ITEX (ITEX) 10-Q 2009 Q1 Quarterly report

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.  20549

FORM 10-Q

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended April 30, 2009.

OR

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 0-18275

ITEX CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	93-0922994
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

3326 160th Ave SE, Suite 100, Bellevue, WA 98008-6418

(Address of principal executive offices)

(425) 463-4000

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yesx No¨

Indicate by check mark whether the registrant  has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes¨ No¨

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

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

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

As of April 30, 2009, we had 17,856,248 shares of common stock outstanding.

ITEX CORPORATION

FORM 10-Q

For The Quarterly Period Ended April 30, 2009

INDEX

		Page(s)
PART  I.	Financial Information
ITEM 1.	Financial Statements
	Consolidated Balance Sheets as of April 30, 2009 (unaudited) and July 31, 2008	1
	Consolidated Statements of Income for the Three and Nine Months Ended April 30, 2009 and 2008 (unaudited)	2
	Consolidated Statement of Stockholders’ Equity for the Nine Months Ended April 30, 2009 (unaudited)	3
	Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2009 and 2008 (unaudited)	4
	Notes to Consolidated Financial Statements (unaudited)	5
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 4T.	Controls and Procedures	39
PART II.	Other Information	39
ITEM 1.	Legal Proceedings	39
ITEM 6.	Exhibits	39
	Signatures	39

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

ITEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

	April 30, 2009			July 31, 2008
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,194		$	1,061
Accounts receivable, net of allowance of $294 and $361		1,245			1,331
Prepaid expenses		105			238
Loans and advances		68			67
Notes receivable - corporate office sales		241			204
Advertising credits		507			-
Deferred tax asset		707			819
Other current assets		13			13
Total current assets		4,080			3,733
Property and equipment, net of accumulated depreciation of $240 and $151		270			176
Intangible assets, net of amortization of $1,545 and $1,078		1,729			2,093
Notes receivable - corporate office sales, net of current portion		689			886
Deferred tax asset, net of current portion		5,990			6,061
Other long-term assets		90			32
Goodwill		3,318			3,168
Total assets	$	16,166		$	16,149
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	86		$	215
Commissions payable to brokers		-			666
Accrued commissions to brokers		1,320			713
Accrued expenses		482			445
Advance payments		120			117
Deferred revenue		126			75
Current portion of notes payable		-			591
Total current liabilities		2,134			2,822
Long-term liabilities:
Other long-term liabilities		276			8
Total liabilities		2,410			2,830
Commitments and contingencies
Stockholders’ equity:
Common stock, $.01 par value; 50,000 shares authorized; 17,856 and 17,816 shares issued and outstanding, respectively		179			178
Additional paid-in capital		28,941			28,908
Accumulated deficit		(15,364	)		(15,767	)
Total stockholders' equity		13,756			13,319
Total liabilities and stockholders’ equity	$	16,166		$	16,149

See accompanying notes to consolidated financial statements.

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ITEX CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

 (In thousands, except per share amounts)

	Quarter ended April 30,				Nine months ended April 30,
	2009		2008		2009		2008
	(unaudited)				(unaudited)
Revenue:
Marketplace revenue and other revenue	$	3,981	$	3,871	$	12,245	$	11,899
Costs and expenses:
Cost of marketplace revenue		2,530		2,504		7,831		7,758
Corporate salaries, wages and employee benefits		457		408		1,422		1,193
Selling, general and administrative		458		388		1,825		1,334
Depreciation and amortization		192		163		566		452
		3,637		3,463		11,644		10,737
��
Income from operations		344		408		601		1,162
Interest income, net		12		5		17		10
Income before income taxes		356		413		618		1,172
Provision for income taxes		132		183		215		473
Net income	$	224	$	230	$	403	$	699
Net income per common share:
Basic	$	0.01	$	0.01	$	0.02	$	0.04
Diluted	$	0.01	$	0.01	$	0.02	$	0.04
Weighted average shares outstanding
Basic		17,791		17,655		17,755		17,629
Diluted		17,901		17,884		17,904		17,838

See accompanying notes to consolidated financial statements.

2

ITEX CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED APRIL 30, 2009

(In thousands)

(Unaudited)

	Common Stock					Additional Paid-in			Accumulated
	Shares			Amount		Capital			Deficit			Total
Balance at July 31, 2008		17,816		$	178	$	28,908		$	(15,767	)	$	13,319
Common stock awards issued		90			1		(1	)		-			-
Common stock repurchased and retired		(50	)		-		(30	)		-			(30	)
Stock-based compensation expense for shares vesting in the nine months ended April 30, 2009		-			-		64			-			64
Net income		-			-		-			403			403
Balance at April 30, 2009		17,856		$	179	$	28,941		$	(15,364	)	$	13,756

See accompanying notes to consolidated financial statements.

3

ITEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (In thousands)

	Nine month ended April 30,
	2009			2008
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	403		$	699
Items to reconcile to net cash provided by operations:
Depreciation and amortization		566			452
Stock based compensation		140			120
Change in deferred income taxes		183			377
Loss on disposal of equipment		1			2
Changes in operating assets and liabilities:
Accounts receivable, net		157			217
Prepaid expenses		16			(107	)
Advances to brokers, net of repayments		(12	)		-
Notes receivable from customers, net of repayments		(12	)		7
Other current assets		31			2
Accounts payable		(238	)		46
Commissions payable to brokers		(666	)		-
Accrued commissions to brokers		607			(79	)
Accrued expenses		37			96
Deferred revenue		325			(33	)
Long-term liabilities		(6	)		(8	)
Advance payments		3			(4	)
Other		-			(17	)
Net cash provided by operating activities		1,535			1,770
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions		(68	)		(2,390	)
Payment of contingent consideration for business acquisitions		(150	)		(113	)
Business sales		-			50
Purchase of property and equipment		(108	)		(73	)
Payments received from notes receivable - corporate office sales		160			147
Payments received from loans		23			47
Purchase of investment		-			(30	)
Net cash used in investing activities		(143	)		(2,362	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on third party indebtedness		(1,229	)		(406	)
Repurchase of common stock		(30	)		(162	)
Net cash used in financing activities		(1,259	)		(568	)
Net increase (decrease) in cash		133			(1,160	)
Cash and cash equivalents at beginning of period		1,061			1,753
Cash and cash equivalents at end of period	$	1,194		$	593
Supplemental cash flow information:
Cash paid for interest		35			58
Cash paid for taxes		61			111

See accompanying notes to consolidated financial statements.

4

ITEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Company

ITEX Corporation (“ITEX”, “Company”, “we” or “us”) was incorporated in October 1985 in the State of Nevada.  Through its independent licensed broker and franchise network (individually, “broker”, and together, the “broker network”) in the United States and Canada, the Company operates a leading exchange for cashless business transactions (the “marketplace”) where products and services are exchanged for “currency” only usable in the marketplace (“ITEX dollars”).  The Company administers the marketplace and acts as a third-party record-keeper for its members’ transactions.  A summary of significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows:

Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and, pursuant to rules and regulations of the Securities and Exchange Commission, do not include all information and footnote disclosures normally included in audited financial statements.  However, in the opinion of management, all adjustments necessary to present fairly the results of operations, financial position and cash flows have been made.  For further information, these statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2008.

Principles of Consolidation

The consolidated financial statements include the accounts of ITEX and its wholly-owned subsidiary, BXI Exchange, Inc (“BXI”).  All inter-company accounts and transactions have been eliminated in consolidation.

Operating and Accounting Cycles

For each calendar year, the Company divides its operations into 13 four-week billing and commission cycles always ending on a Thursday (“operating cycle”).  For financial statement purposes, the Company’s fiscal year is from August 1 to July 31 (“year”, “2009” for August 1, 2008 to July 31, 2009, “2008” for August 1, 2007 to July 31, 2008).  The Company’s fiscal third quarter is from February 1, 2009 to April 30, 2009 (“third quarter”).  The Company’s first nine months is from August 1, 2008 to April, 30, 2009. The Company reports its results as of the last day of each calendar month (“accounting cycle”).

5

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions affecting the amounts reported in the consolidated financial statements and accompanying notes.  Changes in these estimates and assumptions may have a material impact on the Company’s financial statements and notes.  Examples of estimates and assumptions include estimating:

· certain provisions such as allowances for accounts receivable

· any impairment of long-lived assets

· useful lives of property and equipment

· the value and expected useful life of intangible assets

· the value of assets and liabilities acquired through business combinations

· tax provisions and valuation allowances

· accrued commissions and other accrual expenses

· litigation-related contingencies.

Actual results may vary from estimates and assumptions that were used in preparing the financial statements.

Reclassifications

Certain prior-year items have been reclassified to conform to the current-year presentation.

Revenue Recognition

The Company generates revenue by charging members percentage-based transaction fees, association fees, and other fees assessed in United States dollars and Canadian dollars where applicable (collectively and as reported on its financial statements “USD” or “Cash”).  The Company recognizes revenue when persuasive evidence of an arrangement exists, the transaction has occurred or a cycle period has ended, the charges are fixed or determinable and no major uncertainty exists with respect to collectability.

The Company’s largest sources of revenues are transaction fees and association fees.  The Company charges members of the marketplace an association fee every operating cycle in accordance with its members’ individual agreements.  The Company also charges both the buyer and the seller a transaction fee based on the ITEX dollar value of that marketplace transaction.  Additionally, the Company may charge various other fees to members, such as late fees, finance charges, insufficient fund fees and annual dues. The total fees charged to members are billed in USD and partially in ITEX dollars (see below, “Accounting for ITEX Dollar Activity”).   The Company bills members for all fees at the end of each operating cycle. Members have the option of paying USD fees automatically by credit card, by electronic funds transfer or by check.  If paying through EFT or by credit card, generally the USD transaction fee is 5.0% to 6.0% of the ITEX dollar amount of the member’s purchases and sales during the operating cycle.  If paying by check, generally, the USD transaction fee is 7.5% of the ITEX dollar amount of that member’s purchases and sales during the operating cycle. Additionally, regardless of a member’s transaction activity, each operating cycle, the Company charges most members an association fee of $20 USD ($260 USD annually) and $10 ITEX dollars ($130 ITEX dollars annually).

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In each accounting cycle, the Company recognizes as revenue all USD transaction fees, association fees and applicable other fees that occurred during that month regardless of which operating cycle the fees occurred.  Annual dues, billed in advance of the applicable service periods, are deferred and recognized into revenue on a straight-line basis over the term of one year.

For transaction and association fees charged to members, the Company shares a portion of its revenue with the brokers in its broker network in the form of commissions based on a percentage of cash collections from members.  For those fees, revenues are recorded on a gross basis in accordance with Emerging Issues Task Force Issue (“EITF”) 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Commissions to brokers are recorded as cost of revenue in the period corresponding to the revenue stream on which these commissions are based.

The Company records an allowance for uncollectible accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required.

On February 12,  2009, the Company signed an agreement granting a media services company a limited, non-exclusive right to use ITEX’s proprietary online broker and client relationship management platform, including billing functionality, data analysis and other offerings, as well as ITEX’s related hosting services. The agreement provides for a one-time consideration of $350,000 paid to ITEX, as a platform subscription fee as well as periodic transaction processing, support and consulting fees. The Company recognizes revenue from the platform subscription fee on a straight-line basis over the contract term of five years. The Company recognizes revenue from recurring transaction processing, support and consulting fees as it is earned.

Accounting for ITEX Dollar Activities

The Company earns ITEX dollars primarily from members’ transaction and association fees, and, to a lesser extent, from other member fees.  ITEX dollars earned from members are later used by the Company as a method of payment in revenue sharing and incentive arrangements with its broker network, co-op advertising with marketplace members, as well as for certain general corporate expenses.

The accounting guidance of the EITF 93-11, Accounting for Barter Transactions Involving Barter Credits, indicates that transactions in which non-monetary assets are exchanged for barter credits should be accounted for under the Accounting Principle Board (“APB”) 29, Accounting for Non-monetary Transactions. EITF 93-11 also concludes that in the exchange involving barter credits it should be presumed that the fair value of the nonmonetary asset exchanged is more clearly evident than the fair value of the barter credits.

The basic principle of APB 29 is that, generally, exchanges of non-monetary assets should be recorded at fair value of the assets (or services) involved, rather than the assets recorded costs. The fair value of the asset received should be used to measure the exchange if its value is more clearly evident than the value of the asset surrendered. APB 29 makes an exception to the fair value recognition principle for cases where the fair value of neither the assets received nor the assets relinquished is determinable within reasonable limits.

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When the Company receives ITEX dollars from its members as payment of member fees, management believes that neither the Company’s services provided nor the ITEX dollars received have determinable fair values. The Company does not recognize any value in this transaction until the ITEX dollars are used by the Company for purchasing goods and services for its own use and the Company can determine the value of the goods and services ultimately received in exchange for the ITEX dollars.

In cases where the Company spends its ITEX dollars as payment for items which lack readily determinable fair values, the expenses are also recorded at the cost basis of the ITEX dollars surrendered, which is zero.

In cases where the Company uses its previously earned ITEX dollars as payment for corporate expenses at prices comparable to what the Company would have paid in USD, the Company believes that the goods and services received have determinable fair value.  The Company then recognizes the fair value of received goods and services and a corresponding amount of revenues earned in ITEX dollars.

While the accounting policies described above are used for financial reporting purposes, the Internal Revenue Service requires, for purposes of taxation, that the Company recognizes revenues, expenses, assets, and liabilities for all transactions in which it either receives or spends ITEX dollars using the ratio of one U.S. dollar per ITEX dollar.  For this reason, the Company tracks its ITEX dollar activity in statements to members and brokers and in other ways necessary for the operation of the marketplace and its overall business.

Business Combinations

The Company accounts for business combinations using the purchase method of accounting prescribed by Statement of Financial Accounting Standards (“SFAS”) 141, Business Combinations. The total consideration paid in an acquisition is allocated to the fair value of the acquired company’s identifiable assets and liabilities. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The consolidated financial statements reflect the results of operations of an acquired business from the completion date of an acquisition. The costs to acquire a business, including transaction costs, are allocated to the fair value of net assets acquired.

The Company identifies and records separately the intangible assets acquired apart from goodwill based on the specific criteria for separate recognition established in SFAS 141, namely:

• the asset arises from contractual or other legal rights; or

• the asset is capable of being separated from the acquired entity and sold, transferred, licensed, rented or exchanged.

Intangible Assets with Definite Lives

Intangible assets acquired in business combinations are estimated to have definite lives and are comprised of membership lists, noncompetition agreements and trade names. The Company amortizes costs of acquired intangible assets using the straight-line method over the contractual life of one to three years for noncompetition agreements, the estimated life of six to ten years for membership lists and the estimated life of ten years for trade names.

8

In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the carrying value of intangible assets with definite lives is reviewed on a regular basis for the existence of facts that may indicate that the assets are impaired. An asset is considered impaired when the estimated undiscounted future cash flows expected to result from its use and disposition are less than the amount of its carrying value. If the carrying value of an asset is deemed not recoverable, it is adjusted downward to the estimated fair value.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired, including domains and other definite-lived intangible assets, and liabilities assumed in business combinations accounted for under the purchase method.

Goodwill acquired in a purchase business combination and determined to have an indefinite useful life is not amortized, but instead tested for impairment at least annually. SFAS 142, Goodwill and other Intangible Assets, prescribes the use of the two-phase approach for testing goodwill for impairment. The first phase is a screen for potential impairment, while the second phase (if necessary) measures the amount of impairment, if any. Goodwill has to be written down and charged to operating results in periods in which the recorded value of goodwill exceeds its fair value. No impairment of goodwill has been recognized in the nine-month period ended April 30, 2009.

Share-based Payments

The Company accounts for share-based compensation to its employees and directors under the provisions of SFAS 123(R), “Share-Based Payment”. SFAS 123(R) requires measurement of compensation expense for all stock-based awards at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. Restricted stock awards issued to employees and directors are measured based on the fair market values of the underlying stock on the dates of grant.  

Advertising Credits

As a result of a business acquisition in August 2008, the Company obtained advertising credits, which represent prepaid credits for future media print and broadcast placements, and it recorded these advertising credits as a current asset. The Company originally recorded the cost of the advertising credits at the fair market value at the time of business combination using a net realizable value approach. Under this approach, the value is determined based on the estimated future selling price less reasonable costs of disposal.

The Company began using the advertising credits for resale to its customers, primarily for ITEX dollars.  In addition to ITEX dollars, the Company also receives its cash transaction fee on sales of the advertising credits for ITEX dollars. The asset is relieved and the expense is recorded as the advertising credits are sold by the Company to its customers.  The expense is recorded in the amount of the fair value of the advertising credits sold. The Company recognized $27,000 expense on sale of advertising credits in the nine-month period ended April 30, 2009. Additionally the Company used approximately $4,000 of advertising credits for its own advertising needs.

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Contingencies

In the normal course of business the Company is periodically involved in litigation or claims. The Company follows the provisions of SFAS 5, Accounting for Contingencies, to record litigation or claim-related expenses. The Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. The Company accrues for settlements when the outcome is probable and the amount or range of the settlement can be reasonably estimated. In addition to the Company’s judgments and use of estimates, there are inherent uncertainties surrounding litigation and claims that could result in actual settlement amounts that differ materially from estimates. The Company expenses its legal costs associated with these matters when incurred.

Recent Accounting Pronouncements

In June 2008, the Financial Accounting Standards Board (“FASB”) issued EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.  EITF 03-6-1 gives guidance as to the circumstances when unvested share-based payment awards should be included in the computation of EPS. EITF 03-6-1 is effective for the Company beginning August 1, 2009, the beginning of its 2010 reporting periods.  The Company is currently assessing the impact of EITF 03-6-1 on its results of operations, cash flows and financial position.

In April 2008, the FASB issued FASB Staff Position (“FSP”) 142-3, Determining the Useful Life of Intangible Assets.  FSP 142-3 amends the factors to be considered in determining the useful life of intangible assets.  Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value.  FSP 142-3 is effective for the Company beginning August 1, 2009, the beginning of its 2010 reporting period.  The Company is currently assessing the impact of FSP 142-3 on its results of operations, cash flows and financial position.

In December 2007, the FASB issued SFAS 141 (revised 2007) (“SFAS 141(R)”), Business Combinations, which replaces SFAS 141 and amends several other pronouncements. Under SFAS 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that companies recognize acquisition-related costs separately from the acquisition and expense those costs as incurred, and that companies generally expense restructuring costs in periods subsequent to the acquisition date. It also requires that changes in valuation allowances for acquired deferred tax assets and acquired income tax uncertainties impact income tax expense. In addition, acquired in-process research and development is required to be capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS 141(R) will change the Company’s accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2010.

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NOTE 2 – ACQUISITION

On August 1, 2008, ITEX acquired from The Intagio Group, Inc. (“Intagio”) certain assets of a media services company.  The advertising and media sector is currently the largest component of transaction volume in the ITEX marketplace.  This acquisition allows the Company to expand its service offerings by providing an “in-kind” payment option for hospitality firms in funding their media campaigns.

At the time of purchase, on August 1, 2008, the total original consideration consisted of $68,000 in cash and a secured promissory note in the amount of $688,000 due to the seller with the interest rate of 8.00% payable in eleven equal monthly payments of $65,000.

On November 10, 2008, the purchase consideration was adjusted by a mutual agreement between Intagio and the Company. The promissory note original principal balance was reduced by $50,000 to $638,000 and the Company agreed to pay immediately the full amount of the remaining outstanding balance of the note. During the quarter ended October 31, 2008, the Company made three monthly installment payments of $65,000 on this note. The remaining balance of $454,000 was paid in full on November 10, 2008.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed in this business acquisition, giving the effect of the purchase consideration adjustment as of November 10, 2008 (in thousands):

Purchase Price Consideration
Cash paid to Intagio	$	68
Notes payable to Intagio, as adjusted on November 10, 2008		638
Total consideration paid	$	706
Fair Value of the Net Assets Acquired
Advertising credits	$	538
Office equipment		85
Accounts receivable		71
Membership list		80
Trade name		20
Lease security deposit		17
Noncompetition agreement		4
Less: Liabilities assumed		(109	)
Net assets acquired	$	706

The purchase price allocation above is preliminary and may be subject to final adjustment that may occur within one year from the date of purchase. The expected lives of the membership list, trade name and noncompetition agreement are ten years, ten years and one year, respectively.  At the closing, ITEX paid Intagio the $68,000 cash purchase price as well as an accelerated final payment of $150,000 to satisfy, in full, its maximum post-closing contingent consideration resulting from the previous acquisition made from Intagio in August of 2007 (see Note 10 to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2008).

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Pro forma results

The following unaudited pro forma combined historical results for the quarter and nine-month period ended April 30, 2008 are presented below as if the Intagio media services company had been acquired on August 1, 2007 (in thousands, except per share data):

	Quarter ended April 30, 2008		Nine months ended April 30, 2008
Revenues	$	4,015	$	12,254
Net income	$	267	$	750
Net income per share
Basic	$	0.02	$	0.04
Diluted	$	0.01	$	0.04

NOTE 3 – ITEX DOLLAR ACTIVITY

As discussed in Note 1, the Company receives ITEX dollars from members’ transaction and association fees, and, to a lesser extent, from other member fees.  ITEX dollars earned from members are later used by the Company as a method of payment in revenue sharing and incentive arrangements with its broker network, co-op advertising with marketplace members, as well as for certain general corporate expenses.

The Company records transactions at the fair value of products or services received when those values are readily determinable.  Most of ITEX dollar transactions during the periods presented in these financial statements lacked readily determinable fair values and were recorded at the cost basis of the trade dollars surrendered, determined to be zero.

During quarters ending April 30, 2009 and 2008, the Company spent ITEX dollars on certain products and services for corporate purposes such as legal, consulting and marketing services with readily determinable fair market values.  Those ITEX dollar activities were included in the Company’s consolidated statements of income as follows (in thousands):

	Quarter ended April 30,				Nine months ended April 30,
	2009		2008		2009		2008
Revenue:
Marketplace and other revenue	$	61	$	59	$	219	$	120
Costs and expenses:
Cost of marketplace revenue		-		-		-		-
Corporate salaries, wages and employee benefits		-		-		3		1
Selling, general and administrative		61		59		216		119
Depreciation and amortization		-		-		-		-
		61		59		219		120
Income from operations		-		-		-		-

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NOTE 4 – CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, COMMISSIONS PAYABLE TO BROKERS AND ACCRUED COMMISSIONS TO BROKERS

As discussed in Note 1, the Company’s billing cycles occur in 13 four-week periods (“operating cycle”) during each year. The billing cycles do not correspond to the end of the calendar month, when the Company reports its results (“accounting cycle”).

 At the end of each operating cycle, the Company records commissions payable to brokers base on a percentage of USD collections of revenues from association fees and transactions fees.  The commissions are paid to brokers in two equal installments with approximately one half paid one week after the end of the operating cycle and the second half paid three weeks after the end of the operating cycle.

In addition to commissions payable on cash collected from members, the Company records estimated accrued commissions on revenue recognized but not yet collected, if subject to estimated future commission payouts.

The payments for salaries and wages to the Company’s employees occur on the same bi-weekly schedule as commission payments to brokers.

The timing differences between the Company’s operating cycles and its accounting cycles cause fluctuations in the comparative balances of cash and cash equivalents, accounts receivable, commissions payable to brokers and accrued commissions to brokers presented on the consolidated balance sheets.  Depending on the length of time between the end of the operating cycle and the end of the accounting cycle, members’ payments on accounts receivable balances may vary.  The longer the time, the greater amount of USD collections causes an increase in the reported cash and cash equivalents balance and a decrease in the net accounts receivable balance.

NOTE 5 - INTANGIBLE ASSETS AND GOODWILL

The Company recorded intangible assets, consisting of membership lists, noncompetition agreements and a trade name, in connection with business combinations completed in fiscal years from 2005 to 2008 and well as in the nine-month period ended April 30, 2009 (see Note 2). Changes in the carrying amount of the intangible assets in the nine-month period ended April 30, 2009 are summarized as follows (in thousands):

	Membership lists			Noncompetition agreements			Trade name			Total intangible assets
Balance as of July 31, 2008	$	1,918		$	175		$	-		$	2,093
Additions from the Intagio acquisition in August 2008		80			4			20			104
Amortization		(365	)		(102	)		(1	)		(468	)
Balance as of April 30, 2009	$	1,633		$	77		$	19		$	1,729

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Based on identified intangible assets recorded as of April 30, 2009 and assuming no subsequent impairment of the underlying assets, amortization expense is expected to be as follows (in thousands):

Year ending July 31,	Membership lists		Noncompetition agreements		Trade name		Total
2009 (1)	$	122	$	34	$	1	$	157
2010		488		27		2		517
2011		467		16		2		485
2012		239		-		2		241
2013		238		-		2		240
Thereafter		79		-		10		89
Total	$	1,633	$	77	$	19	$	1,729

(1) The expected amortization for 2009 reflects amortization expense that the Company anticipates to be recognized in the three-month period from May 1, 2009 to July 31, 2009.

The Company recorded goodwill in connection with business combinations completed in fiscal years from 2005 to 2008. The acquisitions made in 2005 and in 2008 included contingent consideration recorded as additions to goodwill in subsequent periods, as the final settlement amounts became determinable.

The acquisition of certain assets of Intagio, made in July of 2007, included contingent consideration in a form of an earnout agreement.  The earnout amount was based on the achievement of certain revenue targets in the four-quarter period beginning August 1, 2008 and ending July 31, 2009 to the maximum amount of $150,000.

As discussed in Note 2, in August 2008, ITEX made an additional acquisition from Intagio of certain assets of a media services company. At the closing of the August 2008 acquisition, ITEX made an accelerated final payment of $150,000 to satisfy, in full, its maximum post-closing obligation to Intagio for the Intagio earnout.  No further earnout obligations to Intagio remained as of April 30, 2009. Changes in the carrying amount of goodwill in the nine-month period ended April 30, 2009 are summarized as follows (in thousands):

Balance as of July 31, 2008	$	3,168
Intagio earnout payment		150
Balance as of April 30, 2009	$	3,318

NOTE 6 – COMMITMENTS

The Company leases office space under non-cancelable operating leases. Lease commitments include leases for the Company’s corporate headquarters in Bellevue, Washington, and branch offices in Chicago, Illinois and Cleveland, Ohio. Those leases expire between April 2010 and October 2011.  The rent for the Company’s office in Cleveland, Ohio, was paid in part in ITEX dollars until June 1, 2009.

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Future minimum payments at April 30, 2009 under operating leases, for office space were as follows (in thousands):

Year ending July 31,	U.S. dollars		ITEX dollars
2009 (1)		70		1
2010		243		-
2011		126		-
2012		29		-
Total	$	468	$	1

(1) The expected payments for 2009 reflect future minimum payments for the three-month period from May 1, 2009 to July 31, 2009.

Rent expense, including utilities and common area charges, was 82,000 and $61,000, respectively for the quarters ended April 30, 2009 and 2008.  Rent expense was $245,000 and $175,000 for the nine-month periods ended April 30, 2009 and 2008.

In addition to the foregoing lease commitments, the Company is a party to several non-cancelable and non-refundable purchase commitments. Those purchase obligations consist primarily of arrangements for telecommunications and co-location services for the Company’s network operations as well as investor relations consulting. Some of the purchase commitments are payable in ITEX dollars.

Future minimum payments at April 30, 2009 under the non-cancelable commitments were as follows (in thousands):

Year ending July 31,	U.S. dollars		ITEX dollars
2009 (1)		11		23
2010		43		30
2011		15		-
Total	$	69	$	53

(1) The expected payments for 2009 reflect future minimum payments for the three-month period from May 1, 2009 to July 31, 2009.

NOTE 7 – NOTES PAYABLE AND LINE OF CREDIT

The Company has a revolving credit agreement to establish a $1.5 million line of credit facility with its primary banking institution, US Bank, effective through November 30, 2009.The line of credit facility was originally established on December 2, 2004 and last renewed in November 2008, with the amendment to increase the maximum loan amount under its revolving credit facility from $1.0 million to $1.5 million, to lower the interest rate and to remove certain borrowing base limitations.  There were no borrowings made under this line of credit in the nine-month period ended April 30, 2009 and there was no outstanding balance as of April 30, 2009.  The Company may utilize this credit facility for short-term needs in the future.

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On August 1, 2007, the Company entered into a $1.1 million note payable to Intagio in the form of a senior subordinated secured promissory note (“Intagio Note”) with interest at 8.0% and repayments in 24 equal monthly installments. In the quarter ended April 30, 2009, the note was paid in full four months ahead of its original expiration date by mutual agreement of the parties. Total principal repayments for the quarter and nine-month period ended April 30, 2009 amounted to $301,000 and $591,000, respectively.

As discussed in Note 2, in connection to the acquisition from Intagio of certain assets of a media services company, the Company entered into a $688,000 senior subordinated secured promissory note due to the seller with the interest rate of 8.00% payable in eleven equal monthly payments of $65,000. In November 2008, the purchase consideration was adjusted by a mutual agreement between the buyer and the seller. The promissory note original principal balance was reduced by $50,000 to $638,000 and the remaining balance was paid in full in November 2008.

NOTE 8 – LEGAL PROCEEDINGS

In June 2003, a former broker filed a complaint against the Company for wrongful termination of his brokerage agreement and breach of contract in connection with the termination of plaintiff's brokerage in 1999 (Bruce Kamm v. ITEX Corporation, Supreme Court of the State of New York County of New York, Index No.: 602031/2003).  Plaintiff sought damages against the Company in the amount of $5.0 million and a preliminary injunction enjoining the Company from selling a New York office, previously managed by plaintiff, to any person, company or entity.  In July 2003, the Court denied plaintiff's motion for a preliminary injunction.  Plaintiff failed to prosecute the action, and, in May 2004, the Court administratively dismissed the action.  During September 2005, the Court granted a motion from plaintiff to vacate the dismissal of his action and for leave to amend the complaint.  On or about October 12, 2005, the Company was served with an amended complaint stating claims of breach of contract, wrongful termination of the brokerage agreement and breach of covenant of good faith and fair dealing and seeking damages in the amount of $30,000 plus attorneys' fees.  In November 2005, the Company filed a motion to dismiss the action for lack of subject matter jurisdiction pursuant to a forum selection clause in the contract between the parties requiring litigation be filed in Oregon.  The Company’s motion to dismiss was granted on December 12, 2005.  In June 2006, plaintiff re-filed in the Circuit Court of the State of Oregon, (Bruce Kamm and Invision LTD v. ITEX Corporation,  Case No. 0606-05949), stating claims of breach of contract and breach of covenant of good faith and fair dealing and seeking damages in the amount of $30,000 plus attorneys’ fees.  The Company moved the lawsuit to federal court in July 2006.  Plaintiff filed a motion to remand the lawsuit to Oregon state court in August 2006 and the court ruled in favor of the motion in January 2007.  The Company appealed the ruling and that appeal is pending in federal court.  In the interim, the matter is stayed in state court except for discovery purposes.  The Company believes the termination of plaintiff's brokerage was for proper cause.

The Company will vigorously defend against the lawsuit discussed above.  While it is not feasible to predict the exact outcome of the proceeding, in the Company’s opinion, the foregoing proceeding should not ultimately result in any liability that would have a material adverse effect on the Company’s results of operations, cash flows or financial position.  The Company has not established any reserves for any potential liability relating to the foregoing litigation matter.  However, litigation is subject to inherent uncertainties and unfavorable rulings could occur.  If so, it could have a material adverse impact on the Company’s consolidated financial statements in future periods. 

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From time to time the Company is subject to claims and litigation incurred in the ordinary course of business.  In the Company’s opinion, the outcome of other pending legal proceedings, separately and in the aggregate, will not have a material adverse effect on its business operations, results of operations, cash flows or financial condition. 

NOTE 9 – INCOME TAXES

Deferred tax assets primarily include federal and state net operating loss carryforwards (collectively “NOLs”) which are expected to result in future tax benefits.  Realization of these NOLs assumes that the Company will be able to generate sufficient future taxable income to realize these assets.  Deferred tax assets also include temporary differences between the financial reporting basis and the income tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled.

Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carryforwards, if it is more likely than not that the tax benefits will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to be deductible.

The reconciliation of the income tax provision (benefit) calculated using the federal statutory rates to the recorded income tax provision is as follows (dollars in thousands):

	Quarter ended April 30												Nine months ended April 30,
	2009						2008						2009						2008
	Amount			Rate			Amount			Rate			Amount			Rate			Amount			Rate
Expected tax provison at federal statutory rate	$	121			34.0	%	$	140			33.9	%	$	210			34.0	%	$	398			34.0	%
State income taxes		10			2.8	%		48			11.6	%		32			5.2	%		83			7.1	%
Research and development credit		(1	)		-0.3	%		-			-			(2	)		-0.3	%		-			-
Non-deductible expenses		2			0.6	%		-			-			9			1.4	%		3			0.2	%
Change in effective state rate		-			-			-			-			(34	)		-5.5	%		-			-
Other		-			-			(5	)		-1.2	%		-			-			(11	)		-0.9	%
Provision for income taxes	$	132			37.1	%	$	183			44.3	%	$	215			34.8	%	$	473			40.4	%

The change in effective state rate of $34,000 relates primarily to increase in recognition of deferred tax assets at higher state tax rates. The change in the effective state rate was caused by the addition of new geographic locations as well as the increase in the income apportionment factors for the geographic locations in the US. Both factors lead to the increase in effective tax rate and the resulting increase in the expected future realizable tax benefits at the time when the deferred tax assets are expected to reverse. Other items also include permanent differences and research and development credits.

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As required by FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies SFAS 109, Accounting for Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open. A reconciliation of the Company’s unrecognized tax benefits as of April 30, 2009 is as follows (in thousands):

Balance at July 31, 2008	$	193
Additions based on tax positions related to the current year		26
Balance at April 30, 2009	$	219

The Company is subject to income taxes in the U.S as well as various U.S. states jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is subject to U.S. and state income tax examinations by tax authorities for tax years 2004 through the present. The Company does not anticipate any material changes to its recognized tax benefits over the next 12 months.

NOTE 10 – SHARE-BASED PAYMENTS

In March 2004 the Company adopted the ITEX Corporation 2004 Equity Incentive Plan (the "2004 Plan"), for which 2 million shares of common stock have been authorized for issuance. The 2004 Plan provides for the grant of incentive and nonqualified stock options, restricted stock, and stock bonuses to the Company's employees, directors, officers or consultants.

195,000 and 285,000 shares remained available for future grants under the 2004 Plan at April 30, 2009 and July 31, 2008, respectively.

In December 2008, 90,000 shares of restricted common stock, valued at the grant date stock price of $.425, were issued to the Company’s three directors as compensation for their services for the calendar year ending December, 31, 2009. Those shares vest over calendar year ending December 31, 2009 in twelve equal monthly installments.

In December 2007, 90,000 shares of fully vested shares of common stock , valued at $.94 per share, were issued to the Company’s three directors, in equal amounts of 30,000 shares each,  as compensation for their services for the calendar year ending December, 31, 2008, which is considered a requisite service period. The grants to the Company’s directors are amortized over their respective requisite services periods of one year.

In July 2006, the Company issued 340,000 restricted shares to the Company’s CEO and a certain employee, valued at the grant date stock price of $.59 per share, with the vesting period of 3 years from the date of grant. Those grants are amortized over their respective requisite services periods of three years.

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In addition to stock issued under the 2004 Plan to employees and directors, in March 2008, the Company granted 100,000 fully vested warrants to a vendor in exchange for investment advisory and financial communication assistance, valued at $66,000, based on the Black Scholes valuation model and amortized over the contractual service period of thirteen months.

The stock-based compensation expense, including the warrant issued to a non-employee, charged against the results of operations was as follows (in thousands):

	Quarter ended April 30,				Nine months ended April 30,
	2009		2008		2009		2008
Stock-based compensation expense included in:
Corporate salaries, wages and employee benefits	$	14	$	16	$	51	$	50
Selling, general and administrative		19		29		89		70
Total stock-based compensation expense		33		45		140		120

At April 30, 2009, 85,000 shares of common stock granted under the 2004 Plan remained unvested. At April 30, 2009, the Company had $37,000 of unrecognized compensation expense, expected to be recognized over a weighted-average period of approximately 5 months.

NOTE 11 – SUBSEQUENT EVENTS

On May 8,  2009, the Company signed an agreement granting to  ITEX Latin America, Inc. (ILA), a limited, non-exclusive right to use ITEX’s proprietary online broker and client relationship management platform, including billing functionality, data analysis and other offerings, as well as ITEX’s related hosting services,  for a term of five years. The agreement provides for a one-time platform subscription fee and recurring transaction processing fees based on gross merchandise volume, or GMV, which is the total value of all transactional activity hosted by the platform, as well as for certain other periodic service and consulting fees. In addition to this cash consideration, ITEX received certain equity interest in the customer, making up approximately 5% interest in ILA.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to current and historical information, this Quarterly Report on Form 10-Q contains forward-looking statements.  These statements relate to our future operations, prospects, potential products, services, developments, business strategies or our future financial performance.  These statements can generally be identified by the use of terms such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “target,” “will” or other similar expressions.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties.  Actual events or results may differ materially.  We have included a detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements in the section titled “Risk Factors” below.  We undertake no obligation to update or revise publicly any forward-looking statement after the date of this report, whether as a result of new information, future events or otherwise.

Overview

ITEX, The Membership Trading CommunitySM, is a leading exchange for cashless business transactions across North America (the “marketplace”).  We service our member businesses through our independent licensed brokers, area directors and franchise network (individually, “broker” and together, the “broker network”) in the United States and Canada.  Our business services and payment systems enable approximately 24 thousand member businesses (our “members”) to trade goods and services without exchanging cash.  These products and services are instead exchanged for ITEX dollars which can only be redeemed in the marketplace (“ITEX dollars”).  We administer the marketplace and act as a third-party record-keeper for our members’ transactions.  We generate revenue by charging members percentage-based transaction fees, association fees, and other fees assessed in United States dollars and Canadian dollars where applicable (collectively and as reported on our financial statements, “USD” or “Cash”).

For each calendar year, we divide our operations into 13 four-week billing and commission cycles always ending on a Thursday (“operating cycle”).  For financial statement purposes, our fiscal year is from August 1 to July 31 (“year”, “2009” for August 1, 2008 to July 31, 2009, “2008” for August 1, 2007 to July 31, 2008).  Our fiscal third quarter is from February 1, 2009 to April 30, 2009 (“Third quarter”).  We report our results as of the last day of each calendar month (“accounting cycle”). The timing of billing and collection activities after the end of the billing cycle does not correspond with the end of the accounting period, therefore this timing difference results in the fluctuations of the balances of cash, accounts receivable, commissions payable and accrued commissions on the consolidated balance sheet and consolidated statement of cash flows.

Each operating cycle we generally charge our members association fees of $20 USD ($260 USD annually) and $10 ITEX dollars ($130 ITEX dollars annually).  We also charge transaction fees in USD from both the buyer and seller computed as a percentage of the ITEX dollar value of the transaction.

For the quarter ended April 30, 2009, as compared to the quarter ended April 30, 2008, our revenue increased by $110,000, or 2.8%, from $3.9 million to $4.0 million and our income from operations declined by $64,000, or 15.7%, from $408,000 to $344,000.

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For the nine-month period ended April 30, 2009, as compared to the nine-month period ended April 30, 2008, our revenue increased by $346,000, or 2.9%, from $11.9 million to $12.2 million and our income from operations declined by $561,000, or 48.3%, from $1,162,000 to $601,000.

We are seeking to continue to increase our revenue by:

· minimizing the barriers to join the marketplace;

· marketing the benefits of participation in the marketplace;

· adding new franchisees;

· managing corporate-owned offices;

· enhancing our internet applications and web services;

· seeking national partnerships and endorsements.

In August 2008, we acquired certain assets of a media services company.  The advertising and media sector is currently the largest component of transaction volume in the ITEX marketplace.  With the new media services, we seek to expand our capabilities in this market sector by providing an “in-kind” payment option for hospitality firms in funding their media campaigns.

We seek to derive additional revenue from granting third-party subscription rights to our proprietary online broker and client relationship management platform.  In February 2009, we entered into our first such subscription-based agreement, followed by a second subscription-based agreement in May 2009.  We expect this revenue component to gradually develop over subsequent quarters, as our fees, other than a flat base subscription fee, are based on the total value of transactional activity hosted by the platform.

RESULTS OF OPERATIONS

Condensed Results (in thousands, except per share data):

	Quarter ended  April 30,				Nine months ended  April 30,
	2009		2008		2009		2008
	(unaudited)				(unaudited)
Revenue	$	3,981	$	3,871	$	12,245	$	11,899
Costs and expenses		3,637		3,463		11,644		10,737
Income from operations		344		408		601		1,162
Interest income, net		12		5		17		10
Income before income taxes		356		413		618		1,172
Provision for income taxes		132		183		215		473
Net income	$	224	$	230	$	403	$	699
Net income per common share:
Basic	$	0.01	$	0.01	$	0.02	$	0.04
Diluted	$	0.01	$	0.01	$	0.02	$	0.04
Average common and equivalent shares:
Basic		17,791		17,655		17,755		17,629
Diluted		17,901		17,884		17,904		17,838

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Revenue for the quarter ended April 30, 2009, as compared to the corresponding quarter of fiscal 2008, increased by $110,000, or 2.8%. Revenue for the nine-month period ended April 30, 2009, as compared to the corresponding period of fiscal 2008, increased by $346,000, or 2.9%. The increase in revenues came mostly from the increase in transaction revenue. The increase in revenue for the quarter and the nine-month period, as compared to the corresponding periods of prior year, is due to higher number of transactions, as well as our streamlined fee structure, as we gradually transitioned our members to a 6% fee per transaction, which is available to users on automated payment arrangements. This change in fees resulted in the increase of transaction fee revenue as a percentage of our gross merchandise volume, or GMV, which is the total ITEX dollar value of transactional activity between marketplace members.

Income from operations for the quarter ended April 30, 2009, as compared to the corresponding quarter of fiscal 2008, decreased by $64,000, or 15.7%. Income from operations for the nine-month period ended April 30, 2009, as compared to the corresponding period of fiscal 2008, decreased by $561,000, or 48.3%. This decrease for both the quarter and the nine-month period is the result of the increase in operating expenses. Operating expenses increased by $174,000, or 5.0% for the quarter ended April 30, 2009, as compared to the corresponding quarter of fiscal 2008. Operating expenses increased by $907,000, or 8.4% for the nine-month period ended April 30, 2009, as compared to the corresponding period of fiscal 2008.

The increase in operating expenses in the quarter ended April 30, 2009, as compared to the corresponding quarter of fiscal 2008, resulted from $70,000 increase in selling, general and administrative expenses, $49,000 increase in corporate salaries, wages and employee benefits, $29,000 increase in depreciation and amortization and $26,000 increase in costs of marketplace revenue. The increase in our operating expenses for the quarter ended April 30, 2009 is attributed to higher bad debt expense on increased revenue and higher compensation costs on increased headcount, primarily due to the development of our prototype field offices and corporate functions.

The increase in operating expenses in the nine-month quarter ended April 30, 2009, as compared to the corresponding period of fiscal 2008, resulted from $491,000 increase in selling, general and administrative expenses, $229,000 increase in corporate salaries, wages and employee benefits, $114,000 increase in  depreciation and amortization and $73,000 increase in costs of marketplace revenue. The increase in operating expenses is related to higher bad debt expense on increased revenue, additional costs of investor relations initiatives, and higher compensation costs on increased headcount.

During the second half of fiscal 2008, we engaged two outside consulting firms in an effort to increase shareholder value. The first firm, an investment advisory and financial communications firm, with focus on micro through mid-capital public companies, was retained in March 2008 to manage our investor relations initiatives and create more visibility for us in the investment community. The second firm, an investment bank, was retained in May 2008 as our financial advisor to help us evaluate a range of strategic options and update us regarding prevailing market conditions for mergers and acquisitions.  We completed our engagement with our financial advisor on October 31, 2008.

During fiscal 2009, we added new sales positions in order to attract and develop partnerships with enterprise-level accounts and to expand our operations into a new media services sector in connection with our August 2008 acquisition of media services company from Intagio. We also invested resources in the development of our technology infrastructure.

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Net income for the quarter ended April 30, 2009, as compared to the corresponding quarter of fiscal 2008, decreased by $6,000 or 2.6%. Net income for the nine-month period ended April 30, 2009, as compared to the corresponding period of fiscal 2009, decreased by $296,000, or 42.3%. The decrease in net income for both the quarter and the nine-month period resulted from the decrease in the income from operations.

Earnings per share for the quarter ended April 30, 2009 remained on the same level as for the corresponding quarter of fiscal 2008 at $0.01 per share. Earnings per share declined from $0.04 per share for the nine-month period ended April 30, 2008 to $0.02 per share for the nine-month period ended April 30, 2009.

Growth by acquisition

On August 1, 2008, we acquired from Intagio certain assets of a media services company and launched ITEX Media Services.  Prior to the acquisition, the advertising and media sector represented the largest component of transaction volume in the ITEX marketplace.  ITEX Media Services introduced a variety of new opportunities to the ITEX marketplace and provides an ‘in kind’ payment option for hospitality firms in funding their media campaigns.

On February 1, 2008, we acquired from ATX The Barter Company, Inc. (“ATX Barter”) certain assets of a commercial trade exchange network including a membership list, and incorporated the acquired member base into a corporate prototype office in Cleveland, Ohio.

On August 1, 2007, we acquired from Intagio certain assets of a commercial trade exchange network (“Intagio assets”) including a membership list of approximately two thousand member businesses.  These new member businesses are located primarily in six regions (“Intagio regions”) in the United States, four of which were previously not served by our existing network. After the acquisition of the Intagio membership list, we sold three of the six newly acquired regions to two existing franchisees in two separate transactions, and retained three Intagio regions to operate as corporate-owned offices (“corporate prototype offices”).

In our corporate prototype offices, we test our new initiatives and emerging strategies in order to increase marketplace revenue and better serve members.  If successful with our initiatives, we intend to use the strategies as a model for our brokers.

Growing organically

In the nine-month period ended April 30, 2009, we invested in our personnel, sales and technology infrastructure to build a foundation for future revenue growth.  We are building in areas we believe will generate reasonable returns without significant risk. Below are some of the areas we expanded in recent periods:

· Increased the headcount of our broker support team, including senior management, to assist our franchisees in local registrations of businesses in our marketplace.

· Created a new business development department tasked with creating relationships with companies that have a national presence to assist our growth on the local level.

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· Expanded our investment in information technology personnel and network infrastructure. It is our goal to unlock the value of our technological platform by offering its use to other companies, where a digital currency can enhance their business model. We entered into our first agreement granting an enterprise customer subscription rights to use our proprietary online broker and client relationship management platform, including related processing and hosting services. We anticipate to continue our investment in technology infrastructure during the last quarter of fiscal 2009 in support of our new subscription-based service offering.

· Signed a partnership agreement with Sysco iCare Marketing, Inc., an enterprise-level supplier of products and services to the food service and hospitality industries, resulting in the endorsement of our services,  our broker network and our marketplace for its customer base, in order to establish a wider value proposition to its customers and other incentives.

Revenue, Costs and Expenses

The following table sets forth our selected consolidated financial information for the quarters and nine-month periods ended April 30, 2009 and 2008 with amounts expressed as a percentage of total revenues (amounts in thousands):

	Quarter ended April 30,										Nine months ended April 30,
	2009					2008					2009					2008
	(unaudited)										(unaudited)
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Revenue:
Marketplace revenue and other revenue	$	3,981		100.0	%	$	3,871		100.0	%	$	12,245		100.0	%	$	11,899		100.0	%
Costs and expenses:
Cost of marketplace revenue		2,530		63.6	%		2,504		64.7	%		7,831		64.0	%		7,758		65.2	%
Salaries, wages and employee benefits		457		11.5	%		408		10.5	%		1,422		11.6	%		1,193		10.0	%
Selling, general and administrative		458		11.5	%		388		10.0	%		1,825		14.9	%		1,334		11.2	%
Depreciation and amortization		192		4.8	%		163		4.2	%		566		4.6	%		452		3.8	%
		3,637		91.4	%		3,463		89.4	%		11,644		95.1	%		10,737		90.2	%
Income from operations		344		8.6	%		408		10.6	%		601		4.9	%		1,162		9.8	%
Interest income, net		12		0.3	%		5		0.1	%		17		0.1	%		10		0.1	%
Income before income taxes		356		8.9	%		413		10.7	%		618		5.0	%		1,172		9.9	%
Provision for income taxes		132		3.3	%		183		4.7	%		215		1.8	%		473		4.0	%
Net income	$	224		5.6	%	$	230		6.0	%	$	403		3.2	%	$	699		5.9	%

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Revenue

Marketplace revenue and other revenue consist of transaction fees, association fees, other fees net and ITEX dollar revenue.  The following are the components of revenue that are included in the consolidated statements of income (in thousands):

	Quarter ended April 30,							Nine months ended April 30,
	2009		2008		Percent			2009		2008		Percent
	(unaudited)							(unaudited)
Transaction fees	$	2,658	$	2,598		2.3	%	$	8,274	$	8,013		3.3	%
Association fees		1,134		1,130		0.4	%		3,441		3,441		0.0	%
Other revenue		189		143		32.2	%		530		445		19.1	%
	$	3,981	$	3,871		2.8	%	$	12,245	$	11,899		2.9	%

Total revenue increased by $110,000, or 2.8%, for the quarter ended April 30, 2009, as compared to the corresponding quarter of 2008. Total revenue increased by $346,000, or 2.9% for the nine-month period ended April 30, 2009, as compared to the nine-month period ended April 30, 2008.

The increase in absolute amount for the quarter and the nine-month period is primarily due to the increase in transaction fee revenue. Transaction fee revenue increased by $60,000, or 2.3%, and $261,000, or 3.3%, for the quarter and nine-month period ended April 30, 2009, respectively, as compared to the corresponding periods of 2008.  The number of customers increased from the third quarter of 2008 to the third quarter of 2009, which resulted in the corresponding increase in the number of transactions for both the quarter and the nine-month period ended April 30, 2009, as compared to the corresponding periods of 2008. The increase in transaction fee revenue in both the quarter and the nine-month period ended April 30, 2009 is also related to streamlining our fee structure by transitioning members from a 5% to a 6% fee per transaction, available to users on automated payment arrangements. This change in fees resulted in the increase of transaction fee revenue as a percentage of our gross merchandise volume, or GMV.

Association fee revenue increased by $4,000, or 0.4% for the quarter ended April 30, 2009, as compared to the corresponding quarter of 2008. The increase in the association fee revenue is due to the increased number of new accounts opened in the quarter ended April 30, 2009, as compared to the corresponding period of 2008. Association fee revenue remained relatively flat for the nine-month period ended April 30, 2009, as during fiscal 2008 we experienced a decline in customer accounts obtained in earlier acquisitions. The declining trend in the number of customers during 2008 was reversed during the first nine months of 2009.

The increase in other revenue for the quarter and the nine-month period ended April 30, 2009 as compared to the corresponding periods of 2008 relates primarily to new revenue sources opened in fiscal 2009.

On August 1, 2008, we acquired from Intagio certain assets of a media services company.  ITEX Media Services was launched with our August 2008 acquisition. In the quarter and the nine-month period of fiscal 2009, the revenue from our media services was $19,000 and $32,000 respectively.

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On February 12,  2009, we granted a media services company a limited, non-exclusive right to use ITEX’s proprietary online broker and client relationship management platform, including billing functionality, data analysis and other offerings, as well as ITEX’s related hosting services. The revenue generated from platform subscription, support and consulting fee resulting from this arrangement amounted to $37,000 in the quarter and nine-month period ended April 30, 2009.

 During the first nine months of 2009, we were able to increase our revenue, as compared to the first nine months of 2008, as a result of organic growth and acquisitions. We cannot assure you that our revenues will continue to increase in future quarters.  Future revenue streams will depend on our ability to maintain and expand our membership base and our broker network, provide services at prices that provide significant value for our members, our ability to offer additional services to our customers, and on the overall demand for cashless transactions.

ITEX Dollar Revenue

As described in notes to our consolidated financial statements, we receive ITEX dollars from members’ transaction and association fees, and, to a lesser extent, from other member fees.  ITEX dollars earned from members are later used by us as a method of payment in revenue sharing and incentive arrangements with our broker network, including co-op advertising, as well as for certain general corporate expenses. ITEX dollars are only usable in our marketplace.

We take extensive measures to maintain the integrity of our role in the marketplace economy, and to protect against the misuse or misappropriation of ITEX dollars.  For example:

· All ITEX dollar purchases for corporate purposes are approved by senior management.

· We do not sell or purchase ITEX dollars for USD.

We spend ITEX dollars in the marketplace for our corporate needs. As discussed in notes to our consolidated financial statements, we record ITEX dollar revenue in the amounts equal to expenses we incurred and paid for in ITEX dollars. We recorded $61,000 and $59,000 as ITEX dollar revenue for the quarters ended April 30, 2009 and 2008, respectively. We recorded $219,000 and $120,000 as ITEX dollar revenue for the nine-month periods ended April 30, 2009 and 2008, respectively.

The corresponding ITEX dollar expenses were for legal, printing, rents, outside services and miscellaneous expenses.  We will continue to utilize ITEX dollars for our corporate purposes in future periods.

Costs of Marketplace Revenue

Cost of marketplace revenue consists of commissions paid to brokers, salaries, employee benefits and operating expenses of our corporate prototype offices, payment of processing fees and other expenses directly correlated to marketplace revenue.  The following are the main components of cost of marketplace revenue that are included in the consolidated statements of income (in thousands):

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	Quarter ended April 30,						Percent			Nine months ended April 30,						Percent
	2009			2008			increase (decrease)			2009			2008			increase  (decrease)
	(unaudited)									(unaudited)
Transaction fee commissions	$	1,839		$	1,867			-1.5	%	$	5,789		$	5,817			-0.5	%
Association fee commissions		395			431			-8.4	%		1,192			1,342			-11.2	%
Prototype office costs		213			141			51.1	%		595			414			43.7	%
Other costs of revenue		83			65			27.7	%		255			185			37.8	%
	$	2,530		$	2,504			1.0	%	$	7,831		$	7,758			0.9	%
Costs of marketplace revenue as percentage of total revenue		63.6	%		64.7	%					64.0	%		65.2	%

Costs of marketplace revenue for the quarter ended April 30, 2009, as compared to the quarter ended April 30, 2008, increased by $26,000, or 1.0%.  Costs of marketplace revenue for the nine-month period ended April 30, 2009, as compared to nine-month period ended April 30, 2008, increased by $73,000, or 0.9%. The overall increase in costs of revenue corresponds to the increase in total revenue for the same periods.

The overall increase in costs of marketplace revenue for both the quarter and the nine-month period is due primarily to the increase in prototype office costs, consisting of compensation and operating expenses. Our prototype office costs increased by $72,000 and $181,000, or 51.1% and 43.7%, respectively, for the quarter and nine-month period ended April 30, 2009, as compared to the corresponding periods of fiscal 2008. We have increased the headcount in our branch offices in order to provide an increased level of support to our member base, and further enhance member recruitment and retention.

The increase in prototype office costs was partially offset by the reduction in transaction and association fee commissions in the quarter and the nine-month period ended April 30, 2009, as compared to the corresponding periods of fiscal 2008.

Association fee commissions decreased by $36,000 and $150,000, or 8.4% and 11.2%, respectively, for the quarter and nine-month period ended April 30, as compared to the corresponding periods of fiscal 2008. Transaction fee commissions decreased by $28,000 and $28,000, or 1.5% and 0.5%, respectively, for the quarter and nine-month period ended April 30, as compared to the corresponding periods of fiscal 2008.

Lower association and transaction fee commissions for the quarter and the nine-month period resulted in the decrease of costs of marketplace revenue as a percent of total revenue for the comparative periods presented. This decrease in commissions resulted from the gradual conversion to more standardized commission rates from various historic commission structures stemming from legacy arrangements.

Corporate Salaries, Wages and Employee Benefits

Salaries, wages and employee benefits include expenses for corporate employee salaries and wages, payroll taxes, 401(k), payroll related insurance, healthcare benefits, recruiting costs and other personnel related items.  As discussed above in “ITEX Dollar Revenue”, certain ITEX dollar expenses are also included.  Comparative results are as follows (in thousands):

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	Quarter ended April 30,						Percent			Nine months ended April 30,						Percent
	2009			2008			increase			2009			2008			increase
	(unaudited)									(unaudited)
Corporate salaries, wages and employee benefits	$	457		$	408			12.0	%	$	1,422		$	1,193			19.2	%
Corporate salaries, wages and employee benefits as percentage of total revenue		11.5	%		10.5	%					11.6	%		10.0	%

Corporate salaries, wages and employee benefits expenses increased by $49,000 and $229,000, or 12.0% and 19.2%, respectively for the quarter and nine-month period ended April 30, 2009, as compared to the quarter and nine-month period ended April 30, 2008. These expenses also increased as a percentage of the total revenue in the periods presented. The increase in compensation related costs corresponds to the increases in headcount.

We added new sales personnel in order to expand our operations into a new media services sector in connection with our August 2008 acquisition of a media services company.  We invested in staffing of our technology department in order to make improvements in our technology platform. We also invested in the development of our human resources department.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include consulting, legal and professional services, as well as expenses for rent and utilities, marketing, business travel, insurance, bad debts, business taxes, and other expenses.  As discussed above in “ITEX Dollar Revenue”, certain ITEX dollar expenses are also included.  Comparative results are as follows (in thousands):

	Quarter ended April 30,						Percent			Nine months ended April 30,						Percent
	2009			2008			increase			2009			2008			increase
	(unaudited)									(unaudited)
Selling, general and administrative expenses	$	458		$	388			18.0	%	$	1,825		$	1,334			36.8	%
Selling, general and administrative expenses as percentage of total revenue		11.5	%		10.0	%					14.9	%		11.2	%

Selling, general and administrative expenses increased by $70,000 and by $491,000, or 18.0% and 36.8%, respectively, for the quarter and nine-month period ended April 30, 2009, as compared to the quarter and nine-month period ended April 30, 2008. Our selling, general and administrative expenses also increased as a percentage of total revenues in the periods presented.

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The increase in selling, general and administrative expenses for the quarter ended April 30, 2009, as compared to the corresponding quarter of 2008, is due primarily to the $114,000 increase in bad debt expense, due to the increase in revenue for the quarters presented and as well as slower customer collections. The increase in selling, general and administrative expenses for the quarter ended April 30, 2009, as compared to the corresponding quarter of 2008, was partially offset by small reductions in various office expenses.

The increase in selling, general and administrative expenses for the nine-month period ended April 30, 2009, as compared to the corresponding period of 2008, is due primarily to the $234,000 increase in bad debt expense on higher revenues.

The overall increase in selling, general and administrative expenses for the nine-month period ended April 30, 2009 is also partially attributable to the $162,000 increase in investor relations and financial advisory expenses. In the last quarter of fiscal 2008 and the first quarter of fiscal 2008, we retained an investment bank in order to expose our company to new investors and to consider strategic alternatives.  We presented to numerous research analysts, portfolio managers and equity firms around the country to discuss the ITEX business model, our financial performance and expansion goals. From the third quarter of 2008 to the third quarter of 2009, we also retained an advisory and financial communications firm to manage our investor relations initiatives and create more visibility for us in the investment community

The overall increase in selling, general and administrative expenses in the nine-month period ended April 30, 2009, as compared to the corresponding period of fiscal 2008, is also partially attributed to the $70,000 increase in rent from resulting in the assumption of an office lease in the August 2008 acquisition, $44,000 increase in consulting, primarily in information technology services, and $30,000 increase in accounting fees.

The increases were partially offset by the $67,000 reduction in legal fees. In the quarter ended January 31, 2008 additional legal expenses resulted from addressing the unsolicited tender offer to acquire our outstanding common shares.

Depreciation and Amortization

Depreciation and amortization expenses include depreciation on our fixed assets and amortization of our intangible assets, including intangible assets obtained in business combinations.  Comparative results are as follows (in thousands):

	Quarter ended April 30,						Percent			Nine months ended April 30,						Percent
	2009			2008			increase			2009			2008			increase
	(unaudited)									(unaudited)
Depreciation and amortization	$	192		$	163			17.8	%	$	566		$	452			25.2	%
Depreciation and amortization as percentage of total revenue		4.8	%		4.2	%					4.6	%		3.8	%

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Depreciation and amortization increased by $29,000 and $114,000, or 17.8% and 25.2%, respectively for the quarter and the nine-month period ended April 30, 2009, as compared to the quarter and the nine-month period ended April 30, 2008. Depreciation and amortization also increased as a percentage of total revenues in the periods presented. The increases are primarily related to the addition of intangible assets in business acquisitions in fiscal 2008 and 2009, such as the February 2008 acquisition of certain assets of ATX Barter and the August 2008 acquisition of certain assets of a media services company from Intagio.

In the third quarter of 2009, we made additional investments in our network operations infrastructure as we expanded our revenue sources by offering subscription rights to our proprietary online broker and client relationship management platform and related hosting arrangements.  This investment in our infrastructure resulted in an increase in the depreciation expense for the quarter ended April 30, 2009, as compared to the corresponding quarter of 2008.

Interest Income, Net

Interest income is presented net of the related interest expense in our consolidated statements of operations. The gross interest income and expense are as follows (in thousands):

	Quarter ended April 30,						Percent			Nine months ended April 30,						Percent
	2009			2008			increase (decrease)			2009			2008			increase (decrease)
	(unaudited)									(unaudited)
Interest income	$	16		$	21			-23.8	%	$	52		$	68			-23.5	%
Interest expense		(4	)		(16	)		-75.0	%		(35	)		(58	)		-39.7	%
Interest income, net	$	12		$	5			140.0	%	$	17		$	10			70.0	%
Intestest income, net, as percentage of total revenue		0.3	%		0.1	%					0.1	%		0.1	%

The gross interest income is derived primarily from our notes receivable for corporate office sales. During 2004, we sold five corporate-owned offices to our brokers. During our fiscal 2008, we also sold to certain brokers three regional offices obtained from Intagio in the August 2007 acquisition. Those notes receivable are repaid in installments. The installment payments for various notes receivable end between 2010 and 2016. Interest declines as the notes receivable are being repaid by the borrowers.

The gross interest expense results primarily from our two notes payable to Intagio. Those notes originate from the August 2007 and August 2008 business acquisitions. The note originated from August 2008 acquisition was repaid in full in November 2008.  The note originated from August 2007 acquisition paid in full in April 2009.

Income Taxes

We recognized a $132,000 and $183,000 provision for income taxes, in the quarter and nine-month period ended April 30, 2009, respectively, as compared to the $215,000 and $473,000 provision for income taxes in the quarter and nine-month period ended April 30, 2008. Provision for income taxes decreased by $51,000 and $258,000, respectively, for the quarter and the nine-month period ended April 30, 2009, as compared to the corresponding periods of fiscal 2008, due to the corresponding decreases in pre-tax income.

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LIQUIDITY AND CAPITAL RESOURCES

We have financed our ongoing operations over the last several years primarily with cash provided by our operating activities.  Our principal sources of liquidity are our cash flows provided by operating activities, our existing cash and cash equivalents, and a line of credit facility.  As of April 30, 2009 and July 31, 2008, we had $1.2 million and $1.1 million, respectively, in cash and cash equivalents. Our working capital as of April 30, 2009 and as of July 31, 2008 was $1.9 million and $911,000, respectively. Additionally, we have a revolving credit agreement to establish a $1.5 million line of credit facility from our primary banking institution, U.S. Bank (“line of credit”). The current line of credit agreement expires in November 2009. We have no outstanding balance on our line of credit as of April 30, 2009.

Our liquidity is affected by our business acquisitions. During our fiscal 2008, we spent a total cash consideration of $2.4 million on two acquisitions of certain assets of commercial trade exchange networks as follows:

-  the August 2007 acquisition from Intagio

-  the February 2008 acquisition of ATX Barter.

In addition to the upfront cash consideration, the August 2007 acquisition also included a $1.1 million note payable in 24 monthly installments and a $150,000 contingent consideration paid out in the first quarter of 2009.  We made principal payments on this note payable in the amount of $546,000 and $591,000 during fiscal 2008 and during the nine-month period ended April 30, 2009, respectively. The note was paid in full in April 2009.

In August 2008, we completed the acquisition of certain assets of a media services company from Intagio for the total cash consideration of $68,000 and a note payable of $638,000.  This note was paid in full in November 2008.

The following table presents a summary of our cash flows for the nine-month periods ended April 30, 2009 and 2008 (in thousands):

	Nine months ended April 30,
	2009			2008
	(unaudited)
Cash provided by operating activities	$	1,535		$	1,770
Cash used in investing activities		(143	)		(2,362	)
Cash used in financing activities		(1,259	)		(568	)
Increase (decrease) in cash	$	133		$	(1,160	)

Our business model has historically proven to be successful in providing positive cash flow from operating activities.  This positive cash flow enabled us, in large part, to complete acquisitions in fiscal 2008 and 2009.  We feel that our cash flows from operating activities will remain adequate to fund ongoing operating requirements.

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Our working capital as of April 30, 2009, included advertising credits originally obtained in our business acquisition in August 2008 in the amount of $507,000, which represent unsold prepaid credits for future media print and broadcast placements. We recorded the advertising credits at the fair market value based on the estimated future selling price less reasonable costs of disposal. The future operating cash flows may be negatively affected and our original estimate of the net realizable value of the advertising credits will be decreased if we are not able to resell the advertising credits to our customers.

As part of our contemplated future expansion activities or as part of our evaluation of strategic alternatives and opportunities, we may seek to acquire certain competitors or other business to business enterprises, or consider partnering or other collaboration agreements, or a merger or other strategic transaction. We expect that our current working capital would be adequate for this purpose. However, we may seek external financing for a portion of the acquisition cost subject to the consent of any secured creditors.

Inflation has not had a material impact on our business. Inflation affecting the U.S. dollar is not expected to have a material effect on our operations in the foreseeable future.

Operating Activities

For the nine-month period ended April 30, 2009, net cash provided by operating activities was $1.5 million compared to $1.8 million in the nine-month period ended April 30, 2008, a decrease of $235,000, or 13.3%.  The decrease in net cash provided by the operating activities is the result of the decline in net income and the corresponding increase in operating expenses.

The difference between our net income and our net cash provided by operating activities was attributable to non-cash expenses included in net income, and changes in the operating assets and liabilities, as presented below (in thousands):

	Nine months ended April 30,
	2009		2008
	(unaudited)
Net income	$	403	$	699
Add: non-cash  expenses		890		951
Add: changes in operating assets and liabilities		242		120
Net cash provided by operating activities	$	1,535	$	1,770

Non-cash expenses are associated with the amortization of intangible assets, depreciation and amortization of property and equipment, stock-based compensation expense and the changes in the deferred portion of the provision for income taxes.

Changes in operating assets and liabilities primarily reflect changes in working capital components of the balance sheet apart from cash and cash equivalents. Net cash provided by operating activities also reflects changes in some non-current components of the balance sheet, such as long-term deferred rent and non-current prepaid expenses and deposits. As discussed in Note 1 to our consolidated financial statements, during the nine-month period ended April 30, 2009, we granted subscription rights to our proprietary online broker and client relationship management software for an upfront consideration of $350,000 as well as for other recurring fees. The consideration received is amortized into revenue over a contractual term of five years. The deferral of this cash consideration resulted in the increase in cash flows resulting from changes in the operating assets and liabilities.

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As discussed earlier in the overview section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations, for each calendar year, we divide our operations into 13 four-week billing and commission cycles always ending on a Thursday, while we report our financial results as of the last day of each calendar month. The timing of billing and collection activities after the end of the billing cycle does not correspond with the end of the accounting period, therefore this timing difference results in the fluctuations of the balances of cash, accounts receivable, commissions payable and accrued commissions and therefore in periodic fluctuations in cash flows resulting from changes in operating assets and liabilities.

The total cash we received exclusively from our marketplace members, excluding sales to brokers, media sales, and revenue from our subscription-based arrangement for client management platform, and net of credit card returns, electronic fund transfer returns, and return checks is as follows (in thousands):

	Nine months ended April 30,
	2009					2008
	Amount		Percent of total			Amount		Percent of total
	(unaudited)
Credit cards	$	7,406		61.6	%	$	7,147		60.0	%
Electronic funds transfer		3,032		25.2	%		3,078		25.9	%
Cash and checks		1,585		13.2	%		1,682		14.1	%
Cash received from marketplace members	$	12,023		100.0	%	$	11,907		100.0	%

Investing Activities

Net cash used in investing activities was primarily the result of business acquisitions, purchase of property and equipment and the collections on notes receivable from corporate office sales.

For the nine-month period ended April 30, 2009, net cash used in investing activities was $143,000 compared with $2.4  million used in investing activities in the nine-month period ended April 30, 2008, a decrease in cash used in investing activities of $2.2 million, or 93.9%. In the nine-month period ended April 30, 2008, the net cash used in investing activities was primarily related to $2.4 million cash consideration paid for the August 2007 acquisition from Intagio and February 2008 acquisition of ATX Barter. In the nine-month period ended April 30, 2009, the net cash used in investing activities was primarily related to $68,000 cash consideration paid for the August 2008 acquisition from Intagio,  $150,000 final settlement of contingent consideration from August 2007 acquisition and $108,000 of purchases of property and equipment.. Those cash outlays were partially offset by installment payments received on loans granted in earlier periods.

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Financing Activities

Our net cash used in financing activities consists of debt repayments and discretionary repurchases of our common stock in order to provide more value for our remaining shareholders.

For the nine-month period ended  April 30, 2009, net cash used in financing activities was $1.3 million compared with $568,000 used in financing activities in the nine-month period ended April 30, 2008, an increase of cash used in financing activities of $691,000, or 121.7%. In the nine-month period ended April 30, 2009, we made principal repayments in the amount of $1,229,000  on our long-term debt incurred in connection with our August 2007 and August 2008 acquisitions from Intagio and we made a stock repurchase of $30,000.  In the nine-month period ended April 30, 2008, in addition to debt payments of $406,000, we spent $162,000 on stock repurchases.

Commitments and Contingencies

 We lease office space under non-cancelable operating leases. Lease commitments include leases for the Company’s corporate headquarters in Bellevue, Washington, and branch offices in Chicago, Illinois, and Cleveland, Ohio. Those leases expire between April 2010 and October 2011.  The rent for the Company’s office in Cleveland, Ohio, was paid in part in ITEX dollars until June 1, 2009.

In addition to the lease commitments, we are a party to several non-cancelable and non-refundable purchase commitments. Those purchase obligations consist primarily of arrangements for telecommunications and co-location services for our network operations as well as investor relations consulting.  Some of our purchase commitments are payable in ITEX dollars.

Our contractual commitments at April 30, 2009 are presented below (in thousands):

	Operating leases				Purchase commitments				Total
Year ending July 31,	U.S. dollars		ITEX dollars		U.S. dollars		ITEX dollars		U.S. dollars		ITEX dollars
2009 (1)		70		1		11		23		81		24
2010		243		-		43		30		286		30
2011		126		-		15		-		141		-
2012		29		-		-		-		29		-
Total	$	468	$	1	$	69	$	53	$	537	$	54

(1) The expected payments for 2009 reflect future minimum payments for the three-month period from May 1, 2009 to July 31, 2009.

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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate significant estimates used in preparing our financial statements, including those related to:

· revenue recognition, including allowances for uncollectible accounts;

· accounting for ITEX dollar activities;

· the allocation of purchase price in business combinations

· accounting for goodwill and other long-lived intangible assets;

· accounting for income taxes; and

· stock-based compensation.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates if our assumptions change or if actual circumstances differ from those in our assumptions.

For a summary of all of our significant accounting policies, including the critical accounting policies discussed above, see Note 1, Summary of Significant Accounting Policies, to our consolidated financial statements filed with our 2008 annual report on Form 10-K.

Recent Accounting Pronouncements

In June 2008, the FASB issued EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.  EITF 03-6-1 gives guidance as to the circumstances when unvested share-based payment awards should be included in the computation of EPS. EITF 03-6-1 is effective for us beginning August 1, 2009, the beginning of our 2010 reporting periods.  We are currently assessing the impact of EITF 03-6-1 on our results of operations, cash flows and financial position.

In April 2008, the FASB issued FSP 142-3, Determining the Useful Life of Intangible Assets.  FSP 142-3 amends the factors to be considered in determining the useful life of intangible assets.  Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value.  FSP 142-3 is effective for us beginning August 1, 2009, the beginning of our 2010 reporting periods.  We are currently assessing the impact of FSP 142-3 on our results of operations, cash flows and financial position.

In December 2007, the FASB issued SFAS 141 (R), Business Combinations, which replaces SFAS 141 and amends several other pronouncements. Under SFAS 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that companies recognize acquisition-related costs separately from the acquisition and expense those costs as incurred, and that companies generally expense restructuring costs in periods subsequent to the acquisition date. It also requires that changes in valuation allowances for acquired deferred tax assets and acquired income tax uncertainties impact income tax expense. In addition, acquired in-process research and development is required to be capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS 141(R) will change our accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2010.

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FACTORS THAT MAY AFFECT FORWARD-LOOKING STATEMENTS

The issues and uncertainties listed below, among other, may adversely impact and impair our business and should be considered in evaluating our financial outlook and the forward-looking statements included in this report.

Our future revenue growth and profitability remains uncertain.

During 2008 and the first nine months of 2009, we have increased revenues through organic growth and through acquisitions.  We cannot assure you that our revenues will continue to increase in future quarters or future years.  We may continue to add revenue through new subscription-based services or acquisitions, but we cannot assure you that we will be successful in our efforts or that financing for these endeavors will be available.  We have sustained profitable operations for nearly five years.  However, our prospects for the future must be considered in light of the risks, expenses and difficulties frequently encountered by small businesses, including uncertainty of revenues, markets, profitability and the potential need to raise capital to fund our ongoing operations.  We cannot assure you that we will be successful in addressing these risks or that we can continue to be operated profitably, which depends on many factors, including the success of our development and expansion efforts, the control of expense levels and the success of our business activities.  Our future operating results will depend on a variety of factors, including those discussed in the other risk factors set forth below.

We are largely dependent on key personnel.

Potentially, any loss of key officers, key management and other personnel could impair our ability to successfully execute our business strategy particularly when these individuals have acquired specialized knowledge and skills with respect to ITEX and our operations.   Although we believe ITEX is currently being administered capably, we remain substantially dependent on the continued services of our key personnel including the services of CEO and Interim CFO Steven White.  We place heavy reliance on Mr. White’s experience and management skills.  We have not entered into formal employment agreements with our current executive officers including Mr. White.  We carry a $2.0 million life insurance policy covering Mr. White to insure the business in the event of his death but do not carry life insurance for any other key personnel.  If Mr. White or other key personnel were to leave ITEX unexpectedly, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary training and experience.  We believe we have the necessary management expertise to implement our business strategy and that support personnel can be increased as needed.  However, we may need to attract, train, retain and motivate additional financial, technical, managerial, marketing and support personnel.  We face the risk that, if we are unable to attract and integrate new personnel or retain and motivate existing personnel, our business will be adversely affected.

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We may need additional financing; current funds may be insufficient to finance our plans for growth or our operations.

Although we believe that our financial condition is stable and that our cash and cash equivalent balances and cash flows from operations provide adequate resources to fund our ongoing operating requirements, we have limited funds and may incur contractual obligations.  Our existing working capital may not be sufficient to allow us to execute our business plan as fast as we would like or to take full advantage of all available business opportunities.  We believe our core operations reflect a scalable business strategy which will allow our business model to be executed with limited outside financing.  However, we also may seek to acquire certain competitors.  We have a line of credit with our primary banking institution which will provide additional reserve capacity for general corporate and working capital purposes and, if necessary, enable us to make certain expenditures related to the growth and expansion of our business model.  However, if adequate capital were not available or were not available on acceptable terms at a time when we needed it, our ability to execute our business plans, develop or enhance our services, make acquisitions or respond to competitive pressures would be significantly impaired.  Further, we cannot assure you that we will be able to implement various financing alternatives or otherwise obtain required working capital if needed or desired.

We are substantially dependent on our broker network.

Our success depends on our ability to expand, retain and enhance our broker network.  We look to our broker network to enroll new marketplace members, train them in the use of the marketplace, facilitate business among members, provide members with information about marketplace products and services and assure the payment of our dues and fees.  Brokers have a contractual relationship with ITEX typically for a renewable three or five-year term.  There can be no assurance that our brokers will continue to participate in the marketplace or that we will be able to attract new franchisees at rates sufficient to maintain a stable or growing revenue base.  We depend on the ability of our brokers to expand the number of members and the volume of transactions through the marketplace.  We cannot assure you that the market for our products and services will continue to develop as expected.  If our industry does not grow, becomes saturated with competitors, if our products and services do not continue to achieve market acceptance, or if our brokers are unsuccessful in enrolling new members to equalize the attrition of members leaving the marketplace, the overall share of the market handled by our broker network could be reduced.  Consequently our business operating results and financial condition may be materially adversely affected.

We are dependent on the value of foreign currency.

We transact business in Canadian dollars as well as US dollars.  In the nine-month period ended April 30, 2009, approximately 7% of our total revenues were derived from Canadian operations.  While foreign currency exchange fluctuations are not believed to materially adversely affect our operations at this time, changes in the relation of the Canadian dollar to the US dollar could continue to affect our revenues, cost of sales, operating margins and result in exchange losses.

Acquisitions could result in operating difficulties, dilution and other harmful consequences.

We completed our acquisition of select Intagio assets on August 1, 2007 and on August 1, 2008, and our acquisition of ATX Barter on March 1, 2008.  However, we have a limited amount of experience acquiring companies.  We have evaluated, and expect to continue to evaluate, other potential strategic transactions.  From time to time, we may engage in discussions regarding potential acquisitions.  Any of these transactions could be material to our financial condition and results of operations.  In addition, the process of integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures and is risky.

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The areas where we may face risks include:

· The need to implement or remediate controls, procedures and policies appropriate for a public company at companies that prior to the acquisition lacked these controls, procedures and policies.

· Diversion of management time and focus from operating our business to acquisition integration challenges.

· Cultural challenges associated with integrating brokers, members or employees from the acquired company into our organization.

· The need to integrate each company’s accounting, management information, human resource and other administrative systems to permit effective management.

The anticipated benefit of many of these acquisitions may not materialize.  Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition.  Future acquisitions may require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all.

We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes Oxley Act of 2002, and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on the trading price of our common stock.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and SEC rules, we are required to furnish a report by our management assessing the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. In addition, we must comply with Section 404(b) requirements to provide an auditor’s attestation report on internal control over financial reporting beginning with our Annual Report on Form 10-K for our fiscal year ending July 31, 2010.  The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a framework for companies to assess and improve their internal control systems.  The Public Company Accounting Oversight Board’s (“PCOAB”) Auditing Standard No. 5, adopted by the SEC on July 27, 2007, provides the professional standards and related performance guidance for auditors to report on the effectiveness of our internal controls over financial reporting under Section 404.  Our assessment of internal controls over financial reporting requires us to make subjective judgments and, particularly because Standard No. 5 is newly effective, some of the judgments will be in areas that may be open to interpretation.

While we determined in our Management Report on Internal Control over Financial Reporting included in our Form 10-K for the fiscal year ended July 31, 2008, that our internal control over financial reporting was effective as of July 31, 2008, we must continue to monitor and assess our internal control over financial reporting.  If we identify one or more future material weaknesses in our internal control over financial reporting and such weakness remains uncorrected at fiscal year end, we will be unable to assert our internal control is effective.  If we are unable to assert that our internal control over financial reporting is effective for a particular year (or if our auditors are unable to attest that we have maintained, in all material respects, effective internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports.  That would likely have an adverse effect on our stock price.

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ITEM 4T.  CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures.

Under the supervision and with the participation of our management, including the Chief Executive Officer, who is also the Interim Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Disclosure controls and procedures are defined under SEC rules as controls and other procedures that are designed to ensure that information required to be disclosed by a company in reports that it files under the Exchange Act are recorded, processed, summarized and reported within the required time periods.  Based on that evaluation, our CEO and interim CFO concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.

(b) Changes in internal control over financial reporting.

There have been no changes in our internal controls over financial reporting during our most recent quarter that we believe have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

See Note 8 – Legal Proceedings of the Notes to consolidated financial statements (Item 1) for information regarding legal proceedings.

ITEM 6.  EXHIBITS

Exhibit Number	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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

		ITEX CORPORATION
		(Registrant)
Date:  June 9, 2009	By:	/s/ Steven White
		Steven White
		Chief Executive Officer
		Interim Chief Financial Officer

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