ITEX (ITEX) 10-Q 2010 Q0 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 January 31, 2010.

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.

YesxNo¨

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 January 31, 2010, we had 18,051,248shares of common stock outstanding.

ITEX CORPORATION

FORM 10-Q

For the Three-month Period Ended January 31, 2010

INDEX

		Page(s)
PART  I.	Financial Information
ITEM 1.	Financial Statements
	Consolidated Balance Sheets as of January 31, 2010 and July 31, 2009 (unaudited)	1
	Consolidated Statements of Income for the Three and Six Months Ended January 31, 2010 and 2009 (unaudited)	2
	Consolidated Statement of Stockholders’ Equity for the Six Months Ended January 31, 2010 (unaudited)	3
	Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2010 and 2009(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	38
PART II.	Other Information	38
ITEM 1.	Legal Proceedings	38
ITEM 4.	Submission of Matters to a Vote of Security Holders	38
ITEM 6.	Exhibits	39
	Signatures	39

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

ITEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 (Unaudited)

	January 31, 2010			July 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	3,627		$	2,557
Accounts receivable, net of allowance of $330 and $351		1,234			895
Prepaid expenses		194			82
Loans and advances		62			57
Prepaid advertising credits		157			157
Deferred tax asset		739			739
Notes receivable - corporate office sales		164			242
Other current assets		12			19
Total current assets		6,189			4,748
Property and equipment, net of accumulated depreciation of $358 and $280		171			247
Intangible assets, net of accumulated amortization of $1,956 and $1,703		1,242			1,572
Deferred tax asset, net of current portion		5,543			5,798
Notes receivable - corporate office sales, net of current portion		514			624
Other long-term assets		337			354
Goodwill		3,282			3,318
Total assets	$	17,278		$	16,661
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	113		$	98
Commissions payable to brokers		372			691
Accrued commissions to brokers		1,268			828
Accrued expenses		592			521
Deferred revenue		125			144
Advance payments		124			138
Total current liabilities		2,594			2,420
Long-term liabilities:
Other long-term liabilities		224			260
Total Liabilities		2,818			2,680
Commitments and contingencies
Stockholders’ equity:
Common stock, $.01 par value; 50,000 shares authorized; 17,887 and 17,856 shares issued and outstanding, respectively		181			179
Additional paid-in capital		28,990			28,962
Accumulated deficit		(14,711	)		(15,160	)
Total stockholders' equity		14,460			13,981
Total liabilities and stockholders’ equity	$	17,278		$	16,661

See accompanying notes to consolidated financial statements.

1

ITEX CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

	Three-Months Ended January 31,					Six-Months Ended January 31,
	2010			2009		2010			2009
Revenue:
Marketplace revenue and other revenue	$	4,537		$	4,365	$	8,460		$	8,264
Costs and expenses:
Cost of Marketplace revenue		2,907			2,779		5,456			5,301
Corporate salaries, wages and employee benefits		479			455		891			965
Selling, general and administrative		462			707		915			1,367
Depreciation and amortization		163			189		333			374
		4,011			4,130		7,595			8,007
Income from operations		526			235		865			257
Other income (expense)
Net interest		10			7		21			5
Gain (loss) on sale of assets		(257	)		-		(157	)		-
		(247	)		7		(136	)		5
Income before income taxes		279			242		729			262
Provision for income taxes		107			108		280			83
Net income	$	172		$	134	$	449		$	179
Net income per common share:
Basic	$	0.01		$	0.01	$	0.03		$	0.01
Diluted	$	0.01		$	0.01	$	0.03		$	0.01
Weighted average shares outstanding
Basic		17,873			17,756		17,846			17,737
Diluted		17,892			17,858		17,856			17,837

See accompanying notes to consolidated financial statements.

2

ITEX CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JANUARY 31, 2010

(In thousands)

(Unaudited)

	Common Stock				Additional Paid-in		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance at July 31, 2009		17,856	$	179	$	28,962	$	(15,160	)	$	13,981
Share-based compensation expense		31		2		28		-			30
Net income		-		-		-		449			449
Balance at January 31, 2010		17,887	$	181	$	28,990	$	(14,711	)	$	14,460

See accompanying notes to consolidated financial statements.

3

ITEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (In thousands)

(Unaudited)

	Six-months ended January 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	449		$	179
Items to reconcile to net cash provided by operations:
Depreciation and amortization		333			374
Share based compensation		30			76
Increase/(Decrease) in allowance for uncollectible accounts		(21	)		-
Change in deferred income taxes		255			63
Loss on Note – Seattle		255			-
Gain on Sale - SF Office		(99	)		-
Loss on disposal of equipment		-			1
Changes in operating assets and liabilities:
Accounts receivable, net		(332	)		339
Prepaid expenses		(95	)		82
Advances to brokers, net of repayments		(11	)		(25	)
Notes receivable from customers, net of repayments		(14	)		(6	)
Other current assets		7			17
Accounts payable		11			(114	)
Commissions payable to brokers		(318	)		(276	)
Accrued commissions to brokers		441			437
Accrued expenses		71			30
Deferred revenue		(54	)		(9	)
Long-term liabilities		-			(4	)
Advance payments		(13	)		23
Net cash provided by operating activities		895			1,187
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions		-			(68	)
Payment of contingent consideration for business acquisitions		-			(150	)
Business sales		50			-
Purchase of property and equipment		(2	)		(13	)
Payments received from notes receivable - corporate office sales		107			97
Payments received from loans		20			21
Net cash provided by (used in) investing activities		175			(113	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on third party indebtedness		-			(928	)
Net cash used in financing activities		-			(928	)
Net increase in cash		1,070			146
Cash and cash equivalents at beginning of period		2,557			1,061
Cash and cash equivalents at end of period	$	3,627		$	1,207
Supplemental cash flow information:
Cash paid for interest		-			31
Cash paid for taxes		3			52
Non-cash activities:
San Francisco Office note receivable		174			-

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:

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.

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, 2009.

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 matters described herein

· share based payments

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

5

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”, “2010” for August 1, 2009 to July 31, 2010, “2009” for August 1, 2008 to July 31, 2009).  The Company’s fiscal second quarter is the three-month period from November 1, 2009 to January 31, 2010 (“second quarter”).  The Company’s first six months is from August 1, 2009 to January, 31, 2010.The Company reports its results as of the last day of each calendar month (“accounting cycle”).

Business Combinations

The Company accounts for business combinations using the purchase method of accounting. 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 for any business combinations occurring prior to August 1, 2009. Subsequent to August 1, 2009, all costs to acquire a business will be expensed.

The Company identifies and records separately the intangible assets acquired apart from goodwill based on the specific criteria for separate recognition established per the accounting standards codification, 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.

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 a portion of these advertising credits that are expected to be utilized in the next year as a current asset and the balance are recorded as Other  long-term assets. The Company originally recorded the cost of the advertising credits at the fair 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 members, 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 members or as the Company utilizes such credits in its operations.   During the three-months ending January 31, 2010 and 2009, the Company recognized $7 and $12 expense on the sale of advertising credits, respectively. For the six month periods ended January 31, 2010 and 2009, the Company recognized $15 and $12 expense on sale of advertising credits, respectively. Additionally the Company used approximately $13 and $0 of advertising credits in the three-months ending January 31, 2010 and 2009 and $42 and $0 of advertising credits in the six-months ending January 31, 2010 and 2009, respectively for its own advertising needs.

6

 Notes Receivable

We review all notes receivable for possible impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value has been impaired and may not be recoverable.  Factors considered important that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results and a change in management of the Broker responsible for the note. During the three-months ended January 31, 2010 we reflected a loss of $255 from a default on a note receivable by a Broker.  In January 2010, we exercised our step-in rights and are currently managing this location as a corporate-owned office.  We expect to sell the management rights to this office within the next year, which will most likely result in a new note receivable along with generating a gain on sale of assets to be reflected in a subsequent reporting period.

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 is determined to have an indefinite useful life and is not amortized, but instead tested for impairment at least annually. A two-phase approach is used 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 is written down and charged to operating results in any period in which the recorded value of goodwill exceeds its fair value. We analyzed goodwill as of our last fiscal year July 31, 2009 and we did not identify any impairment. Management believes that there have been no triggering events since July 31, 2009 that would cause further evaluation of goodwill for impairment. The primary evaluation measures of operational cash flow and stock price inputs since that last analysis have improved in the six-months ended January 31, 2010 so we have not identified any indications of impairment as of January 31, 2010.

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.

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.

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.

7

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 auxiliary fees to members, such as annual membership dues, late fees, finance charges, statement fees and insufficient fund fees.  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).

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.

Web services contracts include multiple deliverable components, in which we recognize revenue from the platform subscription fee on a straight-line basis over the contract term. The Company recognizes revenue from recurring transaction processing, support and consulting fees as delivery has occurred or services have been rendered.

For transaction and association fees and some other 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 the accounting standards codification. 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.

Income Per Share

We prepare our financial statements on the face of the income statement for both basic and diluted earnings per share.  Basic earnings per share excludes potential dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.  As of January 31, 2010, we had no contracts to issue common stock, other than warrants outstanding to purchase up to 100,000 shares of common stock.

8

The following table presents a reconciliation of the denominators used in the computation of net income per common share - basic and net income per common share – diluted for the three and six-month periods ended January 31, 2010 and 2009 (in thousands, except per share data):

	Three-months Ended January 31,				Six-months Ended January 31,
	2010		2009		2010		2009
Net income available for stockholders	$	172	$	134	$	449	$	179
Weighted avg. outstanding shares of common stock		17,873		17,756		17,846		17,737
Dilutive effect of stock options and restricted shares		19		102		10		100
Common stock and equivalents		17,892		17,858		17,856		17,837
Earnings per share:
Basic	$	0.01	$	0.01	$	0.03	$	0.01
Diluted	$	0.01	$	0.01	$	0.03	$	0.01

For the three and six-month periods ended January 31, 2010 and 2009, none of the 100,000 warrants, respectively, attributable to the outstanding warrants were included in the calculation of diluted earnings per share because the exercise prices of the warrants were greater than or equal to the average price of the common shares, and therefore their inclusion would have been anti-dilutive.

Accounting for ITEX Dollar Activities

Primarily, we receive ITEX dollars from members’ transaction and association fees, but we also receive ITEX dollars, to a much lesser extent, from other member fees.  We expend ITEX dollars for revenue sharing transaction fees and association fees with our Broker Network, and for general Marketplace costs.  Our policy is to record transactions at the fair value of products or services received when those values are readily determinable

Our accounting policy follows the accounting standards codification which indicates that transactions in which non-monetary assets are exchanged for barter credits should be recorded at fair value of the assets (or services) involved.  The fair value of the assets received (in this case ITEX dollars) should be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered or service provided.  Our position is that the fair value of the non-monetary asset exchanged is more clearly evident than the fair value of the ITEX dollar received.  In addition, there is no cost basis to us for ITEX dollars.  Our conclusion may change if we could convert ITEX dollars into USD in the near term, as evidenced by a historical practice of converting ITEX dollars into USD shortly after receipt, or if quoted market prices in USD existed for the ITEX dollar.

We expend ITEX dollars primarily on the following items:

· Co-op advertising with Marketplace members;

· Revenue sharing with Brokers for transaction fees and association fees;

· Incentives to Brokers for registering new members in the Marketplace;

9

We believe that fair value should not be regarded as determinable within reasonable limits if major uncertainties exist about the realizability of the value that would be assigned to the asset received in a non-monetary transaction at fair value.  If neither the fair value of the non-monetary asset (or service) transferred or received in the exchange is determinable within reasonable limits, the recorded amount of the non-monetary asset transferred from the enterprise may be the only measure of the transaction. When our ITEX dollar transactions during the periods presented in the accompanying financial statements lacked readily determinable fair values they were recorded at the cost basis of the trade dollars surrendered, which was zero.  However, we have reflected in our financial statements those items that meet non-monetary recognition by having readily determinable fair values.  Our consolidated statements of income include ITEX dollar expenses for corporate expenses for certain products or services we purchased at prices comparable to what we would have expended had we paid in USD.

While the accounting policies described above are used for financial reporting purposes, the Internal Revenue Service requires, for purposes of taxation, that we recognize revenues, expenses, assets, and liabilities for all transactions in which we either receive or spend ITEX dollars using the ratio of one U.S. dollar per ITEX dollar.  For this reason, we track our ITEX dollar activity in statements to members and Brokers and in other ways necessary for the operation of the Marketplace and our overall business.

Share-based Payments

The Company accounts for share-based compensation to its employees and directors and measures of the amount 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.  

Contingencies

In the normal course of our business we are periodically involved in litigation or claims.  We record litigation or claim-related expenses upon evaluation of among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss.  We accrue for settlements when the outcome is probable and the amount or range of the settlement can be reasonably estimated.  In addition to our 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.  We expense our legal costs associated with these matters when incurred.

Recent Accounting Pronouncements

In June 2008, the Financial Accounting Standards Board (“FASB”) issued guidance as to the circumstances when unvested share-based payment awards should be included in the computation of EPS. The guidance is effective for us beginning August 1, 2009, the beginning of our 2010 reporting periods. We adopted this guidance on August 1, 2009 and it had no material impact on our results of operations, cash flows or financial position.

In April 2008, the FASB issued additional information on 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. This guidance is effective for us beginning August 1, 2009, the beginning of our 2010 reporting periods. We adopted this guidance on August 1, 2009 and it had no material impact on our results of operations, cash flows or financial position.

10

In March 2008, the FASB issued guidance that is intended to enhance the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  The provision is effective for us beginning August 1, 2009, the beginning of our 2010 reporting periods. We adopted this guidance on August 1, 2009 and it had no material impact on our results of operations, cash flows or financial position.

In December 2007, the FASB issued guidance on business combinations.  The guidance retains the purchase method of accounting for acquisitions but changes the way we will recognize assets and liabilities.  It also changes the way we will recognize assets acquired and liabilities assumed arising from contingencies, requires us to capitalize in-process research and development at fair value, and requires us to expense acquisition-related costs as incurred.  This provision was effective for us on August 1, 2009, the beginning of our 2010 reporting periods.  The provision applied prospectively to our business combinations completed on or after August 1, 2009 and did not require us to adjust or modify how we recorded any acquisition prior to that date.

In September 2006, the FASB issued guidance which was intended to provide guidance for using fair value to measure assets and liabilities.  In general, this pronouncement is intended to establish a framework for determining fair value and to expand the disclosures regarding the determination of fair value.  With certain financial instruments, a cumulative effect of a change in accounting principle may be required with the impact of the change recorded as an adjustment to opening retained earnings.  We adopted certain provisions of this guidance on August 1, 2008, the beginning of our 2009 reporting periods.   The adoption affected our accounting policy regarding ITEX dollar activities but there will be no impact on future results of operations, cash flows and financial position.  In February 2008, the FASB delayed the effective date of this provision for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The non-financial assets and non-financial liabilities for which the Company has not applied the fair value provisions include goodwill and other intangible assets.  Full adoption of this provision was effective for us beginning August 1, 2009, the beginning of our 2010 reporting periods.  We adopted this guidance on August 1, 2009 and it had no material impact on our results of operations, cash flows or financial position.

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 in cash and a secured promissory note in the amount of $688 due to the seller with the interest rate of 8.00% payable in eleven equal monthly payments of $65.

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 to $638 and the Company agreed to pay immediately the full amount of the remaining outstanding balance of the note. During the three-months ended October 31, 2008, the Company made three monthly installment payments of $65 on this note. The remaining balance of $454 was paid in full on November 10, 2008.

11

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 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 cash purchase price as well as an accelerated final payment of $150 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, 2009).

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 the three and six-month periods ended January 31, 2010 and 2009, 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):

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		Three-months ended January 31,				Six-months ended January 31,
		2010		2009		2010		2009
Revenue:
Marketplace and other revenue		$	47	$	88	$	61	$	159
Costs and expenses:
Cost of marketplace revenue			-		-		-		-
Corporate salaries, wages and employee benefits			-		-		-		3
Selling, general and administrative			47		88		61		156
Depreciation and amortization			-		-		-		-
			47		88		61		159
Income from operations	��		-		-		-		-

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 based on a percentage of USD collections of revenues from association fees, transactions fees and some other 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 2009. Changes in the carrying amount of the intangible assets in the six-months ended January 31, 2010 are summarized as follows (in thousands):

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	Membership lists			Noncompetition agreements			Trade name			Total intagible assets
Balance as of July 31, 2009	$	1,511		$	43		$	18		$	1,572
Amount allocated to sale of SF Corporate owned office		(76	)					-			(76	)
Amortization		(239	)		(14	)		(1	)		(254	)
Balance as of January 31, 2010	$	1,196		$	29		$	17		$	1,242

Based on identified intangible assets recorded as of January 31, 2010 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
2010 (1)		234		13		1		248
2011		447		16		2		465
2012		219		-		2		221
2013		219		-		2		221
Thereafter		77		-		10		87
Total	$	1,196	$	29	$	17	$	1,242

(1) The expected amortization for 2010 reflects amortization expense that the Company anticipates to be recognized in the six-month period from February 1, 2010 to July 31, 2010.

The Company recorded goodwill in connection with business combinations completed in fiscal years from 2005 to 2009. 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 earn out agreement.  The earn out 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.

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 to satisfy, in full, its maximum post-closing obligation to Intagio for the Intagio earn out.  No further earn out obligations to Intagio remain as of January 31, 2010.

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In October 2009, ITEX sold assets originally acquired in the 2007 Intagio acquisition. As part of the sale, ITEX allocated a pro rata portion of Membership list and Goodwill to the sale in the amount of $76 and $36, respectively. The pro rata percentage amount for Goodwill was calculated using the relative fair value of the San Francisco corporate office to the estimated fair value of the ITEX network as a whole. The pro rata percentage amount of unamortized Membership list was calculated using the amount of the San Francisco corporate office member transaction volume over the total transaction volume of the retained members acquired in the 2007 Intagio transaction.

Changes in the carrying amount of goodwill in the six-months ended January 31, 2010 are summarized as follows (in thousands):

Balance as of July 31, 2009	$	3,318
Sale of SF Corporate owned office in Q1 2010		(36	)
Balance as of January 31, 2010	$	3,282

NOTE 6 – COMMITMENTS

The Company leases office space under operating leases. Lease commitments include leases for the Company’s corporate headquarters in Bellevue, Washington, and branch offices in Chicago, Illinois and Cleveland, Ohio. These leases expire between May 2011 and April 2015.  The rent for the Company’s office in Cleveland, Ohio, was paid in part in ITEX dollars until June 1, 2009.

Future minimum payments at January 31, 2010 under operating leases, for office space were as follows (in thousands):

Year ending July 31,	Amount
2010 (1)	$	141
2011		282
2012		188
2013		163
2014		166
2015		126
Total	$	1,066

(1) The expected payments for 2010 reflect future minimum payments for the six-month period from February 1, 2010 to July 31, 2010.

Rent expense, including utilities and common area charges, was $73 and $81, respectively for the three month periods ended January 31, 2010 and 2009.  Rent expense was $151 and $163 for the six month periods ended January 31, 2010 and 2009.

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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.

Future minimum payments at January 31, 2010 under the non-cancelable commitments were as follows (in thousands):

Year ending July 31,	U.S. dollars
2010 (1)		20
2011		15
Total	$	35

(1) The expected payments for 2010 reflect future minimum payments for the six-month period from February 1, 2010 to July 31, 2010.

NOTE 7 – NOTES PAYABLE AND LINE OF CREDIT

The Company has a revolving credit agreement to establish a $2.5 million line of credit facility with its primary banking institution, US Bank, effective through November 30, 2010.The line of credit facility was originally established on December 2, 2004.   There were no borrowings made under this line of credit in the Three Months ended January 31, 2010 and there was no outstanding balance as of January 31, 2010.  The Company may utilize this credit facility for short-term needs in the future.

On November 4, 2009, the maximum loan amount under the revolving credit facility increased from $1.5 million to $2.5 million and its maturity date was extended to November 30, 2010.

NOTE 8 – LEGAL PROCEEDINGS

In June 2003, a former Broker filed a complaint against us 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 us in the amount of $5,000 and a preliminary injunction enjoining us 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, we were 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, we 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.  Our 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.  A trial date has been set in April 2010.  We believe the termination of plaintiff's brokerage was for proper cause.

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We will vigorously defend against the lawsuit discussed above.  While it is not feasible to predict the exact outcome of the proceedings, in our opinion, it is not likely that the foregoing proceeding would ultimately  result in any liability that would have a material adverse effect on our results of operations, cash flows or financial position.  We have 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 our Consolidated Financial Statements in future periods.

From time to time we are subject to claims and litigation incurred in the ordinary course of business.  In our opinion, the outcome of other pending legal proceedings, separately and in the aggregate, will not have a material adverse effect on our 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):

	Three-months ended January 31											Six-months ended January 31,
	2010					2009						2010						2009
	Amount		Rate			Amount			Rate			Amount			Rate			Amount			Rate
Expected tax provison at federal statutory rate	$	95		34	%	$	82			34	%	$	248			34	%	$	89			34	%
State income taxes		9		3	%		21			9	%		25			3	%		22			8	%
Research and development credit		-		0	%		(1	)		-1	%		(1	)		0	%		(1	)		-1	%
Non-deductible expenses		3		1	%		6			3	%		8			1	%		7			3	%
Change in effective state rate and other items		-		0	%		-			0	%		-			0	%		(34	)		-13	%
Other		-		0	%		-			0	%		-			0	%		-			0	%
Provision for income taxes	$	107		38	%	$	108			45	%	$	280			38	%	$	83			31	%

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The change in effective state tax rate of 3% for the six month period ending January 31, 2010 compared to the 8% corresponding period ending January 31, 2009 relates primarily to increase in recognition of deferred tax assets at higher state tax rates during the six month period ended January 31, 2009. 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.

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. A reconciliation of the Company’s unrecognized tax benefits as of January 31, 2010 is as follows (in thousands):

Balance at July 31, 2009	$	249
Additions based on tax positions related to the current year		15
Balance at January 31, 2010	$	264

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 thousands, except per share amounts)

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.

No shares remain available for future grants under the 2004 Plan.

In October 2009, the Company issued 195 restricted shares to the Company’s CEO, valued at the grant date stock price of $0.68 per share, with a vesting period of 3 years from the date of grant. The grant is to be amortized over the respective requisite service period of three years.

In December 2008, 90 shares of restricted common stock, valued at the grant date stock price of $0.43, 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 addition to stock issued under the 2004 Plan to employees and directors, in March 2008, the Company granted 100 fully vested warrants to a vendor in exchange for investment advisory and financial communication assistance, valued at $66, based on the Black Scholes valuation model and amortized over the contractual service period of thirteen months.

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

	Three-months ended January 31,				Six-months ended January 31,
	2010		2009		2010		2009
Stock-based compensation expense included in:
Corporate salaries, wages and employee benefits	$	11	$	20	$	14	$	37
Selling, general and administrative		6		17		16		39
Total stock-based compensation expense		17		37		30		76	��

At January 31, 2010, 179 shares of common stock granted under the 2004 Plan remained unvested. At January 31, 2010, the Company had $119 of unrecognized compensation expense, expected to be recognized over a remaining weighted-average period of approximately 33 months.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per share amounts)

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 the negative of these terms 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 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”, “2010” for August 1, 2009 to July 31, 2010, “2009” for August 1, 2008 to July 31, 2009).  Our second quarter is the three-month period from November 1, 2009 to January 31, 2010 (“second 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 three-months ended January 31, 2010, as compared to the three-months ended January 31, 2009, our revenue increased by $172, or 4%, from $4,365 to $4,537 and our income from operations increased by $291, or 124%, from $235 to $526.

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Our increase in revenues for the three and six-months ended January 31, 2010 came primarily from media and web services revenue streams. In February 2009, we began offering subscription-based rights to our proprietary online broker and client relationship management platform.  We are optimistic our web services revenue will continue to increase, however our success in this area is dampened by the lack of revenue growth in the rest of our core business.  Transaction fee revenue decreased by 1% for the three and six-month periods ended January 31, 2010, respectively, compared to the 2009 corresponding periods.

For the six-month period ended January 31, 2010, we also reflected a gain of $99 due to the sale of a San Francisco corporate-owned office, and absorbed a loss of $255 from a default on a note receivable by a Broker.  In January 2010, we exercised our step-in rights and are currently managing this location as a corporate-owned office.  We expect to sell the management rights to this office within the next year, which will generate a gain to be reflected in a subsequent reporting period.

For the six-month period ended January 31, 2010, as compared to the six-month period ended January 31, 2009, our revenue increased by $196, or 2%, from $8,264 to $8,460 and our income from operations increased by $608, or 237%, from $257 to $865.

We continue to seek to increase our revenue by:

· minimizing the barriers to join the Marketplace;

· marketing the benefits of participation in the Marketplace;

· adding new Brokers;

· Enhancing our internet applications and web services.

RESULTS OF OPERATIONS

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

	Three-months ended  January 31,					Six-months ended  January 31,
	2010			2009		2010			2009
Revenue	$	4,537		$	4,365	$	8,460		$	8,264
Cost of marketplace revenue	$	2,907		$	2,779	$	5,456		$	5,301
Operating expenses		1,104			1,351		2,139			2,706
Income from operations		526			235		865			257
Other income (expense)		(247	)		7		(136	)		5
Income before income taxes		279			242		729			262
Provision for income taxes		107			108		280			83
Net income	$	172		$	134	$	449		$	179
Net income per common share:
Basic	$	0.01		$	0.01	$	0.03		$	0.01
Diluted	$	0.01		$	0.01	$	0.03		$	0.01
Average common and equivalent shares:
Basic		17,873			17,756		17,846			17,737
Diluted		17,892			17,858		17,856			17,837

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Revenue for the three-months ended January 31, 2010, as compared to the corresponding period of fiscal 2009, increased by $172, or 4%. Revenue for the six-month period ended January 31, 2010, as compared to the corresponding six-month period of fiscal 2009, increased by $196, or 2%. The increase in revenues came primarily from media and web services revenue streams.

Income from operations for the three-months ended January 31, 2010, as compared to the corresponding quarter of fiscal 2009, increased by $291, or 124%. Income from operations for the six-month period ended January 31, 2010, as compared to the corresponding period of fiscal 2009, increased by $608, or 237%. The increase for both the quarter and the six-month period is the result of the increase in revenues along with a decrease in operating expenses.

Operating expenses which include corporate salaries, wages and employee benefits, selling, general and administrative, depreciation and amortization decreased by $247, or 18% for the three-months ended January 31, 2010, compared to the corresponding period of fiscal 2009. Operating expenses decreased by $567, or 21% for the six-month period ended January 31, 2010, compared to the corresponding period of fiscal 2009.

The decrease in operating expenses in the three-months ended January 31, 2010, as compared to the corresponding period of fiscal 2009, resulted from a $245 decrease in selling, general and administrative expenses and a $26 decrease in depreciation and amortization. These decreases were offset somewhat by a $24 increase in corporate salaries, wages and employee benefits.

The decrease in operating expenses in the six-month period ended January 31, 2010, as compared to the corresponding period of fiscal 2009, resulted from a $452 decrease in selling, general and administrative expenses, $41 decrease in depreciation and amortization and a $74 decrease in corporate salaries, wages and employee benefits.

The most significant decrease in the operating expenses year over year is related to the decreases in our selling, general and administrative expenses, resulting from the conclusion of investor relations and financial advisory expenses that were payable in fiscal year 2009.

Net income for the three-months ended January 31, 2010, as compared to the corresponding period of fiscal 2009, increased by $38 or 28%. Net income for the six-month period ended January 31, 2010, as compared to the corresponding period of fiscal 2009, increased by $270, or 151%. The increase in net income for both the three and six-month periods resulted from the increased revenues and the decreases in expenses from operations.

Earnings per share remained at $0.01 per share in the three-months ended January 31, 2010 and 2009. Earnings per share increased from $0.01 per share for the six-month period ended January 31, 2009 to $0.03 per share for the six-month period ended January 31, 2010.

Growth by acquisition

On August 1, 2008, we acquired from 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.    ITEX Media Services was launched with the August 2008 acquisition.  ITEX Media Services offers a variety of 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 (“ATX”) certain assets of a commercial trade exchange network including a membership list, and incorporated the acquired member base into a corporate owned office in Cleveland, Ohio.

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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. Our post-acquisition actions have contributed to the success of the Intagio acquisition.  After the acquisition of the Intagio membership list, we sold three of the six newly acquired regions to two existing Brokers in two separate transactions.  We retained three Intagio regions to operate as corporate-owned offices.  In October 2009, we sold the San Francisco, CA corporate owned office to an existing Broker.

Web Services

We expanded our investment in information technology personnel and network infrastructure in support of our new subscription-based service offerings.  In February 2009, we began offering third-party subscription rights to our proprietary online broker and client relationship management platform to companies whose business model will be enhanced by using a digital currency.    Our fees include a one-time subscription fee in addition to a percentage of the gross merchandise value (GMV) of transactional activity hosted by the platform. As of January 31, 2010 we have a total of $298 of deferred revenue derived from web services reflected on our balance sheet, of which $76 is in current liabilities – deferred revenue and $222 is in other long-term liabilities.

Revenue, Costs and Expenses

The following table sets forth our selected consolidated financial information for the three and six-month periods ended January 31, 2010 and 2009 with amounts expressed as a percentage of total revenues (in thousands):

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	Three-months ended January 31,											Six-months ended January 31,
	2010						2009					2010						2009
	Amount			Percent			Amount		Percent			Amount			Percent			Amount		Percent
Revenue:
Marketplace revenue and other revenue	$	4,537			100.0	%	$	4,365		100.0	%	$	8,460			100.0	%	$	8,264		100.0	%
Costs and expenses:
Cost of Marketplace revenue		2,907			64.1	%		2,779		63.7	%		5,456			64.5	%		5,301		64.1	%
Salaries, wages and employee benefits		479			10.6	%		455		10.4	%		891			10.5	%		965		11.7	%
Selling, general and administrative		462			10.2	%		707		16.2	%		915			10.8	%		1,367		16.5	%
Depreciation and amortization		163			3.6	%		189		4.3	%		333			3.9	%		374		4.6	%
		4,011			88.4	%		4,130		94.6	%		7,595			89.8	%		8,007		96.9	%
Income from operations		526			11.6	%		235		5.4	%		865			10.2	%		257		3.1	%
Other Income/(expense)		(247	)		-5.4	%		7		0.2	%		(136	)		-1.6	%		5		0.1	%
Income before income taxes		279			6.1	%		242		5.6	%		729			8.6	%		262		3.2	%
Provision for income taxes		107			2.4	%		108		2.5	%		280			3.3	%		83		1.0	%
Net income	$	172			3.8	%	$	134		3.1	%	$	449			5.3	%	$	179		2.2	%

Marketplace revenue

Marketplace revenue consists of transaction fees, association fees and other revenues net. Other revenue includes web services, media and ITEX dollar revenue.  The following are the components of Marketplace revenue that are included in the consolidated statements of income (in thousands):

	Three-months ended January 31,							Six-months ended January 31,				Percent
	2010		2009		Percent increase			2010		2009		increase (decrease)
	(unaudited)							(unaudited)
Transaction fees	$	2,989	$	3,016		-1	%	$	5,559	$	5,616		-1	%
Association fees		1,206		1,162		4	%		2,397		2,307		4	%
Other revenue		342		187		83	%		504		341		48	%
	$	4,537	$	4,365		4	%	$	8,460	$	8,264		2	%

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Total revenue increased by $172, or 4%, for the three-months ended January 31, 2010, as compared to the corresponding period ended January 31, 2009. Total revenue increased by $196, or 2% for the six-month period ended January 31, 2010, as compared to the six-month period ended January 31, 2009.

The increase in revenues for the three and six-month periods is primarily due to the increase in association fee revenue and other revenue. Other revenue increased by $155, or 83%, and $163, or 48%, for the three and six-month periods ended January 2010, respectively, as compared to the corresponding periods of 2009. Association fee revenue increased by $44, or 4%, and $90, or 4%, for the three and six-month periods ended January 2010, respectively, as compared to the corresponding periods of 2009.  These increases in revenue were offset somewhat by transaction fee revenue which decreased by $27, or 1%, and $57, or 1%, for the three and six-month periods ended January 2010, respectively, as compared to the corresponding periods of 2009.

The increase in the other revenue is primarily related to continued progress in our web services revenue initiatives which began on February 12, 2009, when 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. This was followed by a second subscription-based agreement in May 2009.  Our fees include a one-time subscription fee in addition to support services provided and a percentage of the gross merchandise value (GMV) of transactional activity hosted by the platform. The revenue generated from platform subscription, support and consulting fees resulting from these arrangements amounted to $165 and $252 in the three and six-month periods ended January 31, 2010, as compared to $0 and $0 for the three and six-months ended January 31, 2009, respectively.

The increase in the association fee revenue for the quarter and six-month period ended January 31, 2010 is primarily attributable to  more new member accounts opened and fewer closed accounts in these periods, as compared to the corresponding periods of 2009. The slight decrease in transaction revenue is related to fewer transactions completed in the comparable periods.

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 Note 1 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 $47 and $88 as ITEX dollar revenue for the three-months ended January 31, 2010 and 2009, respectively. We recorded $61 and $159 as ITEX dollar revenue for the six-month periods ended January 31, 2010 and 2009, respectively.

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The corresponding ITEX dollar expenses in the three and six-month period ending January 31, 2010 were for  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 and employee benefits of our corporate owned 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):

	Three-months ended January 31,						Percent			Six-months ended January 31,						Percent
	2010			2009			increase (decrease)			2010			2009			increase (decrease)
Transaction fee commissions	$	2,110		$	2,071			2	%	$	3,912		$	3,950			-1	%
Association fee commissions		427			409			4	%		842			797			6	%
Corporate-owned office costs		197			212			-7	%		431			382			13	%
Other costs of revenue		173			87			99	%		271			172			58	%
	$	2,907		$	2,779			5	%	$	5,456		$	5,301			3	%
Costs of Marketplace revenue as percentage of total revenue		64	%		64	%					64	%		64	%

Costs of Marketplace revenue for the three-months ended January 31, 2010, as compared to the three-months ended January 31, 2009, increased by $128, or 5%.  Costs of Marketplace revenue for the six-month period ended January 31, 2010, as compared to six-month period ended January 31, 2009, increased by $155, or 3%. The overall increase in costs of revenue corresponds to the increase in total revenue for the same periods. Costs of Marketplace revenue and a percentage of total revenue remained at 64% for both the three and six-month periods ended January 2010 and 2009, respectively.

Transaction fee commissions increased by $39, or 2% for the three-months ended January 31, 2010, as compared to the corresponding quarter of fiscal 2009.  The increase in transaction fee commissions was primarily due to the sale of our San Francisco corporate-owned store to an existing Broker in October 2009, Transaction fee commissions decreased by $38 or 1% for the six-month period ended January 31, 2010 as compared to the corresponding period of fiscal 2009 as transaction revenue decreased by a similar rate during the comparable periods

Association fee commissions increased by $18 and $45, or 4% and 6%, respectively for the three and six-month periods ended January 31, 2010 as compared to the corresponding periods of fiscal 2009. The increase in commissions was in line with the corresponding increase in association revenue for the same periods.

Corporate owned office costs consist of compensation and operating expenses. Our corporate owned office costs decreased by $15 or 7% for the three-months ended January 31, 2010, as compared to corresponding period ended January 31, 2009. The decrease is due to the sale of our San Francisco corporate-owned store in October of 2009 which resulted in lower costs during the three-months ended January 31, 2010. Corporate-owned office costs increased by $49 or 13% for the six-month period ended January 31, 2010, as compared to the six-months ended January 31, 2009 due to more costs being allocated from operating expenses in 2010 compared to the same period in 2009.

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Other costs of revenue consist of miscellaneous Marketplace related expenses such as marketing and credit card processing fees along with other commissions not associated with association or transaction revenue. Other costs of revenue increased by $86 and $99, or 99% and 58%, respectively for the three and six-month periods ended January 31, 2010 as compared to the corresponding periods of fiscal 2009. The primary increase is due to $79 of expense for computer equipment and software upgrades that will be awarded to Brokers upon meeting established eligibility requirements during the six-month period ended January 31, 2010.

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):

	Three-months ended January 31,						Percent			Six months ended January 31,						Percent
	2010			2009			increase			2010			2009			decrease
Corporate salaries, wages and employee benefits	$	479		$	455			5	%	$	891		$	965			-8	%
Corporate salaries, wages and employee benefits as percentage of total revenue		11	%		10	%					11	%		12	%

Corporate salaries, wages and employee benefits expenses increased by $24 or 5% for the three-months ended January 31, 2010, as compared to the corresponding period ended January 31, 2009. The increase is primarily related to increased headcount. Corporate salaries, wages and employee benefits expenses decreased by $74 or 8% for the six-month period ended January 31, 2010, as compared to the six-month period ended January 31, 2009. The decrease in compensation related costs for the six-month period is primarily due to recruiting fees incurred only in 2009 and a decrease in stock based compensation.

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):

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	Three-months ended January 31,						Percent			Six- months ended January 31,						Percent
	2010			2009			decrease			2010			2009			decrease
Selling, general and administrative expenses	$	462		$	707			-35	%	$	915		$	1,367			-33	%
Selling, general and administrative expenses as percentage of total revenue		10	%		16	%					11	%		17	%

Selling, general and administrative expenses decreased by $245 and by $452, or 35% and 33%, respectively, for the three and six-month periods ended January 31, 2010, as compared to the three and six-month periods ended January 31, 2009. Our selling, general and administrative expenses also decreased as a percentage of total revenues in the periods presented.

The decrease in selling, general and administrative expenses for the three-months ended January 31, 2010, as compared to the corresponding period of 2009, is due primarily to a $115 decrease in bad debt expense, a $47 decrease in investor relations expenses due to a consulting arrangement with an investor relations firm, which began in March of 2008 and ended in 2009. In addition, supplies and other office expenses decreased $43 during the quarter ended January 31, 2010.

The decrease in selling, general and administrative expenses for the six-month period ended January 31, 2010, as compared to the corresponding period of 2009, is due primarily to the $186 decrease in investor relations and financial advisory expenses. In the last three-months of fiscal 2008 and the first three-months of fiscal 2009, we retained an investment bank along with an Investor relations firm, both of those agreements ended in 2009. In addition, $87 less of SG&A was transferred to cost of goods sold and supplies and other office expenses were $89 less in the six-month period ended January 2010 as compared the same period in 2009.

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):

	Three-months ended January 31,						Percent			Six-months ended January 31,						Percent
	2010			2009			decrease			2010			2009			decrease
Depreciation and amortization	$	163		$	189			-14	%	$	333		$	374			-11	%
Depreciation and amortization as percentage of total revenue		4	%		4	%					4	%		5	%

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Depreciation and amortization decreased by $26 and $41, or 14% and 11%, respectively for the three and the six-month periods ended January 31, 2010, as compared to the three and the six-month periods ended January 31, 2009. Depreciation and amortization decreased as a percentage of total revenues in the six-month period ended January 31, 2010 compared to the same period in 2009. There were  no material additions of property and equipment and intangible assets in 2010 which resulted in a decreased amount of depreciation and amortization.

Other income (expense)

Other income (expense) includes interest received on notes receivable and promissory notes, offsetting interest expense on notes payable and certain one-time gains and losses.  It includes interest expense from our two notes payable to Intagio resulting primarily from business acquisitions originated in August 2007 and August 2008. Both notes have been paid in full as of January 31, 2010.

Comparative results are as follows (in thousands):

	Three-months ended January 31,						Percent			Six-months ended January 31,						Percent
	2010			2009			increase (decrease)			2010			2009			increase (decrease)
Interest income	$	10		$	15			-33	%	$	21		$	36			-42	%
Interest expense		-			(8	)		-100	%		-			(31	)		-100	%
Interest income, net	$	10		$	7			43	%	$	21		$	5			320	%
Gain (loss) on sale of assets	$	(257	)	$	-			100	%	$	(157	)	$	-			100	%
Other income/(expense)	$	(247	)	$	7			-3629	%	$	(136	)	$	5			-2820	%
Other income/(expense), as percentage of total revenue		-5	%		0	%					-2	%		0	%

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 fiscal 2008, we sold to certain Brokers three regional offices obtained from Intagio in August 2007 and in October, 2009 we sold the San Francisco, CA corporate-owned office. As a result of San Francisco office sale, a new corporate office notes receivable was originated in the amount of $175. The notes receivable are repaid in installments. The installment payments for the various notes receivable end between 2010 and 2017. Interest income declines as the notes receivable are being repaid by the borrowers.

Interest expense was derived from notes payable all of which have been paid in full.

Other income/expense includes a gain on a sale of $99 due to the sale of the San Francisco corporate-owned office in October 2009. Also included is a loss of $255 representing the principal amount due on a note originating from the November 2003 sale of the Seattle corporate-owned office to a Broker. The original amount of the Note was $450. In January of 2010, we exercised our step-in rights and are currently managing the Seattle office as a corporate owned office.   The note balance was declared to be in default resulting in the recognition of the $255 loss.

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We expect to sell the management rights to this office within the next year, which will most likely result in a new note receivable along with generating a gain on sale of assets.

Income Taxes

Comparative results are as follows (in thousands):

	Three-months ended January 31											Six-months ended January 31,
	2010					2009						2010						2009
	Amount		Rate			Amount			Rate			Amount			Rate			Amount			Rate
Expected tax provison at federal statutory rate	$	95		34	%	$	82			34	%	$	248			34	%	$	89			34	%
State income taxes		9		3	%		21			9	%		25			3	%		22			8	%
Research and development credit		-		0	%		(1	)		-1	%		(1	)		0	%		(1	)		-1	%
Non-deductible expenses		3		1	%		6			3	%		8			1	%		7			3	%
Change in effective state rate and other items		-		0	%		-			0	%		-			0	%		(34	)		-13	%
Other		-		0	%		-			0	%		-			0	%		-			0	%
Provision for income taxes	$	107		38	%	$	108			45	%	$	280			38	%	$	83			31	%

We recognized a $107 and $280 provision for income taxes, in the three and six-month periods ended January 31, 2010, respectively, as compared to the $108 and $83 provision for income taxes in the three and six-month periods ended January 31, 2009. Provision for income taxes decreased by $1 for the three-months ended January 31, 2010, as compared to the corresponding period of fiscal 2009. The decrease was due to an effective lower state tax rate used in 2010 compared to the estimated state tax accrued in 2009.

The provision for income taxes increased by $197 for the six-month period ended January 31, 2010, as compared to the corresponding period of fiscal 2009, due to the corresponding increase in pre-tax income.

The effective tax rate related to our provision for income taxes in the six-months ended January 31, 2010 was a rate of 38%. The effective tax rate related to our recorded benefit for income taxes in the corresponding period of 2009 was a rate of 31%.

In the six month period ended January 31, 2010, the provision for income taxes of $280 is related to the income before income taxes for the six-month period ended January 31, 2010 of $729. In the six month period ended January 31, 2009, the provision for income taxes of $83 was related to the income before income taxes for the six-month period ended January 31, 2009 of $262. The 2009 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. The increase in effective tax rate lead to the increase in the expected future realizable tax benefits at the time when our deferred tax assets are expected to reverse.

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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 July 31, 2009 and January 31, 2010, we had $2.6 million and $3.6 million, respectively, in cash and cash equivalents. Additionally, we have a $2.5 million revolving credit facility from our primary banking institution, U.S. Bank (“line of credit”). The credit agreement expires in November 2010. We had no outstanding balance on our line of credit as of January 31, 2010.

During the three-months ended October 31, 2008, we completed the acquisition of certain assets of a media services company from Intagio for the total cash consideration of $68 and a note payable of $638.  In the first quarter of 2009, we made payments of $184 on this note payable. The remaining balance on this note was paid in full in November of 2008.

The following table presents a summary of our cash flows for the six-month periods ended January 31, 2010 and 2009 (in thousands)(unaudited):

	Six-months ended January 31,
	2010		2009
Cash provided by operating activities	$	895	$	1,187
Cash provided by (used) in investing activities		175		(113	)
Cash used in financing activities		-		(928	)
Increase (decrease) in cash	$	1,070	$	146

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 in the first three-months of 2009.  We feel that our cash flows from operating activities will remain adequate to fund ongoing operating requirements.

Our balance sheet as of January 31, 2010, includes $410 of advertising credits originally obtained in our business acquisition in August 2008. The advertising credits are 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 any strategic transaction, 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.

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Operating Activities

For the six-month period ended January 31, 2010, net cash provided by operating activities was $895 compared with $1,187 in the six-month period ended January 31, 2010 a decrease of $292, or 25%.  The decrease in net cash provided by the operating activities is the result of changes in operating assets and liabilities due to cycle close timing, offset somewhat by the increase in net income and the decrease 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)(unaudited):

	Six months ended January 31,
	2010			2009
Net income	$	449		$	179
Add: non-cash  expenses		753			514
Add: changes in operating assets and liabilities		(307	)		494
Net cash provided by operating activities	$	895		$	1,187

Non-cash expenses are primarily associated with the amortization of intangible assets, depreciation and amortization of property and equipment, stock-based compensation expense, the changes in the deferred portion of the provision (benefit) for income taxes, loss on the Seattle note  and gain on sale of assets.

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 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.

The total cash we received exclusively from our members, net of credit card returns, electronic fund transfer returns, and return checks is as follows (in thousands)(unaudited):

	Six-months ended January 31,
	2010					2009
	Amount		Percent of total			Amount		Percent of total
Credit cards	$	5,214		65	%	$	5,139		61	%
Electronic funds transfer		2,094		26	%		2,123		25	%
Cash and checks		740		9	%		1,103		13	%
Cash received from marketplace members	$	8,048		100	%	$	8,365		100	%

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Investing Activities

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

For the six-month period ended  January 31, 2010, net cash provided by investing activities was $175 compared with $113 used in investing activities in the six-month period ended January 31, 2009, a decrease of $288, or 255%.  In the six-month period ended January 31, 2009, the net cash used in investing activities was primarily related to $68 cash consideration paid for the August 2008 acquisition from Intagio as well as a $150 final payment of contingent earn-out consideration from August 2007 acquisition. In the six-month period ended January 31, 2010, the net cash provided by investing activities was primarily related to the collection of existing notes receivables and the sale of a corporate owned office.

Financing Activities

Our net cash used in financing activities consists of debt repayments and discretionary repurchases of our common stock in order to enhance long-term shareholder value.

For the six-month period ended  January 31, 2010, net cash used in financing activities was $0 compared with $928 used in financing activities in the six-month period ended January 31, 2009, a decrease of cash used in financing activities of $928. In the six-month period ended January 31, 2009, we made principal repayments on our long-term debt incurred in connection with our August 2007 and August 2008 acquisitions from Intagio.

Commitments and Contingencies

 We lease office space under operating leases. Lease commitments include leases for the Company’s corporate headquarters in Bellevue, Washington, and branch offices in Chicago, Illinois, and Cleveland, Ohio. These leases expire between May 2011 and April 2015.  The rent for the Company’s office in Cleveland, Ohio, was paid in part in ITEX dollars through 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. Our contractual commitments at January 31, 2010 are presented below (in thousands):

Year ending July 31,	Operating leases			Purchase commitments		Total
2010 (1)	$	141		$	20	$	161
2011		282			15		297
2012		188			-		188
2013		163	��		-		163
2014		166			-		166
2015		126			-		126
Total	$	1,066		$	35	$	1,101

(1) The expected payments for 2010 reflect future minimum payments for the six-month period from February 1, 2010 to July 31, 2010.

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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

· share-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 2009 annual report on Form 10-K.

Recent Accounting Pronouncements

In June 2008, the Financial Accounting Standards Board (“FASB”) issued guidance as to the circumstances when unvested share-based payment awards should be included in the computation of EPS. The guidance is effective for us beginning August 1, 2009, the beginning of our 2010 reporting periods.  We adopted this guidance on August 1, 2009 and it had no material impact on our results of operations, cash flows or financial position.

In April 2008, the FASB issued additional information on 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.  This guidance is effective for us beginning August 1, 2009, the beginning of our 2010 reporting periods. We adopted this guidance on August 1, 2009 and it had no material impact on our results of operations, cash flows or financial position.

In March 2008, the FASB issued guidance that is intended to enhance the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  The provision is effective for us beginning August 1, 2009, the beginning of our 2010 reporting periods. We adopted this guidance on August 1, 2009 and it had no material impact on our results of operations, cash flows or financial position.

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In December 2007, the FASB issued guidance which changed the accounting and reporting requirements for minority interests.  Under the provisions, minority interests will be re-characterized as “noncontrolling interests” and reported as a component of equity separate from our equity.  Subsequently, we would be required to record all changes in interests that do not result in changes in control as equity transactions.  In addition, we would report net income attributable to noncontrolling interests on the face of our consolidated Statements of Income.  Upon a loss of control, we would record the interest sold, as well as any interest retained, at fair value with recognition of any gain or loss in earnings.  The provision was effective for us on August 1, 2009, the beginning of our 2010 reporting periods.  This provision will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively.  We adopted this guidance on August 1, 2009 and it had no material impact on our results of operations, cash flows or financial position.

In September 2006, the FASB issued guidance which was intended to provide guidance for using fair value to measure assets and liabilities.  In general, this pronouncement is intended to establish a framework for determining fair value and to expand the disclosures regarding the determination of fair value.  With certain financial instruments, a cumulative effect of a change in accounting principle may be required with the impact of the change recorded as an adjustment to opening retained earnings.  We adopted certain provisions of this guidance on August 1, 2008, the beginning of our 2009 reporting periods.   The adoption affected our accounting policy regarding ITEX dollar activities but there will be no impact on future results of operations, cash flows and financial position.  In February 2008, the FASB delayed the effective date of this provision for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The non-financial assets and non-financial liabilities for which the Company has not applied the fair value provisions include goodwill and other intangible assets.  Full adoption of this provision was effective for us beginning August 1, 2009, the beginning of our 2010 reporting periods.  We adopted this guidance on August 1, 2009 and it had no material impact on our results of operations, cash flows or financial position.

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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 2009 and the six-month period of 2010, we have increased revenues.  We cannot assure you that our revenues will continue to increase in future quarters or future years.  We may continue to add revenue through acquisitions, but we cannot assure you that we or our Broker Network will be successful in our acquisition efforts or that financing for these endeavors will be available.  We have sustained profitable operations for six 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.

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.  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.

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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 Brokers 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 six-month month period ended January 31, 2010, approximately 8% 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.

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.

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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, 2009, that our internal control over financial reporting was effective as of July 31, 2009, 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.

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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of our stockholders was held on December 11, 2009.  The following proposals were submitted for a vote by the stockholders and were adopted as indicated below:

PROPOSAL # 1 - Election of directors.

The following directors were elected to serve on the ITEX Board of Directors for a one-year term.  No other director’s term of office continued after the meeting.

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	Vote of the Stockholders
Directors	For		Against		Withheld		Broker Non-Vote
Steven White		13,188,930		0		3,207,444		1,004,240
Eric Best		13,194,250		0		3,202,124		1,004,240
John Wade		13,194,150		0		3,202,124		1,004,240

PROPOSAL # 2 - Ratification of auditors.

The ratification of the selection of Ehrhardt Keefe Steiner & Hottman PC as our independent auditor for fiscal year 2010.

For	14,276,748
Against	2,102,161
Abstain	17,464
Broker non-vote	1,004,241

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:  March 9, 2010	By:	/s/ Steven White
		Steven White
		Chief Executive Officer
		Interim Chief Financial Officer

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