10,182           $ (1)        $  (992)   $ 2,679    $11,912
Purchase of treasury stock.....         --     --           --             --            (195)        --       (195)
Satisfaction of restricted
  stock........................         --     --           --              1              --         --          1
Issuance of restricted stock...         --     --            2             --              --         --          2
Net loss.......................         --     --           --             --              --     (3,705)    (3,705)
                                 ---------    ---      -------           ----         -------    -------    -------
Balance at December 31, 2001...  4,441,325     44       10,184             --          (1,187)    (1,026)     8,015
Purchase of treasury stock.....         --     --           --             --            (186)        --       (186)
Stock warrants expired.........         --     --          195             --              --         --        195
Net loss.......................         --     --           --             --              --       (384)      (384)
                                 ---------    ---      -------           ----         -------    -------    -------
Balance at December 31, 2002...  4,441,325     44       10,379             --          (1,373)    (1,410)     7,640
Issuance of options to
  consultants..................         --     --           --            337              --         --        337
Exercise of common stock
  options......................    321,484      4          474             --              --         --        478
Net loss.......................         --     --           --             --              --     (1,836)    (1,836)
                                 ---------    ---      -------           ----         -------    -------    -------
Balance at December 31, 2003...  4,762,809    $48      $10,853           $337         $(1,373)   $(3,246)   $ 6,619
                                 =========    ===      =======           ====         =======    =======    =======
</Table>

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

                                        46
<PAGE>

                     I-SECTOR CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               2001      2002      2003
                                                              -------   -------   -------
                                                                    (IN THOUSANDS)
<S>                                                           <C>       <C>       <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Net loss..................................................  $(3,705)  $  (384)  $(1,836)
  Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
  Net loss from discontinued operations.....................      167        --        --
  Gain on disposal of discontinued operations...............     (337)     (262)     (210)
  Depreciation and amortization.............................      666       596       764
  Current income tax benefit attributable to discontinued
    operations..............................................      (87)     (136)     (108)
  Satisfaction of restricted stock..........................        1        --        --
  Loss (gain) on retirement of assets.......................       10        34       (88)
  Bad debt expense..........................................    1,052     1,271       769
  Changes in assets and liabilities that provided (used)
    cash:
    Accounts receivable.....................................     (881)   (3,133)   (3,680)
    Accounts receivable, affiliates and other...............      173       115       111
    Inventory...............................................      187      (147)     (257)
    Income taxes receivable.................................      712      (337)      488
    Notes receivable........................................     (117)   (1,154)     (287)
    Other current assets....................................      (69)      (58)     (250)
    Other assets............................................      (13)       --        --
    Accounts payable........................................     (119)    3,072     1,676
    Cost and estimated earnings in excess of billings.......   (1,695)      986      (743)
    Billings in excess of cost and estimated earnings.......     (431)        3       187
    Accrued expenses........................................      456      (288)      556
    Deferred revenue........................................      (10)      (45)      475
                                                              -------   -------   -------
        Net cash provided by (used in) continuing
        operations..........................................   (4,040)      133    (2,433)
  Net operating activities from discontinued operations.....     (413)      676       (29)
                                                              -------   -------   -------
        Net cash provided by (used in) operating
        activities..........................................   (4,453)      809    (2,462)
                                                              -------   -------   -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures......................................     (688)     (347)     (399)
  Proceeds on sale of assets................................        6        --        80
  Cash paid for acquisitions................................      (50)       --      (566)
  Proceeds on sale of discontinued operations...............      526        --        --
                                                              -------   -------   -------
        Net cash used in investing activities...............     (206)     (347)     (885)
                                                              -------   -------   -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Exercise of stock options.................................       --        --       478
  Purchase of treasury stock................................     (195)     (186)       --
  Net decrease in notes payable.............................      (58)     (219)     (138)
  Notes payable -- interest bearing borrowings on credit
    line....................................................       --        --     1,688
                                                              -------   -------   -------
        Net cash provided by (used in) financing
        activities..........................................     (253)     (405)    2,028
                                                              -------   -------   -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........   (4,912)       57    (1,319)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............    8,346     3,434     3,491
                                                              -------   -------   -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................  $ 3,434   $ 3,491   $ 2,172
                                                              =======   =======   =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid for interest....................................  $     9   $    --   $    29
                                                              =======   =======   =======
  Cash received for income taxes............................  $  (712)  $(1,123)  $   (73)
                                                              =======   =======   =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
  ACTIVITIES:
  Intangible assets acquired through note payable...........  $   646   $    --   $    --
  Fixed assets acquired through note payable................       35        --        --
  Fixed assets acquired through capital lease...............       --        --        63
  Options granted to consultants............................       --        --       337
  Offering costs accrued....................................       --        --       317
</Table>

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

                                        47
<PAGE>

                     I-SECTOR CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     I-Sector Corporation and subsidiaries ("I-Sector" or the "Company") are
engaged in the business of providing computer services and of selling associated
hardware and telephony software products in the United States and abroad.
I-Sector operates through three wholly-owned subsidiaries:

     - Internetwork Experts, Inc. ("INX") is a network professional services and
       integration organization with areas of practice that include large-scale
       enterprise network engineering consulting, network security, network
       management, wireless networking and IP telephony.

     - Stratasoft, Inc. ("Stratasoft") creates and markets software related to
       the integration of computer and telephone technologies.

     - Valerent, Inc. ("Valerent") provides information technology solutions
       that lowers its client's expense by utilizing centralized, remote enabled
       computing management tools which predict, announce and manage service
       interruptions. Additionally Valerent provides customers with traditional
       computer services such as on-site and carry-in computer repair,
       application support, operating system and network migration services,
       turn-key outsourced IT helpdesk solutions, technical staff augmentation
       for IT helpdesk operations, helpdesk solutions consulting services.

     I-Sector's significant accounting policies are as follows:

     Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of I-Sector and its subsidiaries. All
significant intercompany balances and transactions have been eliminated.

     Inventory -- Inventory consists primarily of Cisco network equipment,
Stratasoft dialers, 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 of I-Sector's inventory is finished goods. The Company records
write downs of its inventory to net realizable value as appropriate.

     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.

     Intangible Assets -- Intangible assets are being amortized over their
estimated useful lives of five to sixteen years (see Note 12).

     Impairment of Long-Lived Assets -- I-Sector records impairment losses on
long-lived assets used in operations 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.

     Income Taxes -- I-Sector accounts for income taxes 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 I-Sector's 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.

     Reclassifications -- Certain prior period amounts in the consolidated
financial statements presented herein have been reclassified to conform to
current period presentation.

     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

                                        48
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 -- I-Sector has a number of different revenue
components, which vary between its reportable operating segments. Each
reportable operating segment has more than one revenue component, and revenue is
recognized differently for each component (or "stream") of revenue earned by
operating segment. The material revenue streams earned by I-Sector, some of
which are earned by more than one operating segment, and some by only one
operating segment, are:

          Products Revenue.  Three of I-Sector's operating segments earn revenue
     from product shipments. Product shipment revenue occurs when products
     manufactured by other parties are purchased and resold to a customer and
     such products are contracted for independently of material services.
     I-Sector recognizes revenue from product shipments when the product is
     shipped or delivered to the customer. In all three segments, the four
     criteria for revenue recognition have been met because: (1) there are
     written, executed contracts, or in the case of INX and Valerent, in some
     situations there are binding purchase orders; (2) delivery has occurred or
     services have been rendered. Stratasoft, however, recognizes revenue on the
     percentage of completion method, as described below; (3) the price is fixed
     or determinable, and (4) collectibility is reasonably assured. Each of
     I-Sector's business segments perform credit research prior to extending
     credit. In Stratasoft's business segment, a substantial portion of the
     total contract price is received in cash or letter of credit when the unit
     is installed.

          Services Revenue.  All of I-Sector's operating segments earn revenue
     from providing stand-alone service revenue. This revenue consists of
     billings for engineering and technician time, programming services, which
     are provided on either a hourly basis or a flat-fee basis, support
     contracts and the service component of maintenance and repair service
     ticket transactions. These services are contracted for separately from any
     product sale, and generally for contracts of short duration are recognized
     when the service is performed and when collection is reasonably assured.
     Two of I-Sector's segments sometimes earn agency fee revenue from various
     sources, the primary source of which is referring customers to other
     organizations for which an agency fee is received. This revenue is
     recognized at the earlier of when payment is received or when notification
     of amounts being due is received from the entity paying such agency fee and
     collectibility is reasonably assured.

          INX has certain fixed and flat fee contracts that extend over three
     months or more, and are accounted for on the percentage of completion
     method of accounting. The percentage of revenue recognized in any
     particular period is determined on the basis of the relationship of the
     actual hours worked to estimated total hours to complete the contract.
     Revisions of the estimated hours to complete are reflected in the period in
     which the facts necessitating the revisions become known. When a contract
     indicates a loss, a provision is made for the total anticipated loss.

          Custom Project Revenue.  Stratasoft earns revenue from projects that
     are recognized using the percentage of completion method of accounting for
     such revenue. The majority of Stratasoft's revenue consists of system sales
     in which it bundles its proprietary software, along with third-party
     hardware products and related software customization services,
     installation, training services, warranty services and incidental post
     contract support ("PCS") together under a single contract with the
     customer. PCS is insignificant on such contracts for one year or less, and
     therefore, we have determined that the value of such PCS should not be
     unbundled from the project revenue as set forth in paragraph 59 of SOP
     97-2. Accordingly, such PCS revenue is recognized together with the project
     revenue, and the estimated cost to provide the PCS is accrued. The value of
     the PCS is determinable within the contract, which defines the period that
     the PCS is granted and offers renewals at stated amounts, thereby defining
     the value of the PCS. The software customization, together with the
     hardware customization and integration, represent a significant
     modification, customization and/or production of the product and,
     therefore, the entire

                                        49
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     arrangement is required to be accounted for using the percentage of
     completion method of accounting pursuant to SOP 81-1. The percentage of
     revenue recognized in any particular period is determined principally on
     the basis of the relationship of the cost of work performed on the contract
     to estimated total costs. The percentage-of-completion method relies on
     estimates of total expected contract revenue and costs. We follow this
     method since reasonably dependable estimates of the revenue and costs
     applicable to various stages of a contract can be made. Revisions of
     estimates are reflected in the period in which the facts necessitating the
     revisions become known. When a contract indicates a loss, a provision is
     made for the total anticipated loss. The following reflects the amounts
     relating to uncompleted contracts at:

<Table>
<Caption>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  2002           2003
                                                              ------------   ------------
<S>                                                           <C>            <C>
Costs incurred on uncompleted contracts.....................     $  429         $1,019
Estimated earnings..........................................      1,478          3,117
                                                                 ------         ------
                                                                  1,907          4,136
Less: Billings to date......................................      1,273          2,946
                                                                 ------         ------
Total.......................................................     $  634         $1,190
                                                                 ======         ======
Included in accompanying balance sheets under the following
  captions:
Cost and estimated earnings in excess of billings...........     $  709         $1,452
Billings in excess of cost and estimated earnings...........        (75)          (262)
                                                                 ------         ------
Total.......................................................     $  634         $1,190
                                                                 ======         ======
</Table>

          During the quarter ended June 30, 2003, the Company recorded
     adjustments to defer revenue for certain custom projects that had more than
     one year of free PCS and certain renewals of PCS paid in advance. The
     adjustment includes approximately $152 related to years prior to 2003.
     Management determined that the effect of these adjustments was not material
     to the previously reported results or to the results expected for 2003.

          During December 2003 I-Sector's operating segment Stratasoft sold $408
     of software products to a reseller for which the related revenue was
     deferred at December 31, 2003. Revenue from this sale will be recognized in
     the accounting periods that payments from the reseller become due, or in
     the accounting period when it has been firmly established that the software
     has been re-sold to an end-user of the software and that collection is
     reasonably assured by the Company.

          During 2001, 2002 and 2003, I-Sector has recognized revenue of $2,251,
     $614 and $502, respectively, on the percentage-of-completion basis for
     several projects associated with one reseller in South Asia. For these
     projects, Stratasoft entered into a three-party contract between
     Stratasoft, the South Asia reseller and the end-user customers. Stratasoft
     was responsible for performing the substantial majority of the project for
     the end-user customer, from whom Stratasoft was directly obligated to be
     paid for such project by the end-user customer.

     Credit Risk -- 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 collectibility
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.

                                        50
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Vendor Incentives -- From time to time, the Company participates in
programs provided by suppliers that enable it to earn incentives. These
incentives are generally earned by sales volume, sales growth and customer
satisfaction levels. The amounts earned under these programs are recorded as a
reduction of cost of goods when earned and determinable. The amount of vendor
incentives recognized can vary significantly between quarterly and annual
periods.

     Advertising Costs -- Advertising costs consist of print advertising and
trade show materials and are expensed as incurred. Advertising costs for the
year ended December 31, 2001, 2002 and 2003 were $334, $370 and $323,
respectively.

     Research and Development Costs -- Expenditures relating to the development
of new products and processes, including significant improvements and
refinements to existing products, are expensed as incurred.

     Warranty Reserve -- I-Sector records a warranty reserve related to certain
software products sold by its Stratasoft subsidiary. That reserve is classified
in accrued expenses and is amortized over the life of the warranty, which is
generally twelve months, against actual warranty expenditures. This warranty
reserve relates to the estimate of warranty obligations from sales of
Stratasoft's call center telephony systems, which consist of Stratasoft's
software, configured hardware components as well as telephone support relating
to Stratasoft's software products. This liability amount has been consistently
recorded within each period as a charge to cost of goods based upon five percent
of period revenue. This percentage was based upon a review of the costs of
providing the warranty work, which was initially performed in connection with
the acquisition of the Stratasoft technology. Stratasoft incurs numerous types
of costs related to the warranty work, which includes labor cost of technicians
and programmers, hardware cost, the cost of developing and uploading software
patches related to "bug fixes", telephone support, and hardware parts cost
related to defective hardware sold as a part of a complete Stratasoft system.
The majority of these costs are individually insignificant amounts for which the
cost/benefit relationship does not warrant tracking, but which we periodically
assess and continue to estimate at approximately five percent of Stratasoft
sales. As the actual costs are not tracked, Stratasoft amortizes the recorded
amounts to cost of goods over the average life of the contractual warranty
period as costs are believed to be incurred ratably over the warranty period.
The difference between the actual warranty costs incurred and the amount of
amortization is not considered to be materially different. The following table
depicts the activity in the warranty reserve:

<Table>
<Caption>
                                                              DECEMBER 31,
                                                              -------------
                                                              2002    2003
                                                              -----   -----
<S>                                                           <C>     <C>
Balance, beginning of the period............................  $ 263   $ 305
Additions to reserve........................................    373     348
Expenses offset against reserve.............................   (331)   (351)
                                                              -----   -----
Balance, end of period......................................  $ 305   $ 302
                                                              =====   =====
</Table>

     Stock-Based Compensation -- The Company has elected to account for employee
stock-based compensation using the intrinsic value method of accounting in
accordance with Accounting Principles Bulletin ("APB") No. 25 "Accounting for
Stock Issued to Employees". Under this method no compensation expense is
recognized when the number of shares granted is known and the exercise price of
the stock option is equal to or greater than the fair value of the common stock
on the grant date. The Company has recorded no stock-based compensation
associated with stock options granted to employees and directors in its
consolidated statement of operations. I-Sector and its subsidiaries apply the
fair value method as prescribed by SFAS No. 123, as interpreted and amended, for
stock and stock options issued to non-employees and during the year ended
December 31, 2003, recorded $337 of other additional paid in capital related to
compensation to the non-employees. If compensation cost for all option issuances
had been determined consistent with the

                                        51
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

fair value method, I-Sector's net loss and net loss per share would have
increased to the pro-forma amounts indicated below.

     For purposes of estimating the fair value disclosures below, the fair value
of each stock option has been estimated on the grant date with a Black-Scholes
option pricing model using the following weighted-average assumptions for the
2001, 2002 and 2003 periods; dividend yield of 0% for all periods; expected
volatility of 59%, 82.1% and 85.7%, respectively; risk-free interest rate of
5.5%, 3.63% and 3.63%, respectively; and expected lives of 8.0, 7.57 and 8.4
years, respectively, from the original date of the stock option grants.

<Table>
<Caption>
                                                                     DECEMBER 31,
                                                              --------------------------
                                                               2001      2002     2003
                                                              -------   ------   -------
<S>                                                           <C>       <C>      <C>
Net loss as reported........................................  $(3,705)  $ (384)  $(1,836)
Deduct: Total stock-based employee compensation determined
  under fair value based method for all awards, net of
  related tax effects.......................................     (256)    (184)     (233)
                                                              -------   ------   -------
Pro forma net loss -- basic.................................   (3,961)    (568)   (2,069)
Deduct: INX income attributable to potential minority
        interest related to INX options.....................       --       --       (29)
                                                              -------   ------   -------
Pro forma net loss -- diluted...............................  $(3,961)  $ (568)   (2,098)
                                                              =======   ======   =======
Basic earnings per share:
  As reported...............................................  $ (0.95)  $(0.10)  $ (0.49)
  Pro forma.................................................  $ (1.01)  $(0.15)  $ (0.56)
Diluted earnings per share:
  As reported...............................................  $ (0.95)  $(0.10)  $ (0.50)
  Pro forma.................................................  $ (1.01)  $(0.15)  $ (0.57)
</Table>

     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 6).

     Fair Value of Financial Instruments -- I-Sector'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.

     Cash and Cash Equivalents -- Cash and cash equivalents include any highly
liquid securities with an original maturity of three months or less when
purchased.

  ACCOUNTING PRONOUNCEMENTS

     In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145, among other things,
amends SFAS No. 4 and SFAS No. 64, to require that gains and losses from the
extinguishments of debt generally be classified within continuing operations.
The provisions of SFAS No. 145 are effective for fiscal years beginning after
May 15, 2002 and early application is encouraged. The Company adopted SFAS No.
145 on January 1, 2003. The adoption of this statement had no impact on the
financial statements.

                                        52
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force (EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity"). This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The Company adopted SFAS No. 146 on January 1, 2003. The
adoption of this statement had no impact on the financial statements.

     In February 2003, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation: Transition and Disclosure -- An Amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS 123 to provide alternative methods of transition
for an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends the disclosure
provisions of that Statement to require prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions with respect
to stock-based compensation. The statement also amends APB Opinion No. 28,
"Interim Financial Reporting", to require disclosure about those effects in
interim financial information. The Company has chosen not to voluntarily change
to the fair value based methods of accounting for stock-based employee
compensation but has adopted the disclosure rules of SFAS 148.

     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies when a derivative contains a financing component that warrants special
reporting in the statement of cash flows and amends certain other existing
pronouncements, resulting in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003. The Company does not believe that the adoption of
SFAS No. 149 will have a material impact on its financial statements.

     In January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities -- An Interpretation of ARB No.
51". FIN 46 addresses consolidation by business enterprises of variable interest
entities. This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. On December 17, 2003, the FASB issued FIN 46R,
providing a deferral of the application of FIN 46 for interests held by public
entities in a variable interest entity or potential variable interest entity
until fiscal periods ending after March 15, 2004. The Company has not fully
assessed the impact of FIN 46 on its financial statements, particularly its
relationship with Allstar Equities, Inc., but the adoption of this statement is
not expected to have a material impact on the Company's financial statements.

     In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables". EITF 00-21 addresses certain aspects of the accounting by a
vendor for arrangements under which it will perform multiple revenue-generating
activities. Issue 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not
have a material impact on the Company's financial statements.

     In August 2003, the EITF reached a consensus on EITF 03-05, "Applicability
of AICPA Statement of Position 97-2 to Non-Software Deliverables in an
Arrangement Containing More-Than-Incidental Software". EITF 03-05 requires
revenue recognition under SOP 97-2 for all arrangements in which the software
sold is essential to the functionality of the hardware. The adoption of the EITF
03-05 had no impact on the Company's financial statements.

                                        53
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2.  DISCONTINUED OPERATIONS

     On November 6, 2001, I-Sector approved a plan to sell or close its IT
Staffing business. This is the measurement date. A sale was finalized effective
December 31, 2001. Under the terms of the sale, I-Sector received a note
receivable for $52, $50 for the ongoing operations of IT Staffing, Inc. and $2
for certain fixed assets of I-Sector. The note receivable bears interest at 5%
per annum and is collectible in installments based on the total monthly revenue
of the buyer over 24 months beginning in April 2002. A disposal loss, including
an estimate of the operating results from the measurement date, November 6, 2001
to the closing date of the sale of $17, and estimates for impairment of assets
caused by the disposal decision of $43, totaling $9 (net of tax of $5) was
recognized in 2001. Additional loss on disposal of $13 (net of tax of $7) was
recognized in 2002. Net loss from discontinued operations was $167 and $0 (net
of tax of $85 and $0) in 2001 and 2002, respectively. I-Sector retained accounts
receivable of approximately $82 and $0, net of reserves at December 31, 2001 and
2002, fixed assets of $52 and liabilities related to the IT Staffing business at
December 31, 2001. Fixed assets were redeployed in the continuing operations.
The balance sheet caption "Liabilities related to discontinued operations"
contains $36 and $0 of estimated future expenses relating to the wind-up of the
IT Staffing business at December 31, 2002 and 2003, respectively. Revenue for
the IT Staffing business for the year ended December 31, 2001 was $967; there
was no revenue subsequent to 2001.

     Prior to 2001, I-Sector sold two other businesses that have contributed to
discontinued operations in subsequent periods. In 1999, I-Sector decided to sell
both its computer products reselling business and its PBX telephone systems
dealer business, which together accounted for approximately 90% of total revenue
at the time. I-Sector closed the sale of its PBX telephone systems dealer
business, its Telecom Systems division, on March 16, 2000 and closed the sale of
its computer products reselling business, its Computer Products division, on May
19, 2000.

     During the periods specified below, I-Sector recognized a gain on disposal,
net of income tax provision, of these three businesses as follows:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2001     2002     2003
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
IT Staffing, Inc. (net of taxes of $(5), $(7) and $14,
  respectively).............................................   $ (9)    $(13)    $ 26
Computer Products Division (net of taxes of $179, $53 and
  $53, respectively)........................................    346      104      104
Telecom Division (net of taxes of $0, $88 and $41,
  respectively).............................................     --      171       80
                                                               ----     ----     ----
Net gain on disposal........................................   $337     $262     $210
                                                               ====     ====     ====
</Table>

     The balance sheet caption "Liabilities related to discontinued operations"
contains $904 and $557 at December 31, 2002 and 2003, respectively, of estimated
future expenses related to the winding up of the IT Staffing business, the
Telecom Division and the Computer Products Division, and includes amounts
related to settlement of pending litigation and to Telecom warranties. In 2003
the Company settled liabilities of $285 and revised estimates of liabilities
related to discontinued operations by $62. The liability at December 31, 2003,
relates primarily to the estimated cost to settle pending litigation.

                                        54
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3.  ACCOUNTS AND NOTES RECEIVABLE

     Accounts receivable consisted of the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              ----------------
                                                               2002     2003
                                                              ------   -------
<S>                                                           <C>      <C>
Accounts receivable.........................................  $7,021   $10,276
Accounts receivable retained -- discontinued operations.....     432        93
Allowances for doubtful accounts............................    (928)     (612)
                                                              ------   -------
     Total..................................................  $6,525   $ 9,757
                                                              ======   =======
</Table>

     Notes receivable short-term consisted of the following:

<Table>
<Caption>
                                                               DECEMBER 31,
                                                              ---------------
                                                               2002     2003
                                                              ------   ------
<S>                                                           <C>      <C>
Notes receivable, short-term................................  $1,236   $1,049
Allowances for doubtful accounts, short-term................    (338)    (373)
                                                              ------   ------
     Total..................................................  $  898   $  676
                                                              ======   ======
</Table>

     Notes receivable long-term consisted of the following:

<Table>
<Caption>
                                                              DECEMBER 31,
                                                              ------------
                                                              2002   2003
                                                              ----   -----
<S>                                                           <C>    <C>
Notes receivable, long-term.................................  $ 87   $ 502
Allowances for doubtful accounts, long-term.................   (23)   (250)
                                                              ----   -----
     Total..................................................  $ 64   $ 252
                                                              ====   =====
</Table>

4.  PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2002      2003
                                                              -------   -------
<S>                                                           <C>       <C>
Equipment...................................................  $   248   $   270
Computer equipment..........................................    1,942     1,888
Furniture and fixtures......................................      278       330
Leasehold improvements......................................      588       623
Vehicles....................................................       47        47
                                                              -------   -------
                                                                3,103     3,158
Accumulated depreciation and amortization...................   (1,988)   (1,887)
                                                              -------   -------
     Total..................................................  $ 1,115   $ 1,271
                                                              =======   =======
</Table>

     Property and equipment are depreciated over their estimated useful lives
ranging from three to ten years using the straight-line method. Depreciation
expense totaled $475, $356 and $466 for 2001, 2002 and 2003, respectively.
Assets under capital leases at December 31, 2002 and 2003 totaled $0 and $63
with $0 and $1 of recorded depreciation for 2002 and 2003, respectively.

                                        55
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5.  SEGMENT INFORMATION

     I-Sector has four reportable segments: INX, Stratasoft, Valerent and
Corporate. Corporate is not an operating segment. The accounting policies of the
business segments are the same as those for I-Sector. I-Sector evaluates
performance of each segment based on operating income. Management views accounts
receivable and inventory and not total assets in their decision-making.
Inter-segment sales and transfers are not significant and are shown in the
Eliminations column in the following table. The tables below show the results of
the four reportable segments:

     For the year ended December 31, 2003:

<Table>
<Caption>
                                   INX     STRATASOFT   VALERENT   CORPORATE   ELIMINATIONS   CONSOLIDATED
                                 -------   ----------   --------   ---------   ------------   ------------
<S>                              <C>       <C>          <C>        <C>         <C>            <C>
Revenue:
  Products.....................  $45,749    $    --      $1,573     $    --       $(422)        $46,900
  Services.....................    4,226         --       3,503          --          (4)          7,725
  Custom projects..............       --      7,527          --          --          --           7,527
                                 -------    -------      ------     -------       -----         -------
Total revenue..................   49,975      7,527       5,076          --        (426)         62,152
                                 -------    -------      ------     -------       -----         -------
Cost of goods and services:
  Products.....................   40,060         --       1,421          --        (421)         41,060
  Services.....................    2,976         --       2,412          --          (5)          5,383
  Custom projects..............       --      2,982          --          --          --           2,982
                                 -------    -------      ------     -------       -----         -------
  Cost of goods and services...   43,036      2,982       3,833          --        (426)         49,425
                                 -------    -------      ------     -------       -----         -------
Gross profit...................    6,939      4,545       1,243          --          --          12,727
Selling, general and
  administrative expenses......    6,045      5,888       1,963       1,165          --          15,061
                                 -------    -------      ------     -------       -----         -------
Operating income (loss)........  $   894    $(1,343)     $ (720)    $(1,165)      $  --          (2,334)
                                 =======    =======      ======     =======       =====
Interest and other income,
  net..........................                                                                     107
                                                                                                -------
Loss from continuing operations
  before benefit for income
  taxes........................                                                                  (2,227)
Benefit for income taxes.......                                                                     181
                                                                                                -------
Net loss from continuing
  operations...................                                                                  (2,046)
Net gain on disposal of
  discontinued operations, net
  of taxes.....................                                                                     210
                                                                                                -------
Net loss.......................                                                                 $(1,836)
                                                                                                =======
Accounts receivable, net.......  $ 7,898    $   978      $  788     $    --       $  --         $ 9,664
                                 =======    =======      ======     =======       =====
Accounts receivable retained
  from discontinued operations,
  net..........................                                                                      93
                                                                                                -------
Total accounts receivable,
  net..........................                                                                 $ 9,757
                                                                                                =======
Inventory......................  $   365    $   657      $   16     $    --       $  --         $ 1,038
                                 =======    =======      ======     =======       =====         =======
</Table>

                                        56
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     For the year ended December 31, 2002:

<Table>
<Caption>
                                  INX     STRATASOFT   VALERENT   CORPORATE   ELIMINATIONS   CONSOLIDATED
                                -------   ----------   --------   ---------   ------------   ------------
<S>                             <C>       <C>          <C>        <C>         <C>            <C>
Revenue:
  Products....................  $28,990     $   --     $ 1,092      $  --        $(277)        $29,805
  Services....................    1,748         --       3,900                      (1)          5,647
  Custom projects.............       --      6,569          --                      --           6,569
                                -------     ------     -------      -----        -----         -------
Total revenue.................   30,738      6,569       4,992         --         (278)         42,021
                                -------     ------     -------      -----        -----         -------
Cost of goods and services:
  Products....................   25,659         --       1,055         --         (277)         26,437
  Services....................    1,658         --       2,738         --           (1)          4,395
  Custom projects.............       --      2,920          --         --           --           2,920
                                -------     ------     -------      -----        -----         -------
  Cost of goods and
     services.................   27,317      2,920       3,793         --         (278)         33,752
                                -------     ------     -------      -----        -----         -------
Gross profit..................    3,421      3,649       1,199         --           --           8,269
Selling, general and
  administrative expenses.....    3,545      3,922       2,236        922           --          10,625
                                -------     ------     -------      -----        -----         -------
Operating loss................  $  (124)    $ (273)    $(1,037)     $(922)       $  --          (2,356)
                                =======     ======     =======      =====        =====
Interest and other income,
  net.........................                                                                     115
                                                                                               -------
Loss from continuing
  operations before benefit
  for income taxes............                                                                  (2,241)
Benefit for income taxes......                                                                   1,595
                                                                                               -------
Net loss from continuing
  operations..................                                                                    (646)
Net gain on disposal of
  discontinued operations, net
  of taxes....................                                                                     262
                                                                                               -------
Net loss......................                                                                 $  (384)
                                                                                               =======
Accounts receivable, net......  $ 4,454     $1,124     $   400      $ 115        $  --         $ 6,093
                                =======     ======     =======      =====        =====
Accounts receivable retained
  from discontinued
  operations, net.............                                                                     432
                                                                                               -------
Total accounts receivable,
  net.........................                                                                 $ 6,525
                                                                                               =======
Inventory.....................  $   348     $  409     $    24      $  --        $  --         $   781
                                =======     ======     =======      =====        =====         =======
</Table>

                                        57
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     For the year ended December 31, 2001:

<Table>
<Caption>
                                  INX     STRATASOFT   VALERENT   CORPORATE   ELIMINATIONS   CONSOLIDATED
                                -------   ----------   --------   ---------   ------------   ------------
<S>                             <C>       <C>          <C>        <C>         <C>            <C>
Revenue:
  Products....................  $ 8,853     $   --     $ 1,113     $    (6)       $(35)        $ 9,925
  Services....................    1,922         --       4,555          --          --           6,477
  Custom projects.............       --      7,257          --          --         (39)          7,218
                                -------     ------     -------     -------        ----         -------
Total revenue.................   10,775      7,257       5,668          (6)        (74)         23,620
Cost of goods and services:
  Products....................    7,707         --       1,026         (13)        (35)          8,685
  Services....................    1,956         --       3,377          --         (11)          5,322
  Custom projects.............       --      3,318          --          --          --           3,318
                                -------     ------     -------     -------        ----         -------
     Cost of goods and
       services...............    9,663      3,318       4,403         (13)        (46)         17,325
                                -------     ------     -------     -------        ----         -------
Gross profit (loss)...........    1,112      3,939       1,265           7         (28)          6,295
Selling, general and
  administrative expenses.....    3,103      3,021       3,077       1,400         (28)         10,573
                                -------     ------     -------     -------        ----         -------
Operating income (loss).......  $(1,991)    $  918     $(1,812)    $(1,393)       $ --          (4,278)
                                =======     ======     =======     =======        ====
Interest and other income,
  net.........................                                                                     316
                                                                                               -------
Loss from continuing
  operations before benefit
  for income taxes............                                                                  (3,962)
Benefit for income taxes......                                                                      87
                                                                                               -------
Net loss from continuing
  operations..................                                                                  (3,875)
                                                                                               -------
Loss from discontinued
  operations, net of taxes....                                                                    (167)
Net gain on disposal of
  discontinued operations, net
  of taxes....................                                                                     337
                                                                                               -------
Net loss......................                                                                 $(3,705)
                                                                                               =======
</Table>

     International sales accounted for $3,111, $1,851 and $3,179 or 13.2%, 4.4%
and 5.1% of consolidated revenue in 2001, 2002 and 2003, respectively, and were
primarily in the Stratasoft segment. International sales accounted for 42.2% of
the Stratasoft segment revenue in the year ended December 31, 2003.
International sales are derived primarily from United States, Canada, the United
Kingdom, Germany, Greece, India, Egypt, the Philippines and Grenada.

6.  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.

                                        58
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The potentially dilutive options of 0; 101,318 and 215,395 for the years
ended December 31, 2001, 2002 and 2003, respectively, were not used in the
calculation of diluted earnings since the effect of potentially dilutive
securities in computing a loss per share is antidilutive.

     The potentially dilutive options of the Company's wholly-owned subsidiary,
Internetwork Experts, Inc., (see Note 14) did not impact the calculation of
I-Sector's earnings per share for 2001 and 2002 since the effect would have been
antidilutive. In 2003, net loss from continuing operations for purposes of
computing the diluted loss per share increased $29 for the assumed exercise of
INX options under the treasury method.

<Table>
<Caption>
                                                               DECEMBER 31,
                                                   ------------------------------------
                                                      2001         2002         2003
                                                   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>
Numerator for basic earnings per share:
Net loss from continuing operations..............  $   (3,875)  $     (646)  $   (2,046)
Net loss from discontinued operations, net of
  taxes..........................................        (167)          --           --
Gain on disposal of discontinued operations, net
  of taxes.......................................         337          262          210
                                                   ----------   ----------   ----------
Net loss.........................................  $   (3,705)  $     (384)  $   (1,836)
                                                   ==========   ==========   ==========
Numerator for diluted earnings per share:
Net loss from continuing operations..............  $   (3,875)  $     (646)  $   (2,046)
INX income attributable to potential minority
  interest.......................................          --           --          (29)
                                                   ----------   ----------   ----------
Net loss from continuing operations used in
  computing loss per share.......................      (3,875)        (646)      (2,075)
Net loss from discontinued operations, net of
  taxes..........................................        (167)          --           --
Gain on disposal of discontinued operations, net
  of taxes.......................................         337          262          210
                                                   ----------   ----------   ----------
Net diluted loss.................................  $   (3,705)  $     (384)  $   (1,865)
                                                   ==========   ==========   ==========
Denominator for basic and diluted earnings per
  share -- weighted-average shares outstanding...   3,911,019    3,709,689    3,691,052
</Table>

     There were warrants to purchase 176,750 shares of common stock for 2001 and
2002 which were not included in computing diluted earnings per share because the
inclusion would have been anti-dilutive. During the three months ended September
30, 2002 such warrants expired and the carrying value of the warrants was
recognized as additional paid in capital.

7.  DEBT

     On September 27, 2001, Stratasoft, a subsidiary of I-Sector, signed a note
payable to a third party for $725, payable in monthly installments through
February 2007. The note does not bear interest and I-Sector has imputed interest
at 5.5% to record the debt and related patent license asset and has recorded
interest of $9, $30 and $17 in 2001, 2002 and 2003, respectively. This note is
collateralized by Stratasoft's patent license assets and Stratasoft has granted
a security interest in its pending patent application and the next two patent
applications filed by Stratasoft. In connection with this note payable, I-Sector
has short-term debt maturing within one year of $68 and long-term debt of $184
at December 31, 2003.

     In October 2001, I-Sector signed a non-interest bearing note payable for
$39 payable in monthly installments through October 2004. In connection with
this note payable, I-Sector has short-term debt maturing within one year of $10
at December 31, 2003.

     In December 2003, I-Sector signed a 36 month non-cancelable capital lease
for the purchase of equipment. I-Sector imputed interest at 10% to record the
debt on which I-Sector has recorded $0 interest in

                                        59
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2003. In connection with this capital lease, I-Sector has recorded short-term
debt maturing within one year of $18 and long-term debt of $45 at December 31,
2003.

     In connection with its credit agreement for the purchase of inventory
discussed immediately below, $1,688 of the outstanding balance on such credit
line was interest bearing at December 31, 2003 and is reflected as short-term
debt in the accompanying balance sheet.

     On January 31, 2002, I-Sector entered into a credit agreement with Textron
Financial Corporation ("Textron") for a revolving line of credit (the "Textron
Facility"). The total credit available under the Textron facility, as amended,
was $7,500 subject to borrowing base limitations that are generally computed as
80% of eligible accounts receivable, and 90% of identifiable inventory purchased
under this agreement and 40% of all other inventory. The borrowing base
limitations restrict the eligibility of accounts receivable for
collateralization by disallowing as eligible any customer's receivables in their
entirety that have balances over 90 days old and that exceed 25% of their total
balance. In November 2003 Textron agreed to increase the credit facility from
$7,500 to $10,000. The facility would increase to $15,000 upon the execution of
syndication loan documents and an activation of syndication for $5,000 with
Silicon Valley Bank. In February 2004, the syndication loan documents were
executed and the credit line increase to $15,000 became effective. Inventory
floor plan borrowings are reflected in accounts payable in the accompanying
balance sheets, except for $1,688 that is interest bearing and is reflected in
short term debt in the accompanying balance sheet at December 31, 2003.
Borrowings accrue interest at the prime rate (4.0% at December 31, 2003) plus
2.5% on outstanding balances that extend beyond the vendor approved free
interest period. This agreement is collateralized by substantially all of
I-Sector's assets except its patent license assets. The loan documents contain
restrictive covenants measured at each quarter end and effective at December 31,
2003, which requires us to maintain minimum tangible capital funds, maintain
minimum debt to tangible capital funds ratio, and effective at March 31, 2004,
to achieve a fixed charge coverage ratio. At December 31, 2003 I-Sector was in
compliance with those loan covenants effective at that date and anticipates that
it will be able to comply with its loan covenants prospectively. In the event
I-Sector does not maintain compliance, it would be required to seek waivers from
Textron and Silicon Valley Bank for those events, which, if not obtained, could
accelerate repayment and require I-Sector to seek other sources of finance. At
December 31, 2003, I-Sector had $7,608 outstanding on inventory floor plan
finance borrowings, and the remaining credit availability was $2,392.

     The weighted-average interest rate for borrowings under all credit line
arrangements in effect during, 2001, 2002 and 2003 was 0%, 0% and 6.73%,
respectively. Interest expense on all credit lines was $0, $0 and $29 for the
years ended December 31, 2001, 2002 and 2003, respectively.

     The aggregate amounts of installments due by calendar year on long-term
debt at December 31, 2003 are as follows:

<Table>
<S>                                                           <C>
2004........................................................  $1,784
2005........................................................     106
2006........................................................     117
2007........................................................       6
                                                              ------
Total.......................................................  $2,013
                                                              ======
</Table>

                                        60
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8.  INCOME TAXES

     The provision for income taxes consisted of the following:

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                              2001      2002      2003
                                                              -----   --------   ------
<S>                                                           <C>     <C>        <C>
Current provision (benefit):
Federal.....................................................  $(87)   $(1,595)   $(181)
State.......................................................    --         --       --
                                                              ----    -------    -----
Total current provision (benefit)...........................   (87)    (1,595)    (181)
Deferred provision (benefit)................................    --         --       --
                                                              ----    -------    -----
Total benefit from continuing operations....................   (87)    (1,595)    (181)
Total benefit from discontinued operations..................   (85)        --       --
Total provision for gain on disposal........................   172        136      108
                                                              ----    -------    -----
  Total.....................................................  $ --    $(1,459)   $ (73)
                                                              ====    =======    =====
</Table>

     The total provision for income taxes for continuing operations during the
years ended December 31, 2001, 2002 and 2003 varied from the U.S. federal
statutory rate due to the following:

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                            -------------------------
                                                             2001      2002     2003
                                                            -------   -------   -----
<S>                                                         <C>       <C>       <C>
Federal income tax at statutory rate......................  $(1,347)  $  (762)  $(757)
Nondeductible expenses....................................       52        18      20
Other.....................................................       --        --      (2)
Valuation allowance.......................................    1,208      (851)    558
                                                            -------   -------   -----
  Total benefit from continuing operations................  $   (87)  $(1,595)  $(181)
                                                            =======   =======   =====
</Table>

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

<Table>
<Caption>
                                                               DECEMBER 31,
                                                              ---------------
                                                              2002     2003
                                                              -----   -------
<S>                                                           <C>     <C>
Net deferred tax assets (liabilities):
  Accounts and notes receivable.............................  $ 486   $   458
  Closing and severance costs...............................    307       189
  Deferred service revenue..................................     27       (35)
  Inventory.................................................     --        13
  Amortization of intangibles...............................    (27)      (17)
  Depreciation..............................................     --       (63)
  Net operating loss carryforward...........................     --       806
                                                              -----   -------
     Total..................................................    793     1,351
Less Valuation allowance....................................   (793)   (1,351)
                                                              -----   -------
  Total.....................................................  $  --   $    --
                                                              =====   =======
</Table>

     Due to the company's recurring losses, a valuation allowance was
established to fully offset the net deferred tax assets at December 31, 2001,
2002 and 2003.

                                        61
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     At December 31, 2003, I-Sector has a net operating loss (NOL) carryforward
for federal income tax reporting purposes of approximately $2,372. Since United
States tax laws limit the time during which an NOL may be applied against future
taxable income and tax liabilities, I-Sector may not be able to take full
advantage of its NOL carryforward for federal income tax purposes. The
carryforward will expire in 2023 if not otherwise used. A change in ownership,
as defined by federal income tax regulations, could significantly limit
I-Sector's ability to utilize its carryforward.

     During 2003, a significant number of non-qualified options were exercised
creating an excess income tax benefit for I-Sector. This benefit will be
utilized to the extent that I-Sector has tax basis income that was not offset by
net operating loss (NOL) carryforwards. At December 31, 2003, approximately $243
of the valuation allowance has been attributed to "excess benefit due to
options." The company will use this portion only when the valuation allowance
has been reduced by $564. Any tax benefit that is realized in subsequent years
from the reduction of the valuation allowance established related to these
options will be recorded as an expense and additional paid-in capital.

     On March 9, 2002, President Bush signed into law the Job Creation and
Worker Assistance Act of 2002. The law provides for the carryback of net
operating losses for any taxable year ending during 2001 and 2002 to each of the
5 tax years preceding the loss year. Previously, a net operating loss was only
eligible to be carried back to the 2 years preceding the year of loss. As a
result of the change in the carryback period, I-Sector recognized a tax benefit
of $1,459 and $73 in the years ended December 31, 2002 and 2003, respectively.
On July 26, 2002 the Company received $1,123 in tax refunds. Additionally, on
July 24, 2003 the Company received $561 in tax refunds.

9.  ACCRUED EXPENSES

     Accrued expenses consisted of the following:

<Table>
<Caption>
                                                               DECEMBER 31,
                                                              ---------------
                                                               2002     2003
                                                              ------   ------
<S>                                                           <C>      <C>
Sales tax payable...........................................  $  386   $  374
Accrued employee benefits, payroll and other related
  costs.....................................................     799    1,359
Accrued property taxes......................................       6        4
Accrued offering costs......................................      --      317
Accrued warranty costs......................................     305      302
Other.......................................................     307      320
                                                              ------   ------
  Total.....................................................  $1,803   $2,676
                                                              ======   ======
</Table>

10.  COMMITMENTS AND CONTINGENCIES

     Litigation -- In August 2002, Inacom Corp.  ("Inacom") filed a lawsuit in
the District Court of Douglas County, Nebraska styled Inacom Corp v. I-Sector
Corporation, f/k/a Allstar Systems, Inc., claiming that I-Sector owed the sum of
approximately $570 to Inacom as a result of Inacom's termination of a Vendor
Purchase Agreement between Inacom and I-Sector. I-Sector believes that the claim
is without merit and intends to vigorously contest the demand.

     I-Sector had filed a claim to collect on a note receivable from E Z Talk
Communications ("E Z Talk") and had entered into arbitration discussions with E
Z Talk. In July 2002, E Z Talk filed a lawsuit to set aside the arbitration and
claiming damages of $250. On March 7, 2003, the parties settled with E Z Talk
paying $25 over 5 months from April 2003 through August 2003 and agreeing to
release all equipment back to I-Sector

                                        62
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

90 days after the final payment. All payments have been made with the last
payment occurring on August 22, 2003.

     The Equal Employment Opportunity Commission ("EEOC") filed a Charge of
Discrimination against Stratasoft on behalf of a former employee on August 1,
2002 in the EEOC Minneapolis, Minnesota office. Stratasoft reached agreement to
settle this claim, without admitting or denying, in September 2003 for $130, and
general and administrative expense of $130 was recognized in the year ended
December 31, 2003.

     In March 2003, I-Sector and other parties were notified of a demand for
return of payments relating to the business activities of a call center
customer. In March 2004, I-Sector was informed by the claimant that claims will
not be pursued at this time. I-Sector believes that the claims against it, if
re-initiated, are without merit and intends to vigorously contest any demands
related to this matter.

     I-Sector 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, I-Sector believes the
final outcome of such matters will not have a materially adverse effect on its
results of operations or financial position.

     Leases -- I-Sector leases office space from Allstar Equities, Inc. In 1999,
I-Sector renewed its office lease for a five year period with monthly rental
payments of $38 plus certain operating expenses through December 1, 2004. The
lease was renewed February 1, 2002 for a five year period with monthly rental
payments of $37 plus certain operating expenses through January 31, 2007. Rental
expense under this agreement amounted to approximately $452, $446, and $446
during years ended December 31, 2001, 2002 and 2003, respectively. Additionally,
future minimum rentals on other operating leases amount to approximately $185 in
2004, $159 in 2005, $112 in 2006 and $3 in 2007. Amounts paid during the years
ended December 31, 2001, 2002 and 2003, under such agreements totaled
approximately $197, $131 and $295, respectively.

     401(k) plan -- I-Sector maintains a 401(k) savings plan wherein I-Sector
matches a portion of the employee contribution. In addition, I-Sector has a
discretionary matching fund based on the net profitability of I-Sector. All
full-time employees who have completed 90 days of service with I-Sector are
eligible to participate in the plan. Declaration of the discretionary portion of
the matching fund is the decision of the Board. I-Sector has made no additional
contributions to the plan for the years ended December 31, 2001, 2002 or 2003.
Under the standard I-Sector matching program, I-Sector's match was $32, $27, and
$31 for the years ended December 31, 2001, 2002 and 2003, respectively.

  Related Party Transactions

     The Company leases office space from Allstar Equities, Inc., a Texas
corporation ("Equities"), a company wholly owned by the CEO. On December 1, 1999
Equities purchased the Company's corporate office building and executed a direct
lease with us with an expiration date of December 31, 2004. In conjunction with
Equities obtaining new financing on the building, a new lease was executed with
the Company on February 1, 2002 with an expiration date of January 31, 2007. The
new lease has rental rates of $37 per month.

     From time to time, I-Sector makes short-term loans and travel advances to
its non-executive employees. The balance of approximately $16 relating to these
loans and advances is included in the Company's balance sheet and reported as
part of Accounts receivable -- other at December 31, 2003.

                                        63
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. INTANGIBLE ASSETS

<Table>
<Caption>
                                            DECEMBER 31, 2002         DECEMBER 31, 2003
                                         -----------------------   -----------------------
                                          GROSS                     GROSS                      WEIGHTED
                                         CARRYING   ACCUMULATED    CARRYING   ACCUMULATED    AMORTIZATION
                                          AMOUNT    AMORTIZATION    AMOUNT    AMORTIZATION      YEARS
                                         --------   ------------   --------   ------------   ------------
<S>                                      <C>        <C>            <C>        <C>            <C>
Amortized intangible assets
  Patent license rights................   $1,046        $148        $1,114        $265           7.50
  Customer list........................      200          90           602         231           2.14
  Other................................      224          70           168         104           1.90
                                          ------        ----        ------        ----
Total..................................   $1,470        $308        $1,884        $600
                                          ======        ====        ======        ====
</Table>

     The estimated aggregate amortization expense for each of the next five
years and thereafter is as follows:

<Table>
<S>                                                            <C>
2004........................................................   $  318
2005........................................................      295
2006........................................................      140
2007........................................................      103
2008........................................................       63
Thereafter..................................................      365
                                                               ------
  Total.....................................................   $1,284
                                                               ======
</Table>

     In October 2000, I-Sector's wholly owned subsidiary INX acquired certain
assets and liabilities of Internetwork Experts, Inc., a professional services
firm focused on the architecture, design, implementation and support of high-end
network infrastructure. The purchase price was $225 in cash and assumed
liabilities of $116. The acquisition was accounted for using the purchase method
of accounting, and accordingly, the purchase price has been allocated to the
assets and liabilities acquired based on fair values at the date of acquisition.
The excess of the purchase price over the fair market value of the net assets
acquired was approximately $341, $200 of which has been allocated to a customer
list and service agreements. The remaining has been allocated to other
intangibles. INX was contingently liable for future payments to the former owner
based on the level of service revenue generated within a specified period of
time and within certain ranges for the customers included on the customer list.
That contingent liability was settled in 2001 for $50. The customer list and
other intangibles are being amortized over their estimated useful lives of 5
years.

     On April 7, 2003, I-Sector's subsidiary, INX, acquired certain assets and
liabilities of one of its competitors, Digital Precision, Inc. ("Digital").
Under the terms of the purchase, INX acquired fixed assets valued at $63,
inventory valued at $101 and intellectual property, customer lists, trademarks,
trade names and service marks, contract rights and other intangibles of Digital
valued at $376, as well as assumed certain operating leases of equipment and
office space with a net future obligation of $548. The office space in Dallas,
Texas was subleased with future rentals of $234. The intangibles are subject to
amortization and have a three year expected life. The purchase price was $540 in
cash and, contingent upon the retention of certain key employees, the obligation
to issue 1,800,000 shares of INX common stock in April 2004. If that contingency
is resolved in April 2004, I-Sector will recognize a minority interest related
to the issuance of INX's common stock (see Note 14). No goodwill was recognized
in the acquisition. The results of operations subsequent to April 7, 2003 are
included in I-Sector's consolidated statement of operations.

                                        64
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13.  STOCKHOLDERS' EQUITY

  STOCK OPTION PLANS

     Under the 1996 Incentive Stock Plan (the "1996 Incentive Plan") and the
1996 Non-Employee Director Stock Option Plan (the "Director Plan") as approved
by the shareholders, I-Sector's Compensation Committee may grant up to 442,500
shares of common stock, which have been reserved for issuance to certain
employees of I-Sector. At December 31, 2003, 114,488 shares were available for
future grant under the 1996 Incentive Plan. The 1996 Incentive Plan provides 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. Additionally, no shares may be granted after the tenth anniversary
of the 1996 Incentive Plan's adoption. I-Sector has reserved for issuance, under
the Director Plan, 100,000 shares of common stock, subject to certain
anti-dilution adjustments, of which 10,000 shares were available for future
grants at December 31, 2003. The Director Plan provides for a one-time option by
newly elected directors to purchase up to 5,000 common shares, after which each
director is entitled to receive an option to purchase up to 5,000 common shares
upon each date of re-election to I-Sector'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 and generally expire ten years
after the grant date.

     In May 2000, I-Sector adopted the 2000 Stock Incentive Plan (the "2000
Incentive Plan") as approved at the annual shareholder's meeting. At the August
20, 2003 shareholder's meeting, the 2000 Incentive Plan was amended and
restated, including a change in the name of the plan to I-Sector Corporation
Incentive Plan ("I-Sector Incentive Plan") and amendments to make it compliant
with both the Sarbanes-Oxley Act of 2002 and with Section 162(m) and other
sections of the Internal Revenue Code. Additionally, the plan was amended to
increase the number of shares of common stock available for granting stock
options to 600,000 in 2003. The I-Sector 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 I-Sector Incentive Plan. Generally, the Compensation Committee has the
discretion to determine the exercise price of each stock option under the
I-Sector Incentive Plan, and they must be exercised within ten years of the
grant date, except those classified as Incentive Stock Option ("ISO") grants to
a 10% or greater stockholder. ISO options grants to a 10% or greater stockholder
must be exercised within five years of the grant date. The exercise price of
each ISO option 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). At December 31, 2003, 4,170 shares were available for future grant
under the I-Sector Incentive Plan.

                                        65
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The activity of employees in all plans is summarized below:

<Table>
<Caption>
                                                       YEAR ENDED DECEMBER 31,
                                   ---------------------------------------------------------------
                                          2001                  2002                  2003
                                   -------------------   -------------------   -------------------
                                              WEIGHTED              WEIGHTED              WEIGHTED
                                              AVERAGE               AVERAGE               AVERAGE
                                              EXERCISE              EXERCISE              EXERCISE
                                    SHARES     PRICE      SHARES     PRICE      SHARES     PRICE
                                   --------   --------   --------   --------   --------   --------
<S>                                <C>        <C>        <C>        <C>        <C>        <C>
Options outstanding at beginning
  of the period..................   383,112    $1.72      399,812    $1.48      396,042    $1.47
Granted during the period........    25,000     1.00       25,000     1.20      338,760     3.58
Exercised during the period......        --       --           --       --     (222,736)    1.44
Transfers to non-employees.......        --       --      (11,330)     .99           --       --
Canceled during the period.......    (8,300)    1.64      (17,440)    1.66      (10,100)    1.36
                                   --------              --------              --------
Options outstanding at end of
  period.........................   399,812    $1.48      396,042    $1.47      501,966    $2.85
                                   ========              ========              ========
Options exercisable at end of
  period.........................   317,722    $1.58      369,312    $1.46      259,406    $1.81
                                   ========              ========              ========
Options outstanding price
  range..........................     $1.06                 $0.82                 $0.82
                                   to $7.62              to $7.62              to $8.06
Weighted average fair value of
  options granted during the
  period.........................     $1.00                 $1.20                 $2.55
Options weighted average
  remaining life.................      6.88                  6.29                  8.39
                                      Years                 Years                 Years
</Table>

<Table>
<Caption>
                                                              EMPLOYEE AND DIRECTOR
                                          -------------------------------------------------------------
                                                      OUTSTANDING                     EXERCISABLE
                                          ------------------------------------   ----------------------
                                                         WEIGHTED
                                                          AVERAGE     WEIGHTED                 WEIGHTED
                                                         REMAINING    AVERAGE                  AVERAGE
                                          OUTSTANDING   CONTRACTUAL   EXERCISE   EXERCISABLE   EXERCISE
                                            SHARES         LIFE        PRICE       SHARES       PRICE
                                          -----------   -----------   --------   -----------   --------
<S>                                       <C>           <C>           <C>        <C>           <C>
$0.82 to $1.99..........................    201,766        6.03        $1.39       163,686      $1.33
$2.00 to $2.99..........................     88,200        9.53         2.66        95,720       2.63
$3.00 to $3.99..........................         --          --           --            --         --
$4.00 to $4.99..........................    202,000        9.76         4.14            --         --
$5.00 to $8.06..........................     10,000          --         8.06            --         --
                                          -----------                            -----------
     Total..............................    501,966        8.22        $2.85       259,406      $1.81
                                          ===========                            ===========
</Table>

     Employees affected by the sale of the Telecom Division on March 16, 2000
and of the Computer Products Division on May 19, 2000 (See Note 2) retained
their respective stock option grants received prior to I-Sector's disposal of
these divisions. In addition, certain affected employees were eligible and
received stock options awards subsequent to their termination dates. The
affected employees' awards will vest or continue to vest according to the
periods specified in their respective stock option agreements, generally five
years, contingent upon the employment with the respective division's acquirer.

                                        66
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The activity of options to the non-employee group is summarized below:

<Table>
<Caption>
                                                       YEAR ENDED DECEMBER 31,
                                   ---------------------------------------------------------------
                                          2001                  2002                  2003
                                   -------------------   -------------------   -------------------
                                              WEIGHTED              WEIGHTED              WEIGHTED
                                              AVERAGE               AVERAGE               AVERAGE
                                              EXERCISE              EXERCISE              EXERCISE
                                    SHARES     PRICE      SHARES     PRICE      SHARES     PRICE
                                   --------   --------   --------   --------   --------   --------
<S>                                <C>        <C>        <C>        <C>        <C>        <C>
Options outstanding at beginning
  of the period..................   183,771    $2.18      181,483    $1.45      168,280    $1.43
Transferred from employee plan...        --       --       10,200     0.99           --       --
Exercised during the period......        --       --           --       --      (98,748)    1.56
Grants during the period.........        --       --           --       --      118,000     2.32
Canceled during the period.......    (2,288)    1.64      (23,403)    1.72           --       --
                                   --------              --------              --------
Options outstanding at end of
  period.........................   181,483    $1.45      168,280    $1.43      187,532    $1.92
                                   ========              ========              ========
Options exercisable at end of
  period.........................    83,304    $1.37      151,859    $1.42      165,492    $1.62
                                   ========              ========              ========

Options outstanding price
  range..........................     $1.06                 $1.06                 $1.06
                                   to $2.31              to $2.31              to $4.14
Options weighted average
  remaining life.................      3.13                  3.13                  5.33
                                      Years                 Years                 Years
</Table>

<Table>
<Caption>
                                                          NON-EMPLOYEE
                                  -------------------------------------------------------------
                                              OUTSTANDING                     EXERCISABLE
                                  ------------------------------------   ----------------------
                                                 WEIGHTED
                                                  AVERAGE     WEIGHTED                 WEIGHTED
                                                 REMAINING    AVERAGE                  AVERAGE
                                  OUTSTANDING   CONTRACTUAL   EXERCISE   EXERCISABLE   EXERCISE
                                    SHARES         LIFE        PRICE       SHARES       PRICE
                                  -----------   -----------   --------   -----------   --------
<S>                               <C>           <C>           <C>        <C>           <C>
$0.82 to $1.99..................    155,780        7.47        $1.70       155,740      $1.70
$2.00 to $2.99..................      9,752        6.35         2.25         9,752       2.25
$3.00 to $3.99..................         --          --           --            --         --
$4.00 to $4.99..................     22,000        9.88         4.14            --         --
$5.00 to $6.00..................         --          --           --            --         --
                                  -----------                            -----------
  Total.........................    187,532        7.69        $1.92       165,492      $1.62
                                  ===========                            ===========
</Table>

     Capital Stock -- Holders of I-Sector'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 I-Sector (the "Board"). Upon any liquidation or dissolution of
I-Sector, 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.

     Restricted Stock -- At December 31, 2002, I-Sector had 1,200 shares of
restricted stock with a par value of $0.01 per share outstanding. The 1,200
shares, valued at $1.563 per share, vested ratably at the end of each one year
period over a five year period from the date of issuance. At December 31, 2003,
all restrictions on these shares have lapsed.

     Warrants -- I-Sector issued warrants to purchase 176,750 common shares at
$9.60 per share to underwriters in connection with its public offering of common
stock. The warrants expired on July 7, 2002.

                                        67
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14.  SUBSIDIARY STOCK OPTION PLAN

     Each of I-Sector's three primary subsidiaries had an incentive stock option
plan in place, but all of the subsidiary plans except for INX were terminated in
December 2003. The INX plan has not been presented to the shareholders of
I-Sector for approval. INX has granted incentive awards under its incentive
plan, and such awards have been granted to certain employees and to management
of INX. Under INX's plan such options vest typically ratably over three to five
years. In December 2003, the Company amended option agreements with INX's two
most senior executives to convert to a fixed 5-year vesting schedule from one
that was determined based on the percentage of attainment of predefined
financial goals by INX. No stock-based compensation was recorded as the exercise
price equaled or exceeded management's estimated fair value of the INX common
stock. Any unvested INX stock options may vest immediately upon the occurrence
of a liquidity event for that subsidiary. 5,435,000 of the options contain an
exercise restriction which only allows vested options to be exercised upon the
occurrence of a liquidity event or one month prior to the option's expiration
date. The INX options expire ten years after the grant date if they are not
exercised. The INX stock option grants are subject to dilution when I-Sector
purchases additional shares of the subsidiary stock in order to keep the
subsidiary sufficiently capitalized. INX has 9,490,692 options granted and
outstanding, of which 3,777,666 are vested and 500,000 are exercisable at
December 31, 2003. The outstanding options have exercise prices ranging from
$0.01 to $0.25 per share with a weighted average of $0.17 per share. There are
no shares in INX's plan available to be issued at December 31, 2003 and INX's
plan has been amended, effective December 31, 2003 so that no further options
may be granted under the plan. The tables below reflect the ownership of INX at
December 31, 2003 and summarize the potential dilutive effect on I-Sector's
ownership in INX if all options granted at December 31, 2003 were fully vested
and option grants were exercised, and include the effects of the issuance of
stock in 2004 relating to INX's acquisition of certain assets and liabilities of
Digital Precision, Inc. The table does not assume any repurchase of shares with
proceeds from option exercises.

<Table>
<Caption>
                                                                  INX        PERCENT OF
                                                              COMMON STOCK     TOTAL
                                                              ------------   ----------
<S>                                                           <C>            <C>
Ownership of INX shares at December 31, 2003:
  Common Stock owned by I-Sector............................   21,834,333      100.0%
                                                               ----------      ------
  Total Common Stock Outstanding............................   21,834,333      100.0%
                                                               ==========      ======
Potential Future I-Sector Dilution of Ownership:
  Common Stock owned by I-Sector at December 31, 2003.......   21,834,333       65.9%
  Options granted and outstanding at December 31,
     2003(1)(2)(3)(4).......................................    9,490,692       28.7%
  Contingent obligation to issue Common Stock related to
     acquisition(5).........................................    1,800,000        5.4%
                                                               ----------      ------
  Total at December 31, 2003................................   33,125,025      100.0%
                                                               ==========      ======
</Table>

---------------

(1) Options granted and outstanding at December 31, 2003 include option grants
    for 4,100,000 shares of INX granted to the two senior executives of INX and
    vesting of these option grants was performance-based relating to the
    percentage of predefined financial goals attained by INX while these two
    senior executives remain employed. In December 2003, these option agreements
    were amended to convert to a fixed 5-year vesting schedule.

(2) Included in the option grants outstanding at December 31, 2003 are grants
    for 1,881,692 shares granted to key employees related to the acquisition
    Digital Precision, Inc. Grants for 500,000 of these shares vested April
    2003. The balance of the grants for 1,381,692 shares, which were granted in
    November 2003, vest over three years, starting in April 2004

                                        68
<PAGE>
                     I-SECTOR CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) During the year ended December 31, 2003, INX granted fully vested options to
    purchase 1,200,000 shares of INX at an exercise price of $0.25 per share to
    the CEO and Chairman of the Board of I-Sector Corporation. Such option grant
    was voluntarily canceled by the CEO and Chairman of the Board of I-Sector
    Corporation in February 2004 concurrent with the issuance of a warrant for
    1.2 million Shares to I-Sector on similar terms. During the year ended
    December 31, 2003, INX granted fully vested options to purchase 300,000
    shares at an exercise price of $0.25 per share to the President and CEO of
    INX. In addition, INX granted options vesting over three years to various
    other employees during the year ended December 31, 2003.

(4) The remainder of the shares included in INX option grants outstanding at
    December 31, 2003 vest over either three or five years based upon continued
    employment by INX of the individuals to whom such grants have been made. All
    options granted by INX expire in ten years if unexercised.

(5) In connection with the acquisition of certain assets and liabilities of
    Digital Precision, Inc. (see Note 12), a portion of the consideration given
    by INX was the contingent obligation to issue 1,800,000 shares of INX Common
    Stock to Digital Precision, Inc. when and if three key employees complete
    one year of employment with INX. If any of such key employees terminates
    employment without cause before completion of one year of employment, the
    number of shares of Common Stock to be issued to all of the former
    stockholders of Digital Precision is decreased by scheduled and agreed upon
    percentages.

                                        69
<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     We have previously reported the information required by this item in a
current report on Form 8-K initially filed with the SEC on June 17, 2003.

ITEM 9A.  CONTROLS AND PROCEDURES

     Under the supervision and with the participation of certain members of our
management, including our Chairman of the Board, Chief Executive Officer and
principal financial officer, we completed an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) to the Securities Exchange Act of 1934, as
amended (the "Exchange Act")). Based on that evaluation, we and our management
have concluded that, except as discussed in the following paragraph, our
disclosure controls and procedures at December 31, 2003 were effective to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the SEC, and are
designed to ensure that information required to be disclosed by us in these
reports is accumulated and communicated to our management, as appropriate to
allow timely decisions regarding required disclosures. In the fourth quarter of
2003, there has been no change in our internal control over financial reporting
that has materially affected, or is reasonably likely to affect, our internal
control over financial reporting.

     Grant Thornton LLP ("Grant Thornton"), our independent accountants, has
identified and reported to the audit committee of the board of directors certain
internal control deficiencies that Grant Thornton considers to be significant
deficiencies under the standards established by the American Institute of
Certified Public Accountants and the SEC. The identified internal control
deficiencies relate to (i) a material weakness involving contemporaneous
documentation of all terms related to revenue transactions and conclusions
regarding customer creditworthiness and (ii) a significant deficiency with
respect to the review of significant agreements by our accounting personnel in
order to monitor compliance with their terms.

     We have initiated corrective actions to address these internal control
deficiencies, by implementing the following measures:

     - established improved procedures for the review of revenue recognition
       policies and contract management polices and procedures;

     - held formalized training of finance and sales staff; and

     - hired an additional person in our accounting department.

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

                                        70
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS

     James H. Long -- Director, April 1983 to present.

     James H. Long, age 45, is our founder and has served as our Chairman of the
Board and Chief Executive Officer since our inception in 1983. Mr. Long also
served as our president through December of 2003 Prior to founding I-Sector, Mr.
Long served with the United States Navy in a technical position and was then
employed by IBM in a technical position.

     Donald R. Chadwick -- Director, September 12, 1996 to present.

     Donald R. Chadwick, age 60, served as Secretary from February, 1992 to
August, 2002 and served as our Chief Financial Officer of the Company from
February 1992 until December, 1999. As Chief Financial Officer, his duties
included supervision of finance, accounting and controller functions.

     Kevin M. Klausmeyer -- Director, August 8, 2001 to present.

     Kevin M. Klausmeyer, age 45, is currently the Chief Financial Officer of
RLX Technologies, a company that invented and manufactured the blade server and
has evolved into a full modular computing company. Mr. Klausmeyer is also
currently on the board of Quest Software, Inc., an independent software vendor.
Mr. Klausmeyer was previously the Chief Financial Officer of PentaSafe Security
Technologies, Inc., a security software company and provider of complete
security policy and infrastructure solutions, since December 1, 1999 through
2002. From 1993 to November 1999, Mr. Klausmeyer was Vice President and Chief
Accounting Officer of BMC Software, Inc., a publicly-held distributor of
computer software. Mr. Klausmeyer is one of three software finance executives,
who, together with representatives from the big four accounting firms, serve on
the AICPA's Software Revenue Recognition Task Force, which interprets and
provides guidance to the software industry on U.S. authoritative software
revenue accounting rules. Mr. Klausmeyer spent 13 years at Arthur Andersen LLP
in the audit and business consulting practice, with a primary focus in assisting
high technology companies.

     John B. Cartwright -- Director, August 8, 2001 to present.

     John B. Cartwright, age 57, has been the owner of John B. Cartwright &
Associates, a Certified Public Accounting firm, since 1990. From 1973 to 1990,
Mr. Cartwright was the managing partner or managing shareholder of Cartwright,
Matthews, Gonsoulin & Bradley, PC, Cartwright, Matthews & Gonsoulin, a
Partnership and Cartwright & Matthews, a Partnership. From 1969 to 1973 Mr.
Cartwright was an Audit Supervisor at Touche Ross & Co., (now Deloitte & Touche
LLP) in Houston. Mr. Cartwright is a member of the American Institute of
Certified Public Accountants, Texas Society of Certified Public Accountants,
Houston Chapter of the Texas Society of Certified Public Accountants, and the
past President of the Houston Chapter of the Community Associations Institute.

BOARD COMMITTEES

     The Board has no nominating committee or any committee performing similar
functions. All of the members of the Board participate in the consideration of
nominations for the election of directors. The Board has two standing
committees, which are an audit committee and a compensation committee.

     Audit Committee.  The audit committee is currently composed of Messrs.
Chadwick, Cartwright and Klausmeyer. The Board has determined that Mr.
Klausmeyer is qualified as an audit committee financial expert within the
meaning of SEC regulations and has accounting and related financial management
expertise

                                        71
<PAGE>

within the meaning of the listing standards of the American Stock Exchange. The
functions of the audit committee are set forth in a written charter adopted by
the Board and include:

     1. reviewing the accounting principles and practices we employ;

     2. meeting with our independent accountants to review their report on their
        annual examination of our accounts, their comments on our internal
        controls and the actions taken by management in response to such
        comments; and

     3. recommending annually to the Board the appointment of our independent
        accountants.

     Compensation Committee.  The compensation committee is currently composed
of Messrs. Chadwick, Klausmeyer and Cartwright. The functions of the
compensation committee include:

     1. reviewing and making recommendations regarding the compensation of our
        executive officers; and

     2. administrating and making awards under our compensation plans.

        EXECUTIVE OFFICERS

     Our executive officers serve until resignation or removal by the Board. Set
forth below is certain information about our Executive Officer, other than James
H. Long.

     Mark T. Hilz -- President and Chief Operating Officer of I-Sector
Corporation, December 23, 2003 to present; and President, Internetwork Experts,
Inc., July 2000 to present.

     Mark Hilz, age 45, was appointed as our President and Chief Operating
Officer in December 2003. Mr. Hilz' responsibilities include management of our
operations and the operations of our subsidiaries, INX, Stratasoft and Valerent.
Mr. Hilz has also served as the President of INX since its founding in July
2000. Mr. Hilz served as a director of our company from April 1999 until June
2001. From January 1999 to June 2000, Mr. Hilz was Vice President of Project
Development at Mathews Southwest, LLC, Inc., a real estate investment and
development firm headquartered in Dallas. From 1998 to July 2000, Mr. Hilz was
one of our directors and the Chief Executive Officer of Nichecast, Inc., a
privately held Internet services company.

     Patricia L. Winstead -- Vice President and Chief Accounting Officer,
November 2001 to present; Secretary, August 2002 to present.

     Patricia L. Winstead, age 62, has served as our Vice President and Chief
Accounting Officer since November 2001. From June 1999 to December 2003, she
served as our Controller. From December of 1999 through August of 2002, Ms.
Winstead also served as Assistant Secretary, and has served as Secretary since
August 2002. Ms. Winstead is responsible for the supervision of our accounting
and reporting functions. From July 1994 to May 1999, Ms. Winstead was the
Regional Controller of GE Capital ITS in Houston. Before that, Ms. Winstead
served as the controller in various companies and as an auditor with Deloitte &
Touche LLP. Ms. Winstead is a Certified Public Accountant.

     William R. Hennessy -- President, Stratasoft, Inc., September 1996 to
present.

     William R. Hennessy, age 45, has served as the President of Stratasoft
since January 1996. Mr. Hennessy's responsibilities include the general
management of the operations of Stratasoft.

     Frank Cano -- President, Valerent, Inc., November 2002 to present.

     Frank Cano, age 39, has served as the President of Valerent since November
2002. Mr. Cano's responsibilities include the general management of the
operations of Valerent. From May 2000 to May 2002, Mr. Cano served as a Division
President of Amherst Southwest, LLP. Prior to that, Mr. Cano held various
positions in our company including serving as the President of our former
computer products division, as our Senior Vice President, Branch Operations and
as our Branch Manager for the Dallas-Fort Worth office. Mr. Cano is the
brother-in-law of Mr. Long.

     Jeffrey A. Sylvester -- Controller, December 2003 to present.

                                        72
<PAGE>

     Jeffrey Sylvester, age 49, was appointed as our Controller in December 2003
and has responsibility for supervision of our accounting and reporting
functions. From March 2001 until September 2003, Mr. Sylvester was with Balli
Klockner, Inc., headquartered in Houston, Texas, where he served as Chief
Financial Officer for the North American operations. From September 2000 to
March 2001, Mr. Sylvester was the Corporate Controller of Henley Healthcare,
Inc., headquartered in Sugar Land, Texas. From 1995 to 2001 Mr. Sylvester served
in various accounting and management positions, including Controller, Regional
Controller and Division President for Master Graphics, Inc. headquartered in
Memphis, and its Houston division Technigrafiks. Mr. Sylvester is a Certified
Public Accountant.

     Timothy J. Grothues -- Treasurer, November, 2003 to present

     Timothy Grothues, age 55, has been our Treasurer since November 2003. From
November 2001 to November 2003, he was our Assistant Controller. His
responsibilities include the treasury and risk management functions. From
January 1998 to November 2001, Mr. Grothues was a private investor. For the
eighteen years prior to that, Mr. Grothues was the Chief Financial Officer of
Blackburn Group, Inc., a privately held industrial construction company
specializing in the petroleum and petrochemical industries.

     Paul Klotz -- Vice President and Chief Operating Officer of Internetwork
Experts, Inc., August 2000 to present.

     Paul Klotz, age 42, has served as the Vice President and Chief Operating
Officer of Internetwork Experts since August 2000. Mr. Klotz' responsibilities
include the operations management of Internetwork Experts. From 1997 to July
2000, Mr. Klotz was the Vice President of Marketing of PC Service Source.

FAMILY RELATIONSHIPS

     James H. Long and Frank Cano are brothers-in-law. There are no other family
relationships among any of our directors and executive officers.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires executive officers and directors
and persons who own more than ten percent of our common stock to file reports of
ownership with the SEC and the American Stock Exchange. Based solely on our
review of copies of forms received by us, or written representations from
certain reporting persons, we believe that during the fiscal year ended December
31, 2003, all filing requirements applicable to our officers, directors and ten
percent stockholders were fulfilled, except for the delinquent filings noted
below.

<Table>
<Caption>
                                                               NUMBER OF      NUMBER OF
NAME OF REPORTING PERSON                                      LATE REPORTS   TRANSACTIONS
------------------------                                      ------------   ------------
<S>                                                           <C>            <C>
James H. Long...............................................       1              1
William R. Hennessy.........................................       2              2
</Table>

CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS

     We have adopted a code of ethics that applies to the Chief Executive
Officer, the Chief Financial Officer, the 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 on our Internet website at
Internet address: http://www.I-Sector.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, the Chief Financial
Officer or the Controller by posting such information on our website at the
above address.

                                        73
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

     The following table sets forth information about compensation we paid or
awarded for services rendered during the fiscal years ended December 31, 2003,
2002 and 2001 to our (i) Chief Executive Officer and (ii) the three most highly
compensated executive officers who were serving as executive officers at the end
of 2003 and whose total annual salary and bonus exceeded $100,000 (the "Named
Executive Officers").

<Table>
<Caption>
                                                                                       LONG-TERM
                                                                                     COMPENSATION
                                                                                 ---------------------
                                              ANNUAL COMPENSATION                       AWARDS
                                 ---------------------------------------------   ---------------------
                                                               OTHER ANNUAL      SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION      YEAR    SALARY    BONUS    COMPENSATION($)(1)        OPTIONS(2)
---------------------------      ----   --------   ------   ------------------   ---------------------
<S>                              <C>    <C>        <C>      <C>                  <C>
James H. Long..................  2003   $121,125       --            --                     --
  Chairman, Chief Executive      2002    127,690       --            --                     --
  Officer and Chief Financial    2001    133,315       --            --                     --
  Officer
Mark T. Hilz...................  2003    200,000   55,120            --                 32,000
  President and Chief Operating  2002    185,190       --            --                     --
  Officer                        2001    185,190       --            --                     --
William R. Hennessy............  2003    125,000   19,063            --                 80,000
  President, Stratasoft, Inc.    2002    133,167   59,028            --                     --
                                 2001     91,162   60,966            --                     --
Paul Klotz.....................  2003    150,000   41,370            --                 25,000
  Vice President,                2002    144,252    7,500            --                     --
  Internetwork Experts, Inc.     2001    144,854       --            --                     --
</Table>

---------------

(1) Amounts exclude the value of perquisites and personal benefits because the
    aggregate amount thereof did not exceed the lesser of $50,000 or 10% of the
    Named Executive Officer's total annual salary and bonus.

(2) See "-- INX Stock Options" for information regarding grants of INX options
    to the Named Executive Officers.

I-SECTOR STOCK OPTIONS

     We have issued stock options to purchase our common stock to our officers,
directors and employees. We have also issued stock options to purchase the
common stock of our subsidiary INX to officers, directors and employees of INX.
The INX stock option plan and the options issued under are discussed below under
the caption "-- INX Stock Options."

     Options to purchase shares of our common stock may be granted to executive
officers and other employees under our 1996 Incentive Stock Option Plan (the
"1996 Incentive Plan") and the I-Sector Corp. Incentive Stock Plan (the
"I-Sector Incentive Plan"). As of December 31, 2003, 114,448 shares were
reserved for issuance upon exercise of outstanding options under the 1996
Incentive Plan and 4,170 were reserved and remained available for future grants
pursuant to the I-Sector Incentive Plan. No options under the plans were granted
to officers or other employees during 2001 and 2002. During 2003, options to
purchase 456,760 shares were granted to officers, consultants and other
employees under the Incentive Stock Plan.

                                        74
<PAGE>

     Options Granted in Last Fiscal Year.  The following table sets forth
information regarding stock options we granted to our Named Executive Officers
during the fiscal year ended December 31, 2003. We did not grant any stock
appreciation rights in the fiscal year ended December 31, 2003.

<Table>
<Caption>
                                                                                       POTENTIAL        POTENTIAL
                                                                                       REALIZABLE       REALIZABLE
                                NUMBER OF                                               VALUE AT         VALUE AT
                                SHARES OF     PERCENT OF                             ASSUMED ANNUAL   ASSUMED ANNUAL
                                  COMMON        TOTAL                                RATE OF STOCK    RATE OF STOCK
                                  STOCK        OPTIONS      EXERCISE                     PRICE            PRICE
                                UNDERLYING    GRANTED TO     OR BASE                 APPRECIATIONS    APPRECIATIONS
                                 OPTIONS     EMPLOYEES IN     PRICE     EXPIRATION     FOR OPTION       FOR OPTION
NAME                             GRANTED     FISCAL YEAR    ($/SHARE)      DATE        TERM 5%(3)      TERM 10%(3)
----                            ----------   ------------   ---------   ----------   --------------   --------------
<S>                             <C>          <C>            <C>         <C>          <C>              <C>
William R. Hennessy(1)........    50,000        15.4%         $2.70     09/08/2013      $219,901         $350,155
William R. Hennessy(1)........    30,000         9.3%          4.14     10/03/2013       202,309          322,143
Mark T. Hilz(2)...............    32,000         9.9%          4.14     10/03/2013       215,796          343,619
Paul Klotz(2).................    25,000         7.7%          4.14     10/03/2013       168,591          268,452
</Table>

---------------

(1) 100% of the options vested as of January 1, 2004, but may not be exercised
    until six months from the date of grant. The options expire ten years from
    the date of grant. Vesting was contingent upon continued employment with us.
    The option is not assignable or transferable otherwise than by will or by
    the laws of descent and distribution.

(2) Options shall vest cumulatively as follows: 50% of the shares shall vest on
    April 3, 2004 and 50% of the shares shall vest on October 3, 2004. Vesting
    is contingent upon continued employment with us, or one of our subsidiaries.
    The options are exercisable at any time after six months from the date of
    grant, but expire ten years from such date. The option is not assignable or
    transferable otherwise than by will or by the laws of descent and
    distribution.

(3) The dollar amounts under these columns are the result of calculations at the
    5% and 10% compounded annual rates set by the Securities and Exchange
    Commission, and therefore are not intended to forecast future appreciation,
    if any, in the price of the common stock. The potential realizable values
    illustrated at the 5% and 10% compounded annual rates of appreciation assume
    that the price of the common stock increases $5.89 and $9.37 per share,
    respectively, over the 10-year term of the options.

AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES

     The following table sets forth information regarding option exercises
during the fiscal year ended December 31, 2003, as well as the number and total
of in-the-money options at December 31, 2003 for each of the Named Executive
Officers:

<Table>
<Caption>
                                                          NUMBER OF SECURITIES
                                                         UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
                                                               OPTIONS AT              IN-THE MONEY OPTIONS AT
                                SHARES                      DECEMBER 31, 2003             DECEMBER 31, 2003
                              ACQUIRED ON    VALUE     ---------------------------   ---------------------------
NAME                           EXERCISE     REALIZED   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                          -----------   --------   -----------   -------------   -----------   -------------
<S>                           <C>           <C>        <C>           <C>             <C>           <C>
James H. Long...............        --      $     --      2,400             --       $   37,632      $     --
William R. Hennessy.........        --            --     68,000         30,000        1,066,240       470,400
Mark T. Hilz................    15,000       109,050         --         32,000               --       501,760
Paul Klotz..................        --            --         --         25,000               --       392,000
</Table>

INX STOCK OPTIONS

     The Internetwork Experts Incentive Plan (the "INX Plan") was adopted
effective July 1, 2000, when INX was formed. The INX Plan was amended, effective
December 31, 2003, so that no further grants may be made under this plan in the
future. We have determined that because INX is a large portion of our total
business, all future stock-based compensation for INX officers and employees
will be made under I-Sector option plans rather than under the INX Plan.

                                        75
<PAGE>

     Under the INX Plan and related option grant agreements, options typically
vest ratably over three to five years. In December 2003, we amended option
agreements with INX's two most senior executives, Mark Hilz and Paul Klotz, to
change the vesting under their INX options to a fixed five-year vesting schedule
from one that was determined based on the percentage of attainment of predefined
financial goals by INX. Liquidity events include: (a) a sale of substantially
all of INX's common stock to a non-related party; (b) a sale of substantially
all of INX's assets; or (c) a sale of all of INX's stock to the general public
in which the general public owns at least 20% of the total outstanding INX
common stock. Any unvested INX stock options may vest immediately upon the
occurrence of a liquidity event. The INX options expire ten years after the
grant date if they are not exercised. The INX stock option grants are subject to
dilution if, and when, we purchase additional shares of INX stock.

     As of December 31, 2001, 2002 and 2003 options for 1,388,500, 5,444,499 and
9,490,692 shares, respectively, of INX stock were granted and outstanding under
the INX Plan. The number of shares of INX stock underlying vested INX options
was 3,777,666 shares as of December 31, 2003. On the date of grant, the INX
options had an exercise price equal to or greater than the fair market value of
the underlying INX stock. The exercise price of the INX options ranges from $.01
per share to $0.25 per share. For 2000, 2001, 2002 and 2003, the weighted
average exercise price of the outstanding INX options was $0.07, $0.07, $0.13
and $0.17, respectively. A portion of the options granted under the INX Plan
will become exercisable only upon a liquidity event involving INX, or during a
thirty-day period prior to expiration of the option.

     During 2000, 2002 and 2003, options under the INX Plan were granted for
900,000, 4,100,000 and 1,675,000 shares of INX stock, respectively, to Named
Executive Officers. The following table sets forth for each of those years
certain information with respect to the INX options issued to the Named
Executive Officers. INX has not granted any restricted stock or stock
appreciation rights under the INX Plan.

<Table>
<Caption>
                                                                                            POTENTIAL          POTENTIAL
                                   NUMBER OF                                             REALIZABLE VALUE   REALIZABLE VALUE
                                   SHARES OF      PERCENT OF                                AT ASSUMED         AT ASSUMED
                                  COMMON STOCK      TOTAL                                 ANNUAL RATE OF     ANNUAL RATE OF
                                   UNDERLYING      OPTIONS      EXERCISE                      PRICE              PRICE
                                    OPTIONS       GRANTED TO     OR BASE                  APPRECIATIONS      APPRECIATIONS
NAME AND                           GRANTED IN    EMPLOYEES IN     PRICE     EXPIRATION      FOR OPTION         FOR OPTION
PRINCIPAL POSITION         YEAR     YEAR(2)      FISCAL YEAR    ($/SHARE)      DATE         TERM 5%(1)        TERM 10%(1)
------------------         ----   ------------   ------------   ---------   ----------   ----------------   ----------------
<S>                        <C>    <C>            <C>            <C>         <C>          <C>                <C>
James H. Long,...........  2003    1,200,000          29.7%       $0.25     09/01/2013       $488,688          $  778,123
  Chairman, Chief          2002           --            --           --             --             --                  --
  Executive Officer        2001           --            --           --             --             --                  --
  and Chief Financial      2000           --            --           --             --             --                  --
  Office
Mark T. Hilz,............  2003      300,000           7.4%        0.25     09/01/2013        122,167             194,531
  President and Chief      2002    3,400,000          82.5%        0.15     03/01/2012        872,273           1,455,090
  Operating Officer        2001           --            --           --             --             --                  --
                           2000      700,000          54.9%        0.01     07/01/2010         11,402              18,156
Paul Klotz,..............  2003      175,000           4.3%        0.25     11/10/2013         57,011              90,781
  Vice President,          2002      700,000          17.0%        0.15     03/01/2012        171,034             272,343
  Internetwork             2001           --            --           --             --             --                  --
  Exports, Inc.            2000      200,000          15.7%        0.01     08/14/2010          3,592               5,992
All Other Employees......  2003    2,365,192          58.6%        0.20     11/10/2013        770,530           1,226,940
                           2002       23,000           0.5%        0.20     12/09/2012          7,493              11,931
                           2001       52,500         100.0%        0.20     11/05/2011         17,103              27,234
                           2000      375,000          29.4%        0.20     10/30/2010        122,167             194,531
</Table>

---------------

(1) During the quarter ended September 30, 2003, INX granted options to purchase
    1,200,000 shares to Mr. Long and 300,000 shares to Mr. Hilz for their
    personal limited guarantee of our credit facility. In February 2004, Mr.
    Long voluntarily cancelled his 1,200,000 share option in exchange for the
    issuance by INX to I-Sector of the I-Sector Warrant for the same number of
    shares, at the same exercise price. Mr. Hilz's option grant for 300,000
    shares related to the personal limited guarantee is fully vested and may be
    exercised at any time after six months from the grant date until expiration.

                                        76
<PAGE>

(2) There is currently no trading market for the common stock of INX. The dollar
    amounts under these columns are the result of calculations at the 5% and 10%
    compounded annual rates and are not intended to forecast future
    appreciation, if any, in the value of the INX common stock. The potential
    realizable values illustrated at the 5% and 10% compounded annual rates of
    appreciation are based on the exercise price of INX options on their
    respective dates of grant, over the 10-year term of the options.

EMPLOYMENT AGREEMENTS

     We have entered into employment agreements with each of the Named Executive
Officers (collectively, the "Executive Employment Agreements"). Under the terms
of the respective agreements, Messrs. Long, Hennessy, Hilz and Klotz are
entitled to an annual base salary of $150,000, $125,000, $200,000 and $150,000
respectively, plus other bonuses, the amounts and payment of which are within
the discretion of our compensation committee. Beginning in the quarter ended
June 30, 2001, Messrs. Long, Hilz and Klotz took voluntarily pay reductions as
compared to the base salary set in their respective employment agreements. The
voluntary pay reductions were terminated for Messrs. Hilz and Klotz after
certain financial performance goals were attained. Mr. Long has extended his
voluntary pay reduction through the current pay period. The agreements with
Messrs. Hilz, Cano, Hennessy and Klutz also include special bonus plan
provisions that may be changed or eliminated at our sole discretion. These four
executives each currently have an opportunity to receive two bonuses on a
quarterly basis, which two bonuses are tied to each of gross profits per share
compared to plan and earnings per share compared to plan for the pertinent
subsidiary. The bonus amounts that may be earned range from zero to as much as
70% of their quarterly salary based upon performance attained. These bonus
arrangements may be modified at any time at the sole discretion of our
compensation committee. All Executive Employment Agreements may be terminated by
us or by the officer named therein at any time by giving proper notice. The
Executive Employment Agreements generally provide that the executive officer
will not, for the term of his employment and for a period of either twelve or
eighteen months, whichever the case may be, following the end of such executive
officer's employment with us, compete with us, disclose any of our confidential
information, solicit any of our employees or customers or otherwise interfere
with the our business relations. The non-compete provision with Mr. Long does
not apply if we elect to terminate Mr. Long's employment without cause; except
that, we may elect to continue the non-compete restrictions in that event by
paying Mr. Long a severance amount during the restricted period. The severance
amount payable to Mr. Long is based upon the greater of 75% of his salary at the
time of termination or 75% of his average monthly salary and bonus, calculated
based on his compensation during the 12 months period prior to his termination.

DIRECTORS' COMPENSATION

     Our directors do not receive any additional compensation for their services
as a director. We pay each independent director $1,000 for each board meeting
attended and $500, except for the Chairperson of the audit committee who is paid
$1,000, for audit committee meetings attended, along with reasonable out-of-
pocket expenses incurred by independent directors to attend board and committee
meetings. Independent directors are also entitled to receive options pursuant to
the Director Plan.

                                        77
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN MANAGEMENT OF I-SECTOR COMMON STOCK

     The following table sets forth, as of March 8, 2004 the number of shares of
common stock owned by each Director, each Named Executive Officer, as defined in
"Item 11. Executive Compensation," and all Directors and Executive Officers as a
group.

<Table>
<Caption>
NAME OF                                                    AMOUNT AND NATURE OF     PERCENT
BENEFICIAL OWNER                                          BENEFICIAL OWNERSHIP(1)   OF CLASS
----------------                                          -----------------------   --------
<S>                                                       <C>                       <C>
James H. Long...........................................         2,000,030(2)         50.6%
Donald R. Chadwick......................................            44,486(3)          1.1%
Kevin Klausmeyer........................................            11,250(4)            *
William R. Hennessy.....................................            85,000(5)          2.1%
John B. Cartwright......................................            15,200(6)            *
All officers and directors..............................         2,318,556(7)         58.7%
</Table>

---------------

(1) Beneficially owned shares include shares over which the named person
    exercises either sole or shared voting power or sole or shared investment
    power. It also includes shares the named person has the right to acquire
    within 60 days by the exercise of any right or option. Unless otherwise
    noted, all shares are owned of record and beneficially by the name person.

(2) Includes 2,400 shares that may be acquired upon exercise of currently
    exercisable options.

(3) Includes 12,686 shares which may be acquired upon exercise of currently
    exercisable options and 300 shares owned by his minor children for which Mr.
    Chadwick disclaims beneficial ownership.

(4) Includes 11,250 shares that may be acquired upon exercise of currently
    exercisable options.

(5) Includes 68,000 shares that may be acquired upon exercise of currently
    exercisable options and 2,000 shares owned by his children, of which one is
    a minor, for which Mr. Hennessy disclaims beneficial ownership.

(6) Includes 15,000 shares which may be acquired upon exercise of currently
    exercisable options.

(7) Includes 190,936 shares which may be acquired upon exercise of currently
    exercisable options.

SECURITY OWNERSHIP OF CERTAIN MANAGEMENT OF INX COMMON STOCK

     Currently, our company holds 100% of the issued and outstanding shares of
common stock of INX. The following table sets forth information regarding the
beneficial ownership of the common stock of INX, as of March 8, 2004, by each of
our Directors, each Named Executive Officer, as defined in "Item 11. Executive
Compensation," and all Directors and Executive Officers as a group. Except as
otherwise indicated, the persons listed below have sole voting and investment
power with respect to all of shares of common stock of INX owned by them.

<Table>
<Caption>
NAME OF                                                    AMOUNT AND NATURE OF     PERCENT
BENEFICIAL OWNER                                          BENEFICIAL OWNERSHIP(1)   OF CLASS
----------------                                          -----------------------   --------
<S>                                                       <C>                       <C>
Mark T. Hilz............................................         2,080,000(2)          6.3%
Paul Klotz..............................................           400,000(3)          1.2%
All officers and directors..............................         3,805,000(4)         11.5%
</Table>

---------------

(1) Beneficially owned shares include shares over which the named person
    exercises either sole or shared voting power or sole or shared investment
    power. It also includes shares the named person has the right to acquire
    within 60 days by the exercise of any right or option. Unless otherwise
    noted, all shares are owned of record and beneficially by the name person.

 (2) Includes 1,400,000 shares that may be acquired upon exercise of currently
     exercisable options. This amount does not include an additional 3,000,000
     shares of the common stock of INX which may vest in the future.

                                        78
<PAGE>

 (3) Includes 260,000 shares that may be acquired upon exercise of currently
     exercisable options. This amount does not include an additional 640,000
     shares of the common stock of INX which may vest in the future.

 (4) Includes 2,985,000 shares which may be acquired upon exercise of currently
     exercisable options. This amount does not include an additional 3,640,000
     shares of the common stock of INX which may vest in the future.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

     The table presented below contains certain information about our equity
compensation plans, as of December 31, 2003, which consists of the 1996
Incentive Plan, the Director Plan and the I-Sector Incentive Plan. All of our
equity compensation plans have been previously approved by its stockholders.

<Table>
<Caption>
                                                                                        NUMBER OF SECURITIES
                                                                                         REMAINING AVAILABLE
                                                                                         FOR FUTURE ISSUANCE
                                             NUMBER OF SECURITIES   WEIGHTED AVERAGE        UNDER EQUITY
                                              TO BE ISSUED UPON     EXERCISE PRICE OF    COMPENSATION PLANS
                                                 EXERCISE OF           OUTSTANDING      (EXCLUDING SECURITIES
                                             OUTSTANDING OPTIONS,   OPTIONS, WARRANTS       REFLECTED IN
                                             WARRANTS AND RIGHTS       AND RIGHTS            COLUMN(A))
PLAN CATEGORY(1)                                     (A)                   (B)                   (C)
----------------                             --------------------   -----------------   ---------------------
<S>                                          <C>                    <C>                 <C>
Equity compensation plans approved by
  security holders.........................        424,898                $1.74                128,658
Equity compensation plans not approved by
  security holders.........................           None                 None                   None
</Table>

---------------

(1) Does not include the INX Incentive Plan. See "Item 11 -- Executive
    Compensation," and Notes to Consolidated Financial Statements -- Note 14.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     We lease office space from Allstar Equities, Inc. a Texas corporation
("Equities"), which is wholly-owned by James H. Long, our Chairman, President
and Chief Executive Officer. On December 1, 1999, Equities purchased the
building where our principal office is located and we executed a direct lease
with Equities with an expiration date of December 31, 2004. In conjunction with
Equities obtaining new financing on the building, we executed a new lease with
Equities on February 1, 2002 with an expiration date of January 31, 2007. Under
the new lease, our rental rate was reduced from $37,692 per month to $37,192 per
month.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

     On June 5, 2003, we dismissed Deloitte & Touche LLP ("Deloitte") as our
independent audit firm. We engaged Grant Thornton effective June 5, 2003. Our
audit committee approved the decision to change accountants.

     The following information sets forth the aggregate fees billed or to be
billed by Grant Thornton and Deloitte for services performed for the fiscal year
2003 and fees billed by Deloitte for the fiscal year 2002. The audit committee
has reviewed the audit and non-audit fees that we paid to the independent
accountants for purposes of considering whether such fees are compatible with
maintaining the auditor's independence. Under the SEC's new rule on auditor
independence, which is effective for the first fiscal years ending after
December 15, 2003 and was adopted as a result of implementing the Sarbanes-Oxley
Act of 2002, fees would be categorized as follows:

     Audit Fees.  Estimated fees billed for services rendered by Grant Thornton
for the audit of our financial statements included in our annual report and the
reviews of financial statements included in our quarterly reports were $225,000
for 2003. Fees billed for services rendered by Deloitte for the audit of the
financial

                                        79
<PAGE>

statements included in our annual report and the reviews of financial statements
included in our quarterly reports were $144,799 for 2002 and $66,885 in 2003.

     Audit-Related Fees.  We did not retain Grant Thornton or Deloitte for any
audit related services in 2002 and 2003 and there were no fees for audit-related
services during those years.

     Tax Fees.  We did not retain Grant Thornton for any tax services in 2002
and 2003 and there were no fees from Grant Thornton during those years.
Aggregate fees billed for tax services related to the preparation of our annual
corporate tax returns rendered by Deloitte were $16,500 during 2002 and $14,300
during 2003.

     All Other Fees.  Aggregate fees billed for all other services rendered by
Grant Thornton to us consisted of $825 in 2003. Except as disclosed above,
Deloitte did not render any other services to us during 2002 and 2003. These
services were related to research and discussions relating to the accounting for
certain employee benefit matters.

     Our audit committee must now pre-approve all audit and non-audit services
that we receive from our independent accountants. This pre-approval authority
may be delegated to a single member of the audit committee and then reviewed by
the entire audit committee at the committee's next meeting. Approvals of
non-audit services will be publicly disclosed in our periodic reports filed with
the SEC.

                                    PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a)(1) Consolidated Financial Statements -- See Index to Consolidated
Financial Statements on Page 21.

     (2) Consolidated Financial Statements Schedule II Valuation and Qualifying
Accounts filed herewith as Exhibit 99.2.

     (3) Exhibits: See index to exhibit table below.

     (b) Form 8-K was filed December 29, 2003 to report that I-Sector had been
approved for listing on the American Stock Exchange.

     Form 8-K was filed November 12, 2003 to report the results of operations
for the quarter ending September 30, 2003.

                                        80
<PAGE>

                                   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, March 8, 2004.

                                          I-SECTOR CORPORATION
                                            (Registrant)

                                          By:       /s/ JAMES H. LONG
                                            ------------------------------------
                                                       James H. Long
                                                  Chief 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.

<Table>
<Caption>
                    SIGNATURE                                    CAPACITY                       DATES
                    ---------                                    --------                       -----
<S>     <C>                                          <C>                                    <C>

                /s/ JAMES H. LONG                     Chief Executive Officer, Chief        March 8, 2004
 ------------------------------------------------    Financial Officer and Chairman of
                  James H. Long                           the Board of Directors


             /s/ PATRICIA L. WINSTEAD                    Vice President and Chief           March 8, 2004
 ------------------------------------------------    Accounting Officer and Secretary
               Patricia L. Winstead


              /s/ DONALD R. CHADWICK                             Director                   March 8, 2004
 ------------------------------------------------
                Donald R. Chadwick


             /s/ KEVIN M. KLAUSMEYER                             Director                   March 8, 2004
 ------------------------------------------------
               Kevin M. Klausmeyer


              /s/ JOHN B. CARTWRIGHT                             Director                   March 8, 2004
 ------------------------------------------------
                John B. Cartwright
</Table>

                                        81
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
  NO.                    DESCRIPTION                  FILED HEREWITH OR INCORPORATED BY REFERENCE FROM:
-------                  -----------                  -------------------------------------------------
<C>       <S>                                         <C>
  3.1     Bylaws of the Company.                      Exhibit 3.1 to Form S-1, Registration No.
                                                      333-09789, filed August 8, 1996
  3.2     Certificate of Incorporation of the         Exhibit 3.2 to Amendment 1 to Form S-1,
          Company.                                    Registration No. 333-09789, filed August 8, 1996
  3.3     Certificate of Amendment to Certificate     Exhibit 3.4 to Amendment 5 to Form S-1,
          of Incorporation of Allstar Systems,        Registration No. 333-09789, filed August 8, 1996
          Inc., dated June 24, 1997.
  3.4     Certificate of Amendment to Certificate     Exhibit 3.3 to Form 8-A, Registration No.
          of Incorporation of Allstar Systems,        001-31949, filed December 29, 2003
          Inc., dated March 5, 1999.
  3.5     Certificate of Amendment to Certificate     Exhibit 3.4 to Form 8-A, Registration No.
          of Incorporation of Allstar Systems, Inc.   001-31949, filed December 29, 2003
          dated July 10, 2000.
  4.1     Specimen Common Stock Certificate.          Exhibit 4.1 to Amendment 2 to Form S-1,
                                                      Registration No. 333-09789, filed August 8, 1996
 10.1     Form of Employment Agreement by and         Exhibit 10.5 to Amendment 1 to Form S-1,
          between the Company and certain members     Registration No. 333-09789, filed August 8, 1996
          of management.
 10.2     Employment Agreement by and between         Exhibit 10.6 to Form S-1, Registration No.
          Stratasoft, Inc. and William R. Hennessy,   333-09789, filed August 8, 1996
          dated September 7, 1995.
 10.3     Employment Agreement by and between All-    Filed herewith
          star Systems, Inc. and James H. Long,
          dated August 15, 1996.
 10.4     Systems Integrator Agreement by and         Filed herewith
          between Cisco Systems, Inc. and
          Internetwork Experts, Inc., dated
          November 13, 2000.
 10.5     Amendment One, dated January 28, 2002, to   Filed herewith
          Systems Integrator Agreement by and
          between Cisco Systems, Inc. and
          Internetwork Experts, Inc., dated
          November 13, 2000.
 10.6     Amendment Two, dated November 21, 2002,     Filed herewith
          to Systems Integrator Agreement by and
          between Cisco Systems, Inc. and
          Internetwork Experts, Inc., dated
          November 13, 2000.
 10.7     Amendment Three, dated January 20, 2003,    Filed herewith
          to Systems Integrator Agreement by and
          between Cisco Systems, Inc. and
          Internetwork Experts, Inc., dated
          November 13, 2000.
 10.8     Amendment Four, dated January 16, 2004,     Filed herewith
          to Systems Integrator Agreement by and
          between Cisco Systems, Inc. and
          Internetwork Expert's, Inc, dated
          November 13, 2000
 10.9     Amended & Restated Allstar Systems, Inc.    Filed herewith
          1996 Incentive Stock Plan, dated
          effective July 1, 1997.
 10.10    Amended & Restated I-Sector Corp. Stock     Filed herewith
          Incentive Plan, dated effective July 28,
          2003.
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT
  NO.                    DESCRIPTION                  FILED HEREWITH OR INCORPORATED BY REFERENCE FROM:
-------                  -----------                  -------------------------------------------------
<C>       <S>                                         <C>
 10.11    Amended & Restated Internetwork Ex-         Filed herewith
          perts, Inc., Stock Incentive Plan dated
          effective August 1, 2003.
 10.12    Lease Agreement by and between Allstar      Exhibit 10.32 to Form 10-K, filed March 28, 2002
          Equities, Inc. and I-Sector Corporation,
          dated February 1, 2002.
 10.13    Asset Purchase Agreement between Amherst    Exhibit 2.1 to Form 8-K, filed March 22, 2000
          Computer Products Southwest, L.P.,
          Amherst Technologies, L.L.C. and Allstar
          Systems, Inc., dated March 16, 2000.
 10.14    Asset Purchase Agreement, by and between    Filed herewith.
          Digital Precision, Inc. and Internetwork
          Experts, Inc., dated April 4, 2003.
 10.15    Asset Purchase Agreement by and between     Exhibit 10.36 to Form 10-K, filed March 24, 2001
          Internetworking Sciences Corporation and
          Internetwork Experts, Inc. dated October
          27, 2000.
 10.16    Lease Agreement by and between Whitehall-   Exhibit 10.37 to Form 10-K, filed March 24, 2001
          Midway Park North, Ltd. and Allstar Sys-
          tems, Inc. dated July 31, 2000.
 10.17    Dealer Loan and Security Agreement by and   Exhibit 10.38 to Form 10-K, filed March 28, 2002
          between Textron Financial Corporation and
          I-Sector Corporation, dated January 31,
          2002.
 10.18    Limited Fraud Guarantee, by and between     Filed herewith.
          James H. Long and Textron Financial
          Corporation, dated September 3, 2003.
 10.19    Loan and Security Agreement by and          Filed herewith
          between Textron Financial Corporation and
          Valerent, Inc., Internetwork Experts,
          Inc., I-Sector Corporation, ISECOLDSUB,
          Inc., and Stratasoft, Inc., dated
          February 18, 2004.
 10.20    Schedule to Loan and Security Agreement     Filed herewith
          by and between Textron Financial
          Corporation and Valerent, Inc.,
          Internetwork Experts, Inc., I-Sector
          Corporation, ISECOLDSUB, Inc., and
          Stratasoft, Inc., dated February 18,
          2004.
 10.21    Reaffirmation of Limited Fraud Guaranty     Filed herewith
          by and between Textron Financial
          Corporation and James H. Long dated
          February 18, 2004.
 10.22    Warrant to Purchase 1,200,000 shares of     Filed herewith
          common stock of Internetwork Experts,
          Inc., by and between Internetwork
          Experts, Inc. and I-Sector Corporation,
          dated February 26, 2004.
 21.1     List of Subsidiaries of the Company.        Exhibit 21.1 to Form 10-K, filed March 31, 2003
 23.1     Consent of Grant Thornton LLP               Filed herewith
 23.2     Consent of Deloitte & Touche LLP            Filed herewith
 31.1     Rule 13a-14(a)/15d-14(a) Certification of   Filed herewith
          Chief Executive Officer and Chief
          Financial Officer.
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT
  NO.                    DESCRIPTION                  FILED HEREWITH OR INCORPORATED BY REFERENCE FROM:
-------                  -----------                  -------------------------------------------------
<C>       <S>                                         <C>
 32.1     Section 1350 Certification of Chief         Filed herewith
          Executive Officer and Chief Financial
          Officer.
 99.1     Report of Independent Certified Public      Filed herewith
          Accountants on Schedule II
 99.2     Schedule II -- Valuation and Qualifying     Filed herewith
          Accounts
</Table>