**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D. C.** **20549**





**FORM
      10 - KSB**




(Mark
      One)


**x**
            
            **Annual
                report under Section 13 or 15(d) of the Securities Exchange Act of
                1934**




**For
      the fiscal year ended July 31, 2007.**




OR




** ̈**
            
            **Transition
                report under 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**


(Name
      of
      small business issuer in its charter)





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





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


(Address
      of principal executive offices)




**(425)
                463-4000**


(Issuer’s
      telephone number including area code)





Securities
      registered under Section 12 (b) of the Exchange Act





None





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





Common
      Stock - $.01 par value





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15 (d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.


Yes  x  No   ̈




1




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10 - KSB or any
      amendment to this Form 10 - KSB. x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes  ̈ No x




State
      issuer’s revenues for its most recent fiscal year $14,171,000





The
      aggregate market value of the voting common stock held by non-affiliates of
      the
      Company as of July 31, 2007 was approximately $12,784,162 based upon 15,980,203
      shares held by such persons and the closing bid price of $.80 as reported by
      the
      OTC Bulletin Board for that date. Shares of common stock held by each officer
      and director and by each person who owns 10% or more of the outstanding common
      stock have been excluded because these people may be deemed to be affiliates.
      This determination of affiliate status is not necessarily a conclusive
      determination for any other purpose.




As
      of
      October 2, 2007, the Company had 17,918,632  shares
      of
      common stock outstanding .







DOCUMENTS
      INCORPORATED BY REFERENCE:





Portions
      of the definitive Proxy Statement to be delivered to shareholders in connection
      with the Annual Meeting of Shareholders are incorporated by reference into
      Part
      III.




Transitional
      Small Business Disclosure Format (check one):


Yes   ̈  No  x





2







**ITEX
      CORPORATION**




**FORM
      10-KSB**




**For
      The Fiscal Year Ended July 31, 2007**




**INDEX**








Page**PART
                I**ITEM
                1.
            
            Description
                of Business
            
            1ITEM
                2.
            
            Description
                of Property
            
            10ITEM
                3.
            
            Legal
                Proceedings
            
            10ITEM
                4.
            
            Submission
                of Matters To a Vote of Security Holders
            
            10**PART
                II**ITEM
                5.
            
            Market
                for Common Equity and Related Stockholder Matters
            
            10ITEM
                6.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            11ITEM
                7.
            
            Financial
                Statements
            
            32ITEM
                8.
            
            Changes
                In and Disagreements With Accountants on Accounting and Financial
                Disclosure
            
            55ITEM
                8A
            
            Controls
                and Procedures
            
            55**PART
                III**ITEM
                9.
            
            Directors,
                Executive Officers, Promoters, Control Persons and Corporate Governance;
                Compliance with Section 16(b) of the Exchange Act
            
            55ITEM
                10.
            
            Executive
                Compensation
            
            56ITEM
                11.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            56ITEM
                12.
            
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            56ITEM
                13.
            
            Exhibits
            
            56ITEM
                14.
            
            Principal
                Accountant Fees and Services
            
            57Signatures
            
            57





iii




**PART
      I**





**Special
      Note Regarding Forward-Looking Statements**





In
      addition to historical information, the discussion of our business contains
      forward-looking statements such as estimates, projections, statements relating
      to our business plans, objectives and expected operating results. These
      forward-looking statements are based on current expectations and assumptions
      that are subject to risks and uncertainties. The actual results may differ
      materially from those anticipated in these forward-looking statements as a
      result of many factors including those discussed in the section entitled “Risk
      Factors” following “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations” ( refer
      to Part II Item 6 ).
      Readers are cautioned not to place undue reliance on these forward-looking
      statements which reflect our expectations and assumptions only as of the date
      of
      this report. We undertake no obligation to update or revise any forward-looking
      statements whether as a result of new information, future events or
      otherwise.








**ITEM
      1. DESCRIPTION OF BUSINESS**





**Overview**





ITEX,
      The
      Membership Trading Community SM ,
      is a
      leading marketplace for cashless business transactions across North America
      (“the Marketplace”). We service our member businesses through our independent
      licensed brokers, area directors and franchise network (individually, “Broker”
and together, the “Broker Network”) in the United States and Canada. Our business
      services and payment systems enable approximately 22,000 member
      businesses (our
“members”) to trade goods
      and services valued at more than $270 million 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”).





We maintain
      our executive offices at 3326 160 th Avenue
      SE, Suite 100, Bellevue, Washington 98008-6418. Our telephone number is
      425-463-4000. Our SEC reports can be accessed through the investor relations
      section of our website, www.itex.com .
      There
      we make available, free of charge, our annual report on Form 10-KSB, quarterly
      reports on Form 10-QSB, current reports on Form 8-K and any amendments to those
      reports, as soon as reasonably practicable after we file such material
      electronically with, or furnish it to, the SEC. These reports are also available
      from the SEC website at www.sec.gov. The information found on our website is
      not
      part of this or any other report we file with or furnish to the
      SEC.





**Marketplace
      Transactions**





The
      Marketplace provides a forum for our members to purchase from and sell their
      products and services to other members using our currency called “ITEX dollars”
instead of USD. An ITEX dollar is an accounting unit used to record the value
      of
      transactions as determined by the members in the Marketplace. ITEX dollars
      are
      not intended to constitute legal tender, securities, or commodities and have
      no
      readily determinable correlation to USD. ITEX dollars may only be used in the
      manner and for the purpose set forth in the rules of the Marketplace. As
      described below, we issue, on a case by case basis, ITEX dollar credit lines
      to
      certain members. Members with positive ITEX dollar account balances or those
      within their ITEX dollar credit line may use available ITEX dollars to purchase
      products or services from other members and may sell their products or services
      to other members. Those members with negative ITEX dollar account balances
      are
      obligated to sell their products or services to other Marketplace members in
      order to offset their negative account balance.




1




We
      assist
      members in marketing their products and services through our Broker Network,
      newsletters, e-mail, on our website at www.itex.com and through other
      promotional means. Transactions are generally conducted by members directly
      but
      can be facilitated by our Brokers.





Businesses
      use our Marketplace to attract new customers, increase sales and market share,
      and to utilize unproductive assets, surplus inventory, or excess capacity.
      The
      Marketplace is especially useful to businesses where the variable costs of
      products or services are low, such as hotels, media, and other service related
      businesses. For example, a hotel that has not filled its rooms by the end of
      the
      day has lost potential revenue but still has nearly the same overhead associated
      with owning and maintaining its facility. Selling these unused rooms for ITEX
      dollars is beneficial for both the traveler or buyer and the hotel or seller.
      The traveler receives a hotel room without spending USD and the hotel can use
      the ITEX dollars earned to purchase other products or services in the
      Marketplace.





In
      order
      to facilitate transactions, we may grant ITEX dollar credit lines to certain
      members. When considering an ITEX dollar credit line, we assess the financial
      stability of the member and the demand by others for the member’s product or
      service. Members without a line of credit may only use their ITEX dollars
      received from selling their product or service to purchase other products or
      services in the Marketplace.





For
      tax
      purposes, the Internal Revenue Service considers ITEX dollar sales to be
      equivalent to USD sales and ITEX dollar expenses to be equivalent to USD
      expenses. ITEX is obliged under the Tax Equity and Fiscal Responsibility Act
      of
      1982 (TEFRA) to send Forms 1099-B to each of our members and to the Internal
      Revenue Service (“IRS”), which we do electronically. The Form 1099-B reflects
      the member’s total ITEX dollar sales for the calendar year less the amount of
      any returns. The IRS requires all Form 1099-B recipients to report their ITEX
      dollars received (sales) as gross income on their tax returns. Expenditures
      of
      ITEX dollars may be reported as deductions in tax returns if they qualify as
      a
      deductible business expense or as other deductions that are permitted by the
      Internal Revenue Code.





**Broker
      Network**





Brokers
      are independent contractors with respect to the Company. Combined, our corporate
      staff, Brokers and their staff, and outside contractors total more than 300
      individuals supporting the Marketplace. Because
      we depend on a high rate of repeat business, the quality of broker interactions
      with members is an important element of our business strategy. Supporting and
      empowering our broker network is vital to our long term success. We
      develop strong, cooperative relationships with our Broker Network by providing
      training, marketing materials and programs, internet and computer-related
      support, incentive programs, and investments in Broker Network technology.




Our
      Brokers provide Marketplace members with information about products and services
      that are available locally, nationally and in Canada. Brokers do not typically
      have exclusive contractual rights to operate in a geographical area. Each Broker
      is responsible for enrolling new Marketplace members, training them in
      Marketplace policies and procedures, facilitating their transactions and
      assuring payment in USD of transaction fees, association fees and other fees
      to
      us. Members of the Marketplace have a direct contractual relationship with
      us.
      In turn, Brokers receive a commission in USD for a percentage of revenue
      collected from the members serviced by those Brokers.




2




Our
      franchise agreements and independent licensed broker contracts both provide
      for
      a five-year term unless we terminate the contract for cause as defined in the
      agreement. These agreements provide for subsequent five-year renewal terms
      as
      long as the franchisee or broker is not in breach of the agreement and is in
      compliance with our performance requirements, policies, and procedures then
      in
      place. Area Director contracts typically provide for a three-year term that
      is
      renewable if specified performance requirements are met. Area Director contracts
      may be terminated upon specified events of default.





Since
      early 2003, we have offered the sale of ITEX franchises to qualified individuals
      and entities. In addition, we have sought to renew all individual Broker
      contracts under our most current franchise agreement which we periodically
      amend
      as current events and circumstances deem necessary. Through our franchisees,
      we
      distribute our services by licensing our business ideas and concepts while
      retaining legal ownership of those concepts and ideas, including our name and
      logos. Our franchise agreement grants a limited license and right to use and
      operate a recognizable ITEX outlet to the franchisee by utilizing our business
      system and proprietary marks. The franchise agreement allows us to oversee
      the
      obligations and responsibilities of the franchisee. Under federal and state
      franchise and business opportunity laws, franchisees are entitled to additional
      protections including the provision that many of the substantive aspects of
      the
      business relationship (e.g., termination, transfer, cancellation, and
      non-renewal) will be governed by state law. Refer to “Government Regulation” for
      more information.





**Sources
      of Revenue**





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”, “2007” for August
      1, 2006 to July 31, 2007, “2006” for August 1, 2005 to July 31, 2006). We report
      our results as of the last day of each calendar month (“accounting cycle”).





Primarily,
      our revenues consist of transaction fees and association fees. Each operating
      cycle we charge ITEX members transaction fees in USD. For most Marketplace
      transactions that occur during the operating cycle, we charge both the buyer
      and
      seller in those transactions a USD fee computed as a percentage of the ITEX
      dollar value of the transaction. If a member pays their total operating cycle
      charges automatically by credit card or electronic funds transfer through our
      Preferred Member Autopay System (“Autopay System”), we charge a USD transaction
      fee of 5% to 6% of the ITEX dollar amount of their purchases and sales during
      the operating cycle. If a member pays their total operating cycle USD fees
      by
      check or otherwise, we charge a USD transaction fee of 7.5% of the ITEX dollar
      amount of their purchases and sales during the operating cycle. Additionally,
      regardless of a member’s transaction activity, each operating cycle we charge
      most member an association fee of $20 USD ($260 USD annually) and $10 ITEX
      dollars ($130 ITEX dollars annually). Transaction and association fees composed
      99% and 97% of our total revenue in 2007 and 2006, respectively.





As
      of
      July 31, 2007 approximately 67% of members pay by electronic funds transfer
      or
      by credit cards using our Autopay System. To minimize both our members’ and our
      time, effort and expense as well as convert our receivables to USD more timely
      and efficiently, we continually strive to increase the percentage of members
      using our Autopay System through member incentives.




3




We
      prepare our financial statements on an accrual basis in accordance with United
      States Generally Accepted Accounting Principles (GAAP). Refer to Note
      1
―“Summary
      of Significant Accounting Policies” included in the “Notes to Consolidated
      Financial Statements”, Item 7 - Financial Statements for a
      description of our accounting policies. As discussed in our critical accounting
      policies, due to the lack of readily determinable fair values and our ability
      to
      control and manipulate ITEX dollars, we do not recognize our Marketplace
      revenues or expenses of ITEX dollars on our financial statements. We recognize
      ITEX dollars as required by the Internal Revenue Service for income tax
      reporting purposes. We account for ITEX dollar transactions and USD fee
      assessments in statements to members and Brokers. The majority of the ITEX
      dollars we earn are distributed back to the Broker Network as revenue share
      and
      sales incentives. Additionally, we use ITEX dollars we earn to fund the ITEX
      co-op advertising program utilized by both members and Brokers. We expend an
      immaterial amount of ITEX dollars for certain ITEX operating
      expenses.





**Business
      Strategy**





Our
      goal
      is to expand our market share of the cashless transaction industry, principally
      in the United States and Canada. We believe we can successfully increase the
      number of members participating in our Marketplace and our revenues if we
      provide members:




o
            *An
                ever expanding variety of products, services and member
                benefits.*In
                order to utilize the bargaining power of our 22,000 Marketplace member
                businesses and their estimated 100,000 employees, we announced our
                Executive Privileges Program (“EPP”) to our Brokers on March 30, 2007.
                Subsequently, we added partnerships with nationally recognized businesses.
                Our relationships differ from partner to partner and our primary
                focus is
                to provide added benefits to our Marketplace member businesses. The
                goal
                of EPP is to identify and provide needed services for small businesses,
                assisting them in being a successful enterprise. We anticipate that
                these
                benefits will assist Brokers in retaining existing members and attracting
                new members. Financially, we earn a small fee on transactions with
                some
                partners while we pay a small fee on transactions with other partners.
                Overall, we do not expect the EPP to have a material direct effect
                on our
                financial statements. Instead, we anticipate that the program will
                have a
                long-term positive effect on our operations by expanding our Marketplace
                member base which should result in increased
                revenues.





o
            *A
                system that enables members to execute and track transactions in
                the
                Marketplace.*We
                have internally developed an industry exclusive, comprehensive, customer
                relationship management and payment processing software called “TEAM.”
                This online software solution provides members, Brokers and our management
                team with enhanced information systems and marketing tools. We plan
                to
                continue to enhance our TEAM
                software.





We
      have
      developed and continue to upgrade and enhance our technologically advanced
      multi-channel payment system that provides efficient internet access to ITEX
      members and our Broker Network. These upgrades and enhancements in computer
      and
      communications technology provide Brokers and members with additional tools
      and
      more effective computer applications to more easily engage in “real-time”
transactions.





o
            *A
                community where members can meet and feel comfortable with other
                members.*In
                the third quarter of 2007, we upgraded the entire look and feel of
                our
                entire website,www.itex.com.
                Our new website has a more casual, community approach conveying to
                Marketplace members the variety of businesses that comprise the
                Marketplace and the benefits that come with their participation.
                To add to
                the community feel, we expanded the member business profile section
                of our
                website to allow business owners to provide personal pictures, tell
                the
                Marketplace more about themselves and communicate with other member
                businesses via blogs. We believe that seeing the photograph of a
                business
                owner and sharing selected personal information will differentiate
                them
                from other businesses, encouraging other member businesses to conduct
                transactions with them in the Marketplace.




4




Additionally,
      we are developing specific microsites as auxiliary supplements to our main
      website. These microsites will target specific high demand business segments
      that existing members have requested to participate in our Marketplace, such
      as
      restaurants, hospitality and professional services. In conjunction with their
      release, we intend to encourage our Brokers to focus their new member
      registration efforts on the businesses in their region fitting our targeted
      business segments. We hope that those businesses, previously unfamiliar with
      ITEX, will be attracted to the Marketplace as a result of viewing our microsites
      specifically tailored to their business segments and the unique needs they
      may
      have.





o
            *More
                regions in which to trade by increasing the size and effectiveness
                of our
                Broker Network.*To
                attract new franchisees and increase the trade regions covered by
                the
                Marketplace, in the second quarter of 2007 we upgraded and expanded
                the
                franchise portion of our website,www.itex.com.
                We identified target markets, provided added detail about our company
                and
                business model, and allowed potential franchisees to calculate sample
                financial forecasts. We anticipate this will facilitate the addition
                of
                new franchisees to the Marketplace.





Subsequent
      to July 31, 2007, we acquired certain assets of a commercial trade exchange
      network from Intagio (refer to “Overview” included in “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”,Part
      II Item 6 )
      and
      significantly expanded our presence in six U.S. regions, four of which were
      previously not served by existing Brokers. The approximately two thousand member
      businesses brought a variety of new products and services to the
      Marketplace.





o
            *Excellent
                customer service by the Broker Network and our corporate office.*We
                continually provide training and support for new and existing Brokers
                and
                refine our franchisee and Broker operating manuals and related support
                materials. Additionally, we hold an annual convention and several
                regional
                meetings where we discuss and attempt to find solutions for current
                issues
                and proactively plan for future enhancements and benefits to our
                Trading
                Community. In the fourth quarter of 2007, we engaged the services
                of a
                national sales manager who is working with Brokers to implement various
                strategies and methods for obtaining new members.





**Members**





The
      Marketplace has approximately 22,000 members in the United States and Canada.
      The majority of members are business owners with fewer than 10 employees.
      Members may choose to participate in the Marketplace for a number of reasons
      including to:


·
            Attract
                new customers


·
            Increase
                sales and market share


·
            Add
                new channels of distribution


·
            Utilize
                unproductive assets, surplus inventory or excess
                capacity





Members
      earn ITEX dollars which they have the opportunity to spend on products and
      services offered by other ITEX members. The following is a representative
      example of a transaction:




5




*A
      dentist* *wants
      to remodel her office. Through the Marketplace, she hires a contractor who
      agrees to perform the remodeling work for $1,500 ITEX dollars. The dentist
      has
      ITEX dollars in her account to spend because she had previously provided dental
      work to the owner of a vacation resort, a restaurant owner and a lawyer, all
      members of the Marketplace, in exchange for ITEX dollars. These other members
      originally acquired ITEX dollars by providing services for other Marketplace
      members.*





**Sales,
      Marketing and Transactions**





*Sales*





The
      primary function of new member enrollment is to grow and retain the Marketplace
      member base and generate additional revenue. We provide standardized marketing
      and support materials, advertising, ongoing training, and promotion to assist
      our Broker Network in expanding the member base. Our Brokers contact prospective
      members to market the benefits of joining the Marketplace. In addition, Brokers
      obtain new members by attending various meetings and networking events in their
      areas and through the referrals of existing Marketplace members. We offer a
      Member Referral Program that provides incentive awards and discounted fees
      to
      existing members that refer new qualified members to the Marketplace.





*Marketing*





Our
      marketing strategy is to promote our Membership Trading Community brand and
      attract new members to the Marketplace while instructing them how to effectively
      use the Marketplace to grow their business. Our marketing efforts include a
      program of support and education for our members and Brokers in addition to
      continual upgrades and features of our website, www.itex.com .
      New
      tools for Brokers to customize and use in their sales efforts include
      pre-designed advertisements, brochures and sales presentations to give ITEX
      a
      consistent look and message. To promote the Marketplace, we market products
      and
      services of existing members through our website, directories, newsletters,
      e-mail, and other means. In addition, we pursue strategic affiliations with
      companies with access to potential small business members.





*Transactions*





Our
      Brokers focus on maximizing transaction volume and maximizing the ITEX dollar
      amount per transaction. Brokers facilitate transactions between members by
      identifying their needs and making them aware of products and services available
      in the Marketplace that could fulfill those needs. Brokers actively market
      products and services available to and from the members they service on our
      ITEX
      website and pursue potential member businesses by introducing them to the
      Marketplace.





**Systems
      and Technologies**





The
      Marketplace is handled by an internally developed, proprietary, online system
      we
      call Trade Exchange Account Manager (“TEAM”) that is based on
      Microsoft ® technologies. We designed TEAM to facilitate the activities of all parties
      involved in the Marketplace, from our corporate management and accounting
      personnel to Brokers and Marketplace members. The system extends well beyond
      record keeping and transaction processing. The major features of the system
      are
      as follows:





·
            Account
                Information Manager (“AIM”) Online - provides our Brokers and corporate
                management with customer relationship management (“CRM”) features
                including notes, transaction histories, calendaring and scheduling
                capabilities as well as Marketplace management
                features.




6




·
            Trade
                Flash - an online classified ad section where members can list products
                and services they are offering for ITEX dollars as well as locate
                products
                and services they are seeking to purchase with ITEX dollars.




·
            Member
                Directory - a categorized listing of ITEX members that allows members
                to
                advertise their business.




·
            Reporting
                - Brokers, corporate management and accounting personnel are provided
                with
                a number of reports allowing for a comprehensive analysis of various
                aspects of the Marketplace.





We
      take
      the steps necessary to ensure the adequate security of our hardware and software
      systems including monitoring and correcting outside intrusions and attacks.
      Our
      technologies are co-hosted in Washington and Idaho and we perform full back-ups
      every 24 hours. We continue to improve the speed and reliability of our
      information systems and transaction tools for all of TEAM’s users by continually
      updating hardware and enhancing our software with new, internally developed
      programs and functionalities.





**Industry
      Overview**





*General*





Our
      industry was developed when various trade exchanges (“Exchanges”) established a
      non USD-based index of valuation for credits and debits called “trade dollars.”
For us, the index of valuation is the ITEX dollar and our trade exchange is
      our
      Marketplace. We act as a third party record-keeper of ITEX dollars exchanged
      for
      products and services among members in our Marketplace. For every transaction,
      we post ITEX dollar activity to the buyer and seller’s accounts. Members can
      transact business directly or may use the services of a Broker who matches
      buyers and sellers. We account for all transactions in our Marketplace with
      our
      TEAM software.





There
      are
      several hundred independently owned Exchanges in the United States and Canada.
      We believe that growth in our industry has been relatively stagnant in recent
      years with most revenue growth driven by consolidation.





**Competition**





We
      have
      three primary competitors: Exchanges, internet distribution channels, and
      private label payment cards. We believe that we are the Exchange leader in
      the
      United States and Canada based on reported USD revenues, participating member
      businesses, the number of payments processed, regions served, and completed
      transactions of a single, non-USD currency. After ITEX, the next largest
      Exchange is International Monetary Systems, Ltd.




Internet
      distribution channel competitors include eBay, Travelocity, Priceline, and
      Overstock.com. Similar to our Marketplace, these companies provide distribution
      channels to move excess or surplus inventory. The greater the number of avenues
      to move excess inventory, the more competitive it is to attract businesses
      to
      trade their inventory in our Marketplace. We also compete with these companies
      through price and brand name awareness.





Private
      labeled, network branded, payment and incentive cards, such as Card USA, Galileo
      Processing and Springbok Services compete with us by providing a branded
      solution for local distribution or sales channels and the ability to create
      in-kind payment solutions.




7




While
      we
      are currently providing a single small business service, a unique sales and
      distribution channel via our Marketplace, we may expand to other small business
      services. In that case, we would face competition from other small business
      service providers.





We
      compete primarily on a service basis, including the number of products and
      services available in the Marketplace and the liquidity of ITEX dollars. We
      expect to encounter competition in our efforts to expand our Marketplace. In
      addition to existing Exchanges, new, smaller competitors can launch new
      Exchanges at a relatively low cost since technological and financial barriers
      to
      entry are relatively low. However, we believe participation from a significant
      number of members is necessary to offer a quality Exchange. We also know there
      is a steep learning curve to manage an Exchange as well as a potentially
      significant investment in TEAM. Ultimately, we believe these elements create
      a
      difficult barrier to entry for new competitors and may require significant
      ramp-up times to make a competitive Exchange successful. Regardless, our
      competitors could include companies with longer operating histories, greater
      market presence and name recognition, larger customer bases and greater
      financial, technical and marketing resources than we have. Such companies would
      be strong competitors if they decided to develop a focused business effort
      in
      our industry.





In
      general, customer demands for wider availability of products and services,
      stronger customer service, better computer servicing technology and the
      acceptance of the internet as a medium for communication and business have
      resulted in a more competitive industry. We believe that in order to capture
      greater market share, local Exchanges will need to expand into larger regional
      or national organizations that possess the ability to offer a wider selection
      of
      products and services, service a more diverse and dispersed member clientele
      and
      have greater access to growth capital and management expertise.





We
      believe we will remain in a good competitive position as long as we continue
      to
      maintain the quality of our services and our relationships with our Broker
      Network and our member base. Our ability to compete successfully will depend
      on
      our ability to continually enhance and improve our existing products and
      services, to adapt products and services to the needs of our Brokers, members
      and potential members, to successfully develop and market new products and
      services, and to continually improve our operating efficiencies. However, we
      cannot assure you that we will be able to compete successfully, that competitors
      will not develop competing technologies, products or strategic alliances and
      affiliations that make our brand, products and services less marketable or
      less
      useful or desirable. Furthermore, we may not be able to successfully enhance
      our
      products and services or develop new products or services to meet our members’
needs. Increased competition, price or other circumstances, could result in
      erosion of our market share and may require price reductions and increased
      spending on marketing and product development to remain competitive. Increased
      competition for our products and services could have a materially adverse effect
      on our results of operations, cash flows or financial condition.





**Government
      Regulation**





Along
      with our Brokers, we are subject to various federal, state and local laws,
      regulations and administrative practices affecting our businesses. These include
      the requirement to obtain business licenses, withhold taxes, remit matching
      contributions for our employees’ social security accounts, and other such legal
      requirements, regulations and administrative practices required of businesses
      in
      general. We are a third party record-keeper under the Tax Equity and Fiscal
      Responsibility Act (“TEFRA”) and we are required to account for and report
      annually to the IRS the total ITEX dollar sales transactions of each member
      in
      our Marketplace.




8




It
      is the
      legal responsibility of our Brokers to pay and withhold all applicable federal
      and state income taxes (including estimated taxes), Social Security, Medicare
      and all applicable federal and state self-employment taxes, and in general
      to
      comply with all applicable federal, state, and local laws, statutes, codes,
      rules, regulations and standards, including but not limited to the Americans
      with Disabilities Act. Our Brokers are independent contractors, and we do not
      own, control or operate the businesses comprising our Broker Network. However,
      a
      number of federal and state laws and regulations are implicated by virtue of
      our
      relationship with our Broker Network. For example, our contractual relationship
      with a Broker could be subject to challenge to determine whether an individual
      is an independent contractor or an employee for purposes of the Fair Labor
      Standards Act or state equivalents. Under various agency positions, we could
      potentially be found liable for the conduct of our independent contractors
      in a
      situation where that contractor has caused injury to a third party. In addition,
      under federal (Federal Trade Commission Act) and state franchise and business
      opportunity laws, franchisees are entitled to certain protections including
      mandatory disclosures and the provision that many of the substantive aspects
      of
      the business relationship (i.e., termination, transfer, cancellation, and
      non-renewal) will be governed by state law. Many states broadly view the
      requirements of what constitutes a franchise and, consequently, many types
      of
      relationships that are ordinarily not considered franchises can be brought
      within the ambit of state and federal franchise regulation. There is a risk
      that
      one or more of our non-franchise business relationships could be deemed to
      constitute a franchise. An adverse finding in one or more of these regulated
      areas could govern the enforceability of our agreements or permit the recovery
      of damages and penalties which could have a material adverse effect on our
      business, results of operations, cash flows and financial condition.





With
      respect to our online technologies, there are currently few laws or regulations
      directly applicable to access to or commerce on the internet. However, it is
      possible that a number of laws and regulations may be adopted with respect
      to
      the internet, covering issues such as taxes, user privacy, information security,
      pricing and characteristics and quality of products and services. We cannot
      predict the impact, if any, that future internet-related regulation or
      regulatory changes might have on our business.





**Proprietary
      Rights**





We
      rely
      on a combination of copyright and trademark laws, trade secrets, software
      security measures, franchise and license agreements and nondisclosure agreements
      to protect our proprietary technology and software products. We have registered
      service marks for the word mark ITEX ® ,
      as well
“ITEX” used in connection with our logo design. We intend to file additional
      service mark word and design applications for ITEX. We seek to police the use
      of
      our marks and to oppose any infringement. We have registered the internet domain
      name “ITEX.com” and other related domain names.





We
      cannot
      be certain that others will not develop substantially equivalent or superseding
      proprietary technology or be certain that equivalent products or services will
      not be marketed in competition with our products thereby substantially reducing
      the value our proprietary rights. Furthermore, there can be no assurance that
      any confidentiality agreements between us and our employees or any license
      agreements with our customers will provide meaningful protection of our
      proprietary information in the event of any unauthorized use or disclosure
      of
      such proprietary information.





**Employees**





As
      of
      July 31, 2007, we had 18 full-time equivalent employees. From time to time,
      we
      utilize independent consultants or contractors for technology support,
      marketing, sales and support, accounting or administrative functions. Our
      employees are not represented by any collective bargaining unit and we have
      never experienced a work stoppage. We believe relations with our employees
      are
      good.




9




**ITEM
      2. DESCRIPTION OF PROPERTY**





Our
      executive offices are located in Bellevue, Washington, where we currently lease
      approximately 7,035 square feet. The lease expires on April 30, 2010. There
      is
      no renewal option. We believe that our current facilities are adequate and
      suitable for their current use. We also believe that all of the leased space
      and
      all property maintained within are adequately insured.




**ITEM
      3. LEGAL PROCEEDINGS**





For
      information regarding legal proceedings, refer to **** Note
      7―“Legal
      Proceedings” included in the “Notes to Consolidated Financial Statements”, Item
      7 - Financial Statements.




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





There
      were no matters submitted to a vote of security holders during the fourth
      quarter of the year ended July 31, 2007.




**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS.**





**Market
      Information**




Our
      common stock trades on the OTC Bulletin Board under the symbol “ITEX.OB” The
      range of high and low bid prices for our common stock for each quarter during
      the two most recent years is as follows:




Fiscal
                  Year Ended July 31,
              
              2007
              
              2006High
              
              
              Low
              
              
              High
              
              
              LowFirst
                  Quarter
              
              $
              0.97
              
              $
              0.47
              
              $
              1.15
              
              $
              0.34Second
                  Quarter
              
              $
              0.85
              
              $
              0.64
              
              $
              0.69
              
              $
              0.55Third
                  Quarter
              
              $
              0.81
              
              $
              0.67
              
              $
              0.81
              
              $
              0.51Fourth
                  Quarter
              
              $
              0.84
              
              $
              0.68
              
              $
              0.63
              
              $
              0.52




This
      table reflects the range of high and low bid prices for our common stock during
      the indicated periods, as published by the OTC Bulletin Board. The quotations
      merely reflect the prices at which transactions were proposed and do not
      necessarily represent actual transactions. Prices do not include retail markup,
      markdown or commissions.





There
      were approximately 894 holders of record of our common stock as of July 31,
      2007. Most shares of our common stock are held by brokers and other institutions
      on behalf of shareholders.





We
      have
      not paid any cash dividends and do not intend to pay any cash dividends in
      the
      foreseeable future.





10




**Purchases
      of Equity Securities by the Issuer and Affiliated
      Purchasers**





The
      following table provides information about our purchases or any affiliated
      purchaser during the quarter ended July 31, 2007 of equity securities that
      are
      registered by us pursuant to Section 12 of the Exchange Act.





(a)
            (b)
            (c)
            (d)Period
            Total
                Number of Shares Purchased (1)
            Average
                Price Paid per Share
            Total
                Number of Shares Purchased as Part of Publicly Announced Plans or
                Programs
            Maximum
                Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased
                Under the Plans or Programs5/01/07
                - 5/31/07
            37,500
            $0.69
            -
            -6/01/07
                - 6/30/07
            -
            -
            -
            -7/01/07
                - 7/31/07
            -
            -
            -
            -




(1)
      We
      purchased 37,500 shares of our common stock from a stockholder in a privately
      negotiated transaction.




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





Our
      management’s discussion and analysis of financial condition and results of
      operations is provided as a supplement to the accompanying consolidated
      financial statements and notes. It helps provide information we believe is
      relevant to an assessment and understanding of our results of operations and
      financial condition.





**OVERVIEW**





ITEX,
      The
      Membership Trading Community SM ,
      is a
      leading marketplace for cashless business transactions across North America.
      Through our independent licensed broker and franchise network (individually,
      “Broker,” and together the “Broker Network”) in the United States and Canada, we
      operate a marketplace for cashless business transactions with 22,000 member
      businesses (the “Marketplace”), where products and services are 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 of our
      members’ transactions. At July 31, 2007, our Broker Network was comprised of
      approximately 95 Brokers. Our business services and payment systems enable
      more
      than $270 million per year in ITEX dollar transactions to be processed in the
      Marketplace. We generate our 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”).





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”, for example, all
      references to “2007” are for the period from August 1, 2006 to July 31, 2007,
“2006” for August 1, 2005 to July 31, 2006, etc.). We report our results as of
      the last day of each calendar month (“accounting cycle”).




11




Our
      Marketplace revenues decreased 2% from $3,506,000 to $3,451,000 for the fourth
      quarter ended July 31, 2007 compared to 2006. For the year ended July 31, 2007
      compared to 2006, our Marketplace revenues decreased 3% from $14,646,000 to
      $14,171,000. We are seeking to increase our revenues and, correspondingly,
      our
      net income by:


·  Encouraging
      our Brokers to focus on increasing member registrations and cash fee generating
      transaction volume.


·  Enhancing
      Marketplace product and services offerings and member benefits in order to
      expand membership.


·  Expanding
      membership by targeting specific business segments and developing corresponding
      microsites.


·  Improving
      and enhancing our internet applications and web-based communication between
      members.


·  Enabling
      members to more easily execute buy and sell transactions.


·  Adding
      new franchisees.


·  Acquiring
      new Exchanges to broaden the effectiveness of the Marketplace and increase
      trade
      regions throughout the United States.





We
      had
      net operating loss carryforwards of approximately $21.2 million at the beginning
      of 2007, of which we used $687,000 during the year to offset taxable income.
      During the fourth quarter of 2007, we concluded that it was more likely than
      not
      that additional net operating loss carryforwards would result in realizable
      deferred tax assets. Accordingly, we recorded a $4.995 million deferred tax
      asset on the 2007 balance sheet for periods beyond 2007. Of our net operating
      loss carryforwards, approximately $19.362 million remains available to offset
      future taxable income.





On
      August
      1, 2007, we expanded the Marketplace by acquiring certain assets of a commercial
      trade exchange network from The Intagio Group, Inc., a Delaware corporation
      (“Intagio”). The acquisition added approximately 2,000 members. The purchase
      price was (i) cash in the amount of $2,000,000, (ii) a secured promissory note
      in the aggregate principal amount of $1,136,961, and (iii) if and to the extent
      we achieve certain revenue targets during the four fiscal quarters beginning
      August 1, 2008, additional cash payments totaling up to $150,000. We also
      assumed certain liabilities of less than $30,000.





We
      utilized $1.7 million of our cash reserves and financed the balance of the
      purchase price by borrowing $300,000 under our Revolving Credit Agreement with
      U.S. Bank and by issuing an 8.0% subordinated secured promissory note (“Note”)
      to Intagio in the aggregate principal amount of $1,136,961 due
      August 31, 2010. The Note is a secured obligation and ranks senior to all of
      our
      other obligations, except that the Note is subordinated to the U.S. Bank debt.
      Principal and interest on the Note is payable in twenty-four equal monthly
      installments of $51,422 payable on the last day of each calendar month
      commencing on August 31, 2007. As of the date of this report, we had repaid
      the
      $300,000 balance on our line of credit in full and there is no balance
      outstanding.





12


**RESULTS
      OF OPERATIONS (in thousands except per share amounts unless otherwise
      indicated)**




**Condensed
      Results**





Quarter
                  Ended
              
              Year
                  EndedJuly
                  31,
              
              July
                  31,2007
              
              2006
              
              2007
              
              2006Marketplace
                  revenue
              
              $
              3,451
              
              $
              3,506
              
              $
              14,171
              
              $
              14,646Costs
                  and expenses
              
              
              3,192
              
              
              3,120
              
              
              12,666
              
              
              13,305Income
                  from operations
              
              
              259
              
              
              386
              
              
              1,505
              
              
              1,341Other
                  income - net
              
              
              44
              
              
              16
              
              
              156
              
              
              117Income
                  before income taxes
              
              
              303
              
              
              402
              
              
              1,661
              
              
              1,458Income
                  tax benefit
              
              
              (3,369
              )
              
              (2,334
              )
              
              (2,843
              )
              
              (1,975
              )Net
                  income
              
              $
              3,672
              
              $
              2,736
              
              $
              4,504
              
              $
              3,433Net
                  income per common shareBasic
              
              $
              0.21
              
              $
              0.15
              
              $
              0.25
              
              $
              0.19Diluted
              
              $
              0.20
              
              $
              0.15
              
              $
              0.25
              
              $
              0.18





Marketplace
      revenue for year ended July 31, 2007, decreased by 3% to $14,171 from $14,646
      during the prior year. We attribute this decrease primarily to the consolidation
      of broker offices after the acquisition of BXI, the reduction of members who
      had
      accounts in both the ITEX and BXI marketplaces (“overlapping members”) and the
      sale of selected assets of one former franchise office. Since August 1, 2006,
      thirteen ITEX and former BXI offices consolidated. The number of overlapping
      members declined from 695 on August 1, 2006 to 159 on July 31, 2007. Overlapping
      members pay association fees and transaction fees on both their ITEX and former
      BXI account. Consolidation of an overlapping member's accounts from two to
      one
      account resulted in the net loss of an account that we previously had assessed
      association and transaction fees. Additionally, in the first quarter of 2007,
      we
      sold selected assets of a former broker office. This office generated $35 and
      $170 in the fourth quarter of 2006 and the year ended July 31, 2006,
      respectively. In 2007, this office generated $22 in the first quarter and $0
      in
      the remaining quarters of 2007.





Income
      before income taxes for the year ended July 31, 2007 was $1,661, an increase
      of
      $203 or 14% from income before income taxes in 2006 of $1,458. We attribute
      this
      increase primarily to conversion of former BXI commission plans to ITEX
      commission plans. During 2006 and continuing into 2007, we converted some
      Brokers to lower Association fee commission structures. This resulted in costs
      of Marketplace revenue, primarily composed of commissions, as a percent of
      Marketplace revenue of 68% in 2007 as compared to 70% in 2006.





Net
      income for the fourth quarter of 2007 included income before income taxes of
      $303 compared to $402 for the fourth quarter of 2006. This decrease of $99
      is
      primarily due to legal fees and outside services to support revenue generating
      ideas during the quarter.





Basic
      income per common share for the year ending July 31, 2007 and 2006 was $0.25
      and
      $0.19, respectively, while diluted earnings per common share was $0.25 and
      $0.18
      for 2007 and 2006, respectively. In both years, income per common share was
      positively and significantly affected by income tax benefits resulting from
      reassessments of valuation allowances on available operating loss carryforwards
      for tax purposes.





13




**Selected
      Quarterly Financial** **Results**




Year
                  ended July 31, 2007
              
              First
                  Quarter
              
              Second
                  Quarter
              
              Third
                  Quarter
              
              Fourth
                  Quarter
              
              TotalMarketplace
                  revenue
              
              
              3,790
              
              
              3,665
              
              
              3,265
              
              
              3,451
              
              
              14,171Income
                  from operations
              
              
              295
              
              
              528
              
              
              423
              
              
              259
              
              
              1,505Net
                  cash flows from operating activities
              
              
              944
              
              
              423
              
              
              577
              
              
              113
              
              
              2,057Total
                  stockholders' equity
              
              
              8,229
              
              
              8,376
              
              
              8,659
              
              
              12,330Year
                  ended July 31, 2006
              
              
              First
                  Quarter
              
              
              Second
                  Quarter
              
              
              Third
                  Quarter
              
              
              Fourth
                  Quarter
              
              
              TotalMarketplace
                  revenue
              
              
              3,714
              
              
              4,007
              
              
              3,419
              
              
              3,506
              
              
              14,646Income
                  from operations
              
              
              275
              
              
              315
              
              
              365
              
              
              386
              
              
              1,341Net
                  cash flows from operating activities
              
              
              865
              
              
              485
              
              
              440
              
              
              46
              
              
              1,836Total
                  stockholders' equity
              
              
              5,157
              
              
              5,399
              
              
              5,485
              
              
              7,968




Over
      the
      past four fiscal years, we have sustained our profitability and net cash flows
      from operating activities by focusing our business model on cashless transaction
      processing and the support of our Broker Network. Additionally, we acquired
      a
      significant competitor, sold all of our corporate-owned offices, eliminated
      non-essential services, and paid off all long-term debt. We continue to provide
      excellent support to our Brokers in the Marketplace as demonstrated by positive
      feedback we received in a Broker survey conducted in the third quarter of 2007.
      As of July 31, 2007, except for payables from routine operations, we were free
      of debt, maintaining our profitability, increasing our stockholders’ equity, and
      generating positive cash flows from operating activities. In the past four
      fiscal years, we have grown our revenues by approximately 34% primarily by
      acquisitions. However, our biggest challenge is to organically grow our
      revenues. For over a year, we have encouraged our Brokers to focus on two tasks:
      increase member registrations and increase cash fee generating transaction
      volume. At our annual convention in May 2006 and then again in May 2007, we
      discussed how we could help Brokers free up their time so they could concentrate
      on these two major tasks. Since then, we have implemented the following changes.





In
      the
      second quarter of 2007, to attract new franchisees we upgraded and expanded
      the
      franchise portion of our website, www.itex.com .
      We
      identified target markets, provided added detail about our company and business
      model, and allowed potential franchisees to calculate sample financial
      forecasts. Expanding our Broker Network by attracting new franchisees is one
      of
      our strategies to increase revenues.





During
      the second and third quarters of 2007, we retained outside technology and
      marketing firms to work on separate projects as part of a multi-faceted strategy
      to approach our potential revenue growth from different angles. One strategy
      considers the success of attracting new members and retaining existing members
      by utilizing our substantial Marketplace business member base to negotiate
      group
      discounts and benefits from nationally-recognized businesses. A second strategy
      considers increasing cash-based transaction volume by targeting certain high
      demand business segments that existing members have requested to participate
      in
      our Marketplace. A third strategy is aligning with business associations to
      refer and endorse our Marketplace in return for a finder’s fee.




14


In
      order
      to utilize the bargaining power of our Marketplace member businesses and their
      estimated 100 thousand employees, we announced our Executive Privileges Program
      (“EPP”) to our Brokers on March 30, 2007. Subsequently, we added partnerships
      with nationally recognized businesses. Our relationships differ from partner
      to
      partner and our primary focus is to provide added benefits to our Marketplace
      member businesses. We anticipate that these benefits will assist Brokers in
      retaining existing members and attracting new members. Financially, we earn
      a
      small fee on transactions with some partners while we pay a small fee on
      transactions with other partners. Overall, we do not expect the EPP to have
      a
      material direct effect on our financial statements. Instead, we anticipate
      that
      the program will have a long-term positive effect on our operations by expanding
      our Marketplace member base which should result in increased
      revenues.





As
      part
      of our strategy to target certain high demand business segments, we changed
      the
      look and feel of our website, www.itex.com .
      Our new
      website has a more casual, community approach conveying to our members the
      variety of businesses that comprise the Marketplace and the benefits that come
      with their participation. To add to the community feel, we expanded the member
      business profile section of our website to allow business owners to provide
      personal pictures and tell the Marketplace more about themselves. We believe
      that seeing the photograph of a business owner and sharing selected personal
      information will differentiate them from other businesses, encouraging other
      member businesses to conduct transactions with them in the Marketplace. In
      the
      fourth quarter, we further promoted the community feel in the Marketplace by
      adding other capabilities to the profile section of our website. We anticipate
      the overall community feel will be more attractive to our 22 thousand member
      businesses.





Additionally,
      we are developing specific microsites as auxiliary supplements to our main
      website. These microsites will target specific high demand business segments
      such as restaurants, hospitality and professional services. In conjunction
      with
      their release, we intend to encourage our Brokers to focus their new member
      registration efforts on the businesses in their region fitting our targeted
      business segments. We hope that those businesses, previously unfamiliar with
      ITEX, will be attracted to the Marketplace as a result of viewing our microsites
      specifically tailored to their business segments and the unique needs they
      may
      have. As with the EPP, we do not believe this strategy will have a direct impact
      on our financial statements but expect it will have the long-term benefit of
      expanding the Marketplace membership base, increasing transactions and,
      subsequently, revenues.





Subsequent
      to July 31, 2007, we acquired certain assets of a commercial trade exchange
      network from Intagio (refer to “Overview” included in “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”,Part
      II Item 6 )
      including a membership list of approximately two thousand member businesses
      which increased our Marketplace to approximately 24 thousand member businesses.
      These new member businesses are located predominantly in six regions in the
      United States, four of which were previously not served by existing Brokers.
      After this acquisition, we sold three of the new regions to two existing Brokers
      in two separate transactions. The remaining three new regions, Cleveland,
      Chicago and San Francisco will be corporate owned and managed by our own
      employees. We intend to implement certain commission structures, test new
      ancillary charges and pursue other strategies in order to increase revenues
      in
      these regions. If successful in increasing revenues, we intend to use the three
      corporate regions as a model for our Brokers.





15


**Revenue,
      Costs and Expenses**





The
      following table summarizes our selected consolidated financial information
      for
      the years ended July 31, 2007 and 2006, with amounts expressed as a percentage
      of total revenues:




Quarters
                  Ended July 31,
              
              Years
                  Ended July 31,2007
              
              2006
              
              2007
              
              2006Amount
              
              Percent
              
              Amount
              
              Percent
              
              Amount
              
              Percent
              
              Amount
              
              PercentRevenue:Marketplace
                  revenue
              
              $
              3,451
              
              
              100
              %
              $
              3,506
              
              
              100
              %
              $
              14,171
              
              
              100
              %
              $
              14,646
              
              
              100
              %Costs
                  and expenses:Cost
                  of Marketplace revenue
              
              
              2,337
              
              
              68
              %
              
              2,388
              
              
              68
              %
              
              9,660
              
              
              68
              %
              
              10,299
              
              
              70
              %Salaries,
                  wages and employee benefits
              
              
              350
              
              
              10
              %
              
              366
              
              
              10
              %
              
              1,448
              
              
              10
              %
              
              1,298
              
              
              9
              %Selling,
                  general and administrative
              
              
              427
              
              
              12
              %
              
              296
              
              
              8
              %
              
              1,257
              
              
              9
              %
              
              1,433
              
              
              10
              %Depreciation
                  and amortization
              
              
              78
              
              
              2
              %
              
              70
              
              
              2
              %
              
              301
              
              
              2
              %
              
              275
              
              
              2
              %3,192
              
              
              92
              %
              
              3,120
              
              
              89
              %
              
              12,666
              
              
              89
              %
              
              13,305
              
              
              91
              %Income
                  from operations
              
              
              259
              
              
              8
              %
              
              386
              
              
              11
              %
              
              1,505
              
              
              11
              %
              
              1,341
              
              
              9
              %Other
                  income, net
              
              
              44
              
              
              1
              %
              
              16
              
              
              0
              %
              
              156
              
              
              1
              %
              
              117
              
              
              1
              %Income
                  before income taxes
              
              
              303
              
              
              9
              %
              
              402
              
              
              11
              %
              
              1,661
              
              
              12
              %
              
              1,458
              
              
              10
              %Income
                  tax benefit
              
              
              (3,369
              )
              
              -98
              %
              
              (2,334
              )
              
              -67
              %
              
              (2,843
              )
              
              -20
              %
              
              (1,975
              )
              
              -13
              %Net
                  income
              
              $
              3,672
              
              
              106
              %
              $
              2,736
              
              
              78
              %
              $
              4,504
              
              
              32
              %
              $
              3,433
              
              
              23
              %


***Marketplace
      revenue***




Marketplace
      revenue consists of transaction fees, association fees and other fees net of
      revenue adjustments. The following are the components of Marketplace revenue
      that are included in the consolidated statements of income:




Fourth
                  Quarter Ended July 31,
              
              Year
                  Ended July 31,2007
              
              %
                  of Total Revenue
              
              2006
              
              %
                  of Total Revenue
              
              2007
              
              %
                  of Total Revenue
              
              2006
              
              %
                  of Total RevenueTransaction
                  fees
              
              $
              2,399
              
              
              70
              %
              $
              2,494
              
              
              71
              %
              $
              10,020
              
              
              71
              %
              $
              10,570
              
              
              72
              %Association
                  fees
              
              
              1,005
              
              
              29
              %
              
              945
              
              
              27
              %
              
              3,960
              
              
              28
              %
              
              3,686
              
              
              25
              %Other
                  marketplace fees
              
              
              47
              
              
              1
              %
              
              67
              
              
              2
              %
              
              191
              
              
              1
              %
              
              390
              
              
              3
              %$
              3,451
              
              
              100
              %
              $
              3,506
              
              
              100
              %
              $
              14,171
              
              
              100
              %
              $
              14,646
              
              
              100
              %
  16


Marketplace
      revenue decreased by $55 or 2% for the fourth quarter ended July 31, 2007
      compared to 2006 and decreased by $475 or 3% for the year ended July 31, 2007
      compared to 2006. We attribute this decrease primarily to the consolidation
      of
      broker offices after the acquisition of BXI, the reduction of members who had
      accounts in both the ITEX and BXI marketplaces (“overlapping members”) and the
      sale of selected assets of one former franchise office. Since August 1, 2006,
      thirteen ITEX and former BXI offices consolidated. The number of overlapping
      members declined from 695 on August 1, 2006 to 159 on July 31, 2007. Overlapping
      members pay association fees and transaction fees on both their ITEX and former
      BXI account. Consolidation of an overlapping member's accounts from two to
      one
      account resulted in the net loss of an account that we previously had assessed
      association and transaction fees. Additionally, in the first quarter of 2007,
      we
      sold selected assets of a former broker office. This office generated $35 and
      $170 in the fourth quarter of 2006 and the year ended July 31, 2006,
      respectively. In 2007, this office generated $22 in the first quarter and $0
      in
      the remainder of 2007. Our plans to increase revenue during 2007 are discussed
      in the previous section under “Condensed Results.”




***Cost
      of Marketplace revenue***




Cost
      of
      Marketplace revenue consists of commissions paid to Brokers and expenses
      directly attributable to Brokers and the Marketplace. The following are the
      components of cost of Marketplace revenue that are included in the consolidated
      statements of income:




Fourth
                  Quarter Ended July 31,
              
              Year
                  Ended July 31,2007
              
              %
                  of Total Revenue
              
              2006
              
              %
                  of Total Revenue
              
              2007
              
              %
                  of Total Revenue
              
              2006
              
              %
                  of Total RevenueTransaction
                  fee commissions
              
              $
              1,832
              
              
              53
              %
              $
              1,868
              
              
              53
              %
              $
              7,579
              
              
              53
              %
              $
              8,068
              
              
              55
              %Association
                  fee commissions
              
              
              424
              
              
              12
              %
              
              467
              
              
              13
              %
              
              1,688
              
              
              12
              %
              
              2,018
              
              
              14
              %Other
                  Marketplace expenses
              
              
              81
              
              
              2
              %
              
              53
              
              
              2
              %
              
              393
              
              
              3
              %
              
              213
              
              
              1
              %$
              2,337
              
              
              68
              %
              $
              2,388
              
              
              68
              %
              $
              9,660
              
              
              68
              %
              $
              10,299
              
              
              70
              %




Cost
      of
      Marketplace revenue decreased by $51 or 2% to $2,337 from $2,388 for the fourth
      quarter of 2007 and 2006, respectively and decreased by $639 or 6% to $9,660
      from $10,299 for the year ended July 31, 2007 and 2006, respectively. These
      decreases primarily relate to conversions of former BXI brokers to lower ITEX
      association fee commission structures.




The
      following shows the commissions separately as a percent of their related
      revenue:




Fourth
                  Quarter Ended July 31,
              
              Year
                  Ended July 31,2007
              
              %
                  of Related Revenue
              
              2006
              
              %
                  of Related Revenue
              
              2007
              
              %
                  of Related Revenue
              
              2006
              
              %
                  of Related RevenueTransaction
                  fee commissions
              
              $
              1,832
              
              
              76
              %
              $
              1,868
              
              
              75
              %
              $
              7,579
              
              
              76
              %
              $
              8,068
              
              
              76
              %Association
                  fee commissions
              
              
              424
              
              
              42
              %
              
              467
              
              
              49
              %
              
              1,688
              
              
              43
              %
              
              2,018
              
              
              55
              %




17


***Salaries,
      Wages and Employee Benefits***





Salaries,
      wages and employee benefits include expenses for employee salaries and wages,
      payroll taxes, 401(k), payroll related insurance, medical and dental benefits,
      temporary services and other personnel related items. Comparative results are
      as
      follows:


Fourth
                  Quarter Ended July 31,
              
              Year
                  Ended July 31,2007
              
              %
                  of Total Revenue
              
              2006
              
              %
                  of Total Revenue
              
              2007
              
              %
                  of Total Revenue
              
              2006
              
              %
                  of Total RevenueSalaries,
                  wages and employee
                benefits
              
              $
              350
              
              
              10
              %
              $
              366
              
              
              10
              %
              $
              1,448
              
              
              10
              %
              $
              1,298
              
              
              9
              %




Salaries,
      wages and employee benefits for the fourth quarter of 2007 decreased by $16
      or
      4% to $350 from $366 as compared with the same quarter in 2006. This decrease
      was primarily due to a reduction of $22 in outside temporary services. In the
      fourth quarter of 2006, we had a temporary employee covering for a full time
      employee who was on maternity leave.





Salaries,
      wages and employee benefits for 2007 increased by $150 or 12% to $1,448 from
      $1,298 as compared with 2006. This increase was primarily due to an increase
      of
      $93 in stock based compensation as a result of stock grants to key employees.
      Additionally, salaries and wages increased by $51 due to certain promotions
      and
      general cost of living adjustments.





***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, insurance,
      bad
      debts, sales tax and other taxes, and other costs. Comparative results are
      as
      follows:


Fourth
                  Quarter Ended July 31,
              
              Year
                  Ended July 31,2007
              
              %
                  of Total Revenue
              
              2006
              
              %
                  of Total Revenue
              
              2007
              
              %
                  of Total Revenue
              
              2006
              
              %
                  of Total RevenueSelling,
                  general and
                administrative
                  expenses
              
              $
              427
              
              
              12
              %
              $
              296
              
              
              8
              %
              $
              1,257
              
              
              9
              %
              $
              1,433
              
              
              10
              %




Selling,
      general and administrative increased by $131 or 44% to $427 from $296 for the
      fourth quarter of 2007 as compared to the fourth quarter of 2006. This increase
      was primarily due to a $103 increase in legal expenses related to certain
      pending litigation. Additionally, we increased outside services by $41 to
      support various revenue generating efforts.





Selling,
      general and administrative decreased by $176 or 12% to $1,257 from $1,433 for
      2007 as compared to 2006. Primary contributors to this decrease include: $120
      for bad debts expense, $113 for discretionary Broker related expenses and $73
      for professional services. These decreases were partially offset by an increase
      of $99 for legal expenses, $60 for outside services and $49 for rent and
      utilities in our new executive office space.





18




***Depreciation
      and Amortization***





Depreciation
      and amortization expenses include depreciation on our fixed assets and
      amortization of our membership list. Comparative results are as
      follows:




Fourth
                  Quarter Ended July 31,
              
              Year
                  Ended July 31,2007
              
              
              %
                  of Total Revenue
              
              
              2006
              
              
              %
                  of Total Revenue
              
              
              2007
              
              
              %
                  of Total Revenue
              
              
              2006
              
              
              %
                  of Total RevenueDepreciation
                  and amortization
              
              $
              78
              
              
              2
              %
              $
              70
              
              
              2
              %
              $
              301
              
              
              2
              %
              $
              275
              
              
              2
              %


Depreciation
      and amortization increased by $8 or 11% to $78 from $70 for the fourth quarter
      of 2007 as compared to the fourth quarter of 2006. Amortization of our
      membership list was $62 for the fourth quarter of both 2007 and 2006. The
      increase was due to added depreciation on fixed assets purchased during
      2007.





Depreciation
      and amortization increased by $26 or 9% to $301 from $275 for 2007 as compared
      to 2006. Amortization of our membership list was $249 in 2007 and 2006. The
      increase was due to added depreciation on fixed assets purchased during
      2007.





***Other
      Income***





Other
      income includes interest received on notes receivable and promissory notes,
      certain one-time gains and offsetting interest expense on notes payable,
      primarily our $1.3 million promissory note from U.S. Bank obtained on July
      29,
      2005. Comparative results are as follows:




2007
              
              %
                  of Total Revenue
              
              2006
              
              %
                  of Total Revenue
              
              2007
              
              %
                  of Total Revenue
              
              2006
              
              %
                  of Total RevenueOther
                  Income
              
              $
              44
              
              
              1
              %
              $
              16
              
              
              0
              %
              $
              156
              
              
              1
              %
              $
              117
              
              
              1
              %




Other
      income for the fourth quarter of 2007 increased by $28 or 175% to $44 as
      compared to $16 for the same quarter in 2006. The increase is partly caused
      by a
      $10 gain on a sale of an investment with a book value of $0. Also, the fourth
      quarter of 2006 included interest expense of $18 as compared with $0 in the
      fourth quarter of 2007.




Other
      income for 2007 increased by $39 or 33% to $156 as compared to $117 for the
      same
      period in 2006. The increase is primarily caused by a net interest increase
      of
      $60 offset by net decreases of $30 on various one-time non-operational
      transactions.





***Recoverability
      of Deferred Tax Assets***




Deferred
      tax assets on our balance sheet 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 we 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 our assets and liabilities
      at enacted tax rates expected to be in effect when such assets or liabilities
      are realized or settled. In 2007 and 2006, respectively, w e
      utilized $2,262 and $1,436 of our available NOLs. As of July 31, 2007, we have
      approximately $19,362 of NOLs available to offset future taxable income.




19


We
      periodically assess the realizability of our available NOLs to determine whether
      we believe we will generate enough future taxable income to utilize some portion
      or all of the available NOLs. During the fourth quarter ended July 31, 2007,
      we
      performed an assessment of our available NOLs because of an additional year
      of
      increased profitability and our anticipated purchase of an additional membership
      list which was completed subsequent to July 31, 2007 on August 1, 2007. In
      that
      assessment, we concluded that it was more likely than not that additional NOLs
      would result in realizable deferred tax assets. Accordingly, we removed our
      valuation allowance on available NOLs and increased deferred tax assets by
      $3,499 to $7,349 as of July 31, 2007. As of July 31, 2007, we have no valuation
      allowance on available Federal NOLs.




We
      acquired BXI by merging BXI into our wholly-owned subsidiary, BXI Acquisition
      Sub, Inc., a Delaware corporation. The transaction was structured as a taxable
      reverse triangular merger, a merger treated for tax purposes as a taxable stock
      purchase. The tax impact on ITEX as of the date of acquisition includes the
      limited use (annual limit of approximately $172) of BXI’s NOLs of approximately
      $2,163 and tax deductible goodwill of $2,594 with annual tax basis amortization
      of $275, subject to restrictions imposed by applicable tax law. For our current
      estimate of the deferred tax benefits to be utilized in future periods beyond
      2007 attributable to the utilization of this NOL, refer to Note
      10, “Income Taxes” included in the “Notes to Consolidated Financial Statements”,
      Item 7 - Financial Statements.








**FINANCIAL
      CONDITION**




Our
      total
      assets were $14,304 and $10,663 at July 31, 2007 and 2006, respectively,
      representing an increase of $3,641 or 34%. This increase resulted primarily
      due
      to our reassessment of the reserve on available NOLs resulting in an increase
      in
      short-term and long-term deferred tax assets. The increase was offset, to a
      lesser extent, by accumulated amortization of the membership list acquired
      from
      BXI. We have continued to generate positive cash flows from operations. Our
      cash
      and cash equivalents totaled $1,753 and $314 as of July 31, 2007 and 2006,
      respectively, representing an increase of $1,439, or 458%. Our cash flow
      activity is described in more detail in the table below.




Accounts
      receivable balances, net of allowances of $265 and $317, were $1,113 and $1,091
      as of July 31, 2007 and 2006 respectively, representing a decrease of $22 or
      2%.




July
                  31, 2007
              
              %
                  of Gross Accounts Receivable
              
              July
                  31, 2006
              
              %
                  of Gross Accounts ReceivableGross
                  accounts receivable
              
              $
              1,378
              
              
              100
              %
              $
              1,408
              
              
              100
              %Less:
                  allowance
              
              
              265
              
              
              19
              %
              
              317
              
              
              23
              %Net
                  accounts receivable
              
              $
              1,113
              
              
              81
              %
              $
              1,091
              
              
              77
              %





Gross
      accounts receivable decreased by $30 or 2% while net accounts receivable
      increased by $22 or 2% because of a decrease in the accounts receivable
      allowance. The decrease in the accounts receivable allowance in 2007 as compared
      to 2006 is the result of better collections, resulting in fewer amounts in
      various aging categories as of July 31, 2007 and 2006, respectively.




20




Our
      total
      current liabilities were $1,954 and $2,285 at July 31, 2007 and 2006,
      respectively, representing a decrease of $331 or 14%. The decrease is due
      primarily to a decrease of $315 in the current portion of debt.





As
      a
      result of the reduction in our liabilities and our continued profitability,
      our
      stockholders’ equity increased by $4,362 or 55% to $12,330 at July 31, 2007,
      compared to $7,968 at July 31, 2006. This was the fifteenth out of sixteen
      quarters that we have increased stockholders’ equity. We increased our
      stockholders’ equity by 22%, on average, every quarter for the last sixteen
      quarters.




Total
      liabilities were $1,973 and $2,695 at July 31, 2007 and 2006, respectively,
      representing a decrease of $722 or 27%. This decrease was primarily attributable
      to our repayment of $725 of notes payable.




As
      of
      July 31, 2007, approximately 67% of member payments are made through electronic
      funds transfer or by credit cards using the Preferred Member Autopay system
      (“Autopay System”). In order to obtain full payment within days of billing, we
      will continue our attempts to increase the percentage of participation in the
      Autopay System during 2008 and beyond through various incentive programs.




The
      change in cash and cash equivalents is as follows:




Year
                  Ended July 31,2007
              
              2006Net
                  cash provided by operating activities
              
              $
              2,057
              
              $
              1,836Net
                  cash provided by investing activities
              
              
              453
              
              
              27Net
                  cash used in financing activities
              
              
              (1,071
              )
              
              (2,118
              )Increase
                  (decrease) in cash and cash equivalents
              
              $
              1,439
              
              $
              (255
              )





We
      have
      financed our liquidity needs over the last two years primarily through cash
      flow
      generated from operations. Net cash provided by operating activities was $2,057
      for the year ended July 31, 2007 compared with $1,836 in 2006. During 2007,
      we
      used this cash for routine operating expenses, debt re-payments, to re-purchase
      438 shares of ITEX stock and to increase our cash balances by $1,439 to $1,753
      as of July 31, 2007. Subsequent to the fiscal year end, we utilized $1,700
      of
      our cash to acquire certain assets of a commercial trade exchange network from
      Intagio (refer to “Overview” included in “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”, Part
      II Item 6 .)





As
      part
      of our contemplated future expansion activities we may continue seeking to
      acquire certain competitors or other business to business enterprises. We do
      not
      expect that our current working capital would be adequate for this purpose
      and
      we may seek to finance a portion of the acquisition cost subject to the consent
      of any secured creditors. We maintain a $1,000 line of credit facility from
      our
      primary banking institution, U.S. Bank, which expires November 30, 2007. The
      line of credit was established to provide additional reserve capacity for
      general corporate and working capital purposes and, if necessary, to enable
      us
      to make future expenditures related to the growth and expansion of our business
      model. There was no outstanding amount under this line of credit as of July
      31,
      2007. Subsequent to July 31, 2007, we utilized $300 of this line of credit
      as
      partial financing of the acquisition of certain assets of a commercial trade
      exchange network from Intagio (refer to “Overview” included in “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”, Part
      II Item 6 .)
      As of
      the date of this report, we had repaid the $300 balance on our line of credit
      in
      full and there is no balance outstanding. In the first quarter of 2008, we
      intend to seek to renew this facility for an additional one year term. We
      believe that our financial condition is stable and that our cash balances,
      other
      liquid assets, and cash flows from operating activities provide adequate
      resources to fund ongoing operating requirements.




21


Since
      inflation of the U.S. dollar has been moderate in recent years, 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.





The
      following summarizes our cash flows by quarter for 2007 and 2006:





Year
                  ended July 31, 2007
              
              First
                  Quarter
              
              Second
                  Quarter
              
              Third
                  Quarter
              
              Fourth
                  Quarter
              
              TotalNet
                  cash provided by operating activities
              
              
              944
              
              
              423
              
              
              577
              
              
              113
              
              
              2,057Net
                  cash provided by (used in) investing activities
              
              
              451
              
              
              (42
              )
              
              33
              
              
              11
              
              
              453Net
                  cash used in financing activities
              
              
              (749
              )
              
              (296
              )
              
              -
              
              
              (26
              )
              
              (1,071
              )Year
                  ended July 31, 2006
              
              
              First
                  Quarter
              
              
              Second
                  Quarter
              
              
              Third
                  Quarter
              
              
              Fourth
                  Quarter
              
              
              TotalNet
                  cash provided by operating activities
              
              
              865
              
              
              485
              
              
              440
              
              
              46
              
              
              1,836Net
                  cash provided by (used in) investing activities
              
              
              (29
              )
              
              35
              
              
              41
              
              
              (20
              )
              
              27Net
                  cash used in financing activities
              
              
              (210
              )
              
              (1,321
              )
              
              (237
              )
              
              (350
              )
              
              (2,118
              )




*Operating
      Activities*





During
      the year ended July 31, 2007, net cash provided by operating activities was
      $2,057 compared with $1,836 in 2006, an increase of $221 or 12%. We have had
      positive net cash provided by operating activities for thirteen of the past
      fifteen quarters. As described above, for each calendar year, we divide our
      operations into thirteen four-week billing and commission cycles. The thirteenth
      operating cycle usually occurs in the fourth quarter of each year. While the
      first three quarters usually have three payroll and commission periods, the
      fourth quarter usually has four periods. This results in decreased net cash
      provided by operating activities in the fourth quarter. In the fourth quarter
      of
      2007 and 2006, however, net cash provided by operating activities remained
      positive.





*Investing
      Activities*





During
      the year ended July 31, 2007, net cash provided by investing activities was
      $453
      compared with $27 during 2006. The increase resulted primarily from payments
      on
      notes and loans receivable offset to a lesser extent by advances on additional
      loans.





*Financing
      Activities*





During
      the year ended July 31, 2007, net cash used by financing activities was $1,071
      compared with $2,118 during 2006. We used cash to re-pay our debt and to
      re-purchase 438 and 1,050 shares of ITEX stock in 2007 and 2006,
      respectively.




22


In
      order
      to partially fund the acquisition of BXI, on June 30, 2005, we borrowed $1.3
      million from U.S. Bank. The promissory note issued to U.S. Bank to evidence
      the
      borrowing (“Bank Note”) provided for a $1.3 million term loan, bearing interest
      at an annual rate of 6.48%. Principal and interest were payable in 47 monthly
      installments of approximately $31 each beginning August 5, 2005 and maturing
      on
      July 5, 2009. Our obligations under the Bank Note were secured by security
      interests in our accounts receivable, general intangibles, and all inventory
      and
      equipment. The Bank Note could be prepaid at any time and we made optional
      prepayments of principal of $250 and $697 in the second quarter of 2006 and
      the
      first quarter of 2007, respectively, before paying off the outstanding principal
      balance and related interest in full in the first quarter of 2007.





On
      August
      1, 2007, in order to partially fund the acquisition of certain assets of a
      commercial trade exchange network from Intagio (refer to “Overview” included in “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”, Part
      II Item 6 ),
      we
      borrowed $300 under our Revolving Credit Agreement with U.S. Bank and issued
      an
      8.0% subordinated secured promissory note (“Note”) to Intagio in the aggregate
      principal amount of $1,137 due August 31, 2009. The Note is a secured obligation
      and ranks senior to all of our other obligations except that the Note is
      subordinated to the U.S. Bank debt. Principal and interest on the Note is
      payable in twenty four equal monthly installments of $51 payable on the last
      day
      of each calendar month commencing on August 31, 2007. Our obligations under
      the
      Note are secured by security interests in our accounts receivable, general
      intangibles, and all inventory and equipment. The Note has events of default
      and
      other provisions that are customary for a loan of this type including
      nonpayment, default on other obligations, bankruptcy and material adverse
      changes in the business, properties or financial condition of ITEX. If any
      of
      these events occur, it may cause all outstanding obligations under the Note
      to
      be accelerated and become immediately due and payable. The Note can be prepaid
      at any time. As of the date of this report, we had repaid the $300 balance
      on
      our line of credit in full and we have no balance outstanding.





Future
      minimum commitments under the Note are as follows:


Year
                  ending July 31,2008
              
              $
              5462009
              
              
              591Total
              
              $
              1,137




**OTHER
      MATTERS**





**Accounting
      Policies and Estimates**





We
      have
      identified the policies below as critical to our understanding of the results
      or
      our business operations. We discuss the impact and any associated risks related
      to these policies on our business operations throughout Management’s Discussion
      and Analysis of Financial Condition and Results of Operations where such
      policies affect our reported and expected financial results.





In
      the
      ordinary course of business, we have made a number of estimates and assumptions
      in preparing our financial statements in conformity with accounting principles
      generally accepted in the United States of America. Actual results could differ
      significantly from those estimates and assumptions. The following critical
      accounting policies are those that are most important to the portrayal of our
      consolidated financial statements. These policies require our most difficult,
      subjective, and complex judgments, often as a result of the need to make
      estimates about the effect of matters that are inherently uncertain. For a
      summary of all of our significant accounting policies, including the critical
      accounting policies discussed below, refer to Note
      1
― “Summary
      of Significant Accounting Policies” included in the “Notes to Consolidated
      Financial Statements”, Item 7 - Financial Statements.




23




*Revenue
      Recognition*





We
      generate our 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”). We recognize revenue when persuasive evidence of an
      arrangement exists, the transaction has occurred or a cycle period has ended,
      the charges are fixed and determinable and no major uncertainty exists with
      respect to collectibility.





Our
      largest sources of revenues are transaction fees and association fees. We charge
      members of the Marketplace an association fee every operating cycle in
      accordance with our members’ individual agreements. We also charge both the
      buyer and the seller a transaction fee based on the ITEX dollar value of the
      Marketplace transaction. Additionally, we may charge various auxiliary fees
      to
      members such as annual membership dues, late fees, and insufficient fund fees.
      The total fees we charge to members are substantially in USD and partially
      in
      ITEX dollars. We bill members for all fees at the end of each operating cycle.
      We track ITEX dollar fees in our internally developed database. Members have
      the
      option of paying USD fees automatically by credit card, by electronic funds
      transfer through our Autopay System or by personal check. Currently,
      approximately 67% of member payments are made through electronic funds transfer
      or by credit cards using the Autopay System. If paying by credit card or through
      our Autopay System, generally, the USD transaction fee is 5% to 6% 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.





In
      each
      accounting cycle, we recognize as revenue all transaction fees, association
      fees
      and applicable other fees that occurred during that month regardless of which
      operating cycle the fees occurred. We defer annual dues, which are prepaid,
      and
      recognize this revenue over the periods they apply.





As
      discussed below, we do not record ITEX dollars we receive from member fees
      or
      distribute for revenue share, sales incentives and various services (refer
      to
“Accounting for ITEX Dollar Activities” included in “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”, Part
      II Item 6 .)
      The
      majority of the ITEX dollars we earn are distributed back to the Broker Network
      as revenue share and sales incentives. Additionally, we use ITEX dollars we
      earn
      to fund the ITEX co-op advertising program utilized by both members and Brokers.
      We expend an immaterial amount of ITEX dollars for certain ITEX operating
      expenses.





ITEX
      dollar summary:


Year
                  Ended July 31,2007
              
              2006Fees
                  received
              
              $
              4,370
              
              $
              4,618Distributions
              
              
              (4,366
              )
              
              (4,533
              )Increase
              
              $
              4
              
              $
              85




*Gross
      versus
      Net Revenue Recognition*




24




In
      the
      normal course of business, we act as administrator to execute transactions
      between Marketplace members. We pay commissions to our Brokers after the close
      of each operating cycle based on member transaction and association fees
      collected in USD. We report revenue based on the gross amount billed to the
      ultimate customer, the Marketplace member. When revenues are recorded on a
      gross
      basis, any commissions or other payments to Brokers are recorded as costs or
      expenses so that the net amount (gross revenues less expenses) is reflected
      in
      Operating Income.





Determining
      whether revenue should be reported as gross or net is first based on an
      assessment of whether we are acting as the principal or acting as an agent
      in
      the transaction. In determining whether we serve as principal or agent, we
      follow the guidance in EITF 99-19, “Reporting Revenue Gross as a Principal
      versus Net as an Agent.” Pursuant to such guidance, we serve as the principal in
      transactions in which we have substantial risks and rewards of ownership. The
      determination of whether we are acting as a principal or an agent in a
      transaction involves judgment and is based on an evaluation of the terms of
      an
      arrangement. In our case, we administer the Marketplace, act as a third-party
      record-keeper for our members’ transactions, bill ITEX members directly pursuant
      to contractual agreements with them, collect all revenue, and assess the
      collectibility of our accounts receivable monthly. Our revenues remain the
      property of ITEX.





*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 on revenue sharing association fees and transaction fees
      with our Broker Network, and for general Marketplace costs. No ITEX dollar
      activity is reflected in the accompanying financial statements. Our policy
      is to
      record transactions at the fair value of products or services received (when
      those values are readily determinable). Further, we believe that all of our
      ITEX
      dollar transactions during the periods presented in the accompanying financial
      statements lacked readily determinable fair values and, thus, were recorded
      at
      the cost basis of the trade dollars surrendered which was zero.





Our
      accounting policy follows the accounting guidance of the Financial Accounting
      Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) 93-11, *Accounting
      for Barter Transactions Involving Barter Credits* ,
      which
      indicates that transactions in which non-monetary assets are exchanged for
      barter credits should be accounted for under the Accounting Principle Board
      (“APB”) 29, *Accounting
      for Non-monetary Transactions* .
      The
      basic principle of APB 29 is that, generally, exchanges of non-monetary assets
      should be recorded at fair value of the assets (or services) involved. 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
      ITEX
      dollars received. In addition, there is no cost basis to us for ITEX dollars.
      Our position 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 ITEX
      dollars.





We
      expend
      ITEX dollars primarily on the following items:





·
            Co-op
                advertising with Marketplace members and
                Brokers;


·
            Revenue
                sharing with Brokers in the form of per operating cycle transaction
                fees
                and association fees based upon member transactions
                consummated;


·
            Sales
                incentives to Brokers based upon new members who have registered
                in the
                Marketplace;


·
            Resolution
                of member disputes, essentially reimbursing the members for some
                or all of
                their ITEX dollars spent on a transaction in which the member is
                dissatisfied.




25


We
      believe that the fair value of these items lack readily determinable fair values
      for several reasons. Under APB 29, 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. Because substantially all items upon which we expend ITEX dollars
      do not have readily determinable fair values, we have determined that meeting
      all of the required criteria for revenue recognition cannot occur as the price
      cannot be concluded as being fixed and determinable.





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.





*Valuation
      of Notes Receivable*




We
      determine a present value of our notes receivable using a monthly average
      treasury note rate with approximately the same term as the note to approximate
      a
      market value interest rate when we determine that a negotiated interest rate
      does not properly reflect the risk associated with the notes. We calculate
      the
      effective rate on the note given the market rate and the payment streams and
      record the note accordingly. We periodically review for our notes for possible
      impairment whenever events or changes in circumstances indicate that the
      carrying value has been impaired and may not be recoverable. Factors we consider
      important that could trigger an impairment review include the following:




·
            Significant
                underperformance relative to expected historical or projected future
                operating results.


·
            Change
                in management of the franchisee or independent licensed broker responsible
                for the note.





We
      look
      primarily to the undiscounted future cash flows in our assessment of whether
      or
      not notes receivable risk being uncollectible or unrecoverable.





*Valuation
      Allowance on Deferred Tax Assets*





Deferred
      tax assets on our balance sheet 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 we 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 its assets and liabilities
      at enacted tax rates expected to be in effect when such assets or liabilities
      are realized or settled.





In
      assessing the recoverability of deferred tax assets, we periodically assess
      whether it is more likely that some portion or all of the deferred tax assets
      will not 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. We consider
      the
      scheduled reversal of deferred tax liabilities, projected future taxable income
      and projections for future taxable income over the periods in which the deferred
      tax assets are expected to be deductible.




26




On
      July
      31, 2007, we had NOLs of approximately $19,362 available to offset future
      taxable income. We periodically assess the realizability of our available NOLs
      to determine whether we believe we will generate enough future taxable income
      to
      utilize some portion or all of the available NOLs. During the fourth quarter
      ended July 31, 2007, we performed an assessment of our available NOLs because
      of
      an additional year of increased profitability and our anticipated purchase
      of an
      additional membership list which was completed subsequent to July 31, 2007
      on
      August 1, 2007. In that assessment, we concluded that it was more likely than
      not that additional NOLs would result in realizable deferred tax assets.
      Accordingly, we removed our valuation allowance on available NOLs and increased
      deferred tax assets by $3,499 to $7,349 as of July 31, 2007. As of July 31,
      2007, we have no valuation allowance on available Federal NOLs.





The
      deferred tax assets recorded in 2007 represent our current estimate of all
      deferred tax benefits to be utilized in the current year and future periods
      beyond 2007.





*Goodwill*





We
      record
      goodwill when the cost of an acquired entity exceeds the net amounts assigned
      to
      identifiable assets acquired and liabilities assumed. In accordance with
      Statement of Financial Accounting Standards (“SFAS”) 142, *Goodwill
      and Other Intangible Assets* ,
      we
      conduct a formal impairment test of goodwill on an annual basis and between
      annual tests if an event occurs or circumstances change that would more likely
      than not reduce the fair value below its carrying value. We have analyzed
      goodwill as of July 31, 2007 and we did not identify any
      impairment.





*Accounting
      for Acquisitions*





We
      account for acquisitions as a purchase in accordance with the provisions of
      SFAS
      141, *Business
      Combinations* .
      We
      report all acquired tangible and intangible assets and liabilities at fair
      value. We recognize the fair value of the purchased intangible assets as
      operating expenses over the estimated useful life of each separate intangible
      asset. Any excess purchase price over the fair values assigned to identifiable
      tangible and intangible assets is recorded as goodwill.





*Software
      for Internal Use*





We
      have
      developed extensive software to manage and track the ITEX dollar activity in
      the
      Marketplace to calculate USD and ITEX dollar fees accordingly. We account for
      qualifying costs incurred in the development of software for internal use in
      accordance with the American Institute of Certified Public Accountants’
Statement of Position (“SOP”) 98-1, *Accounting
      for Costs of Computer Software Developed or Obtained for Internal
      Use* .
      In
      accordance with SOP 98-1, costs incurred in the planning and post-implementation
      stages are expensed as incurred, while costs relating to application development
      are capitalized. Qualifying software development costs, including software
      in
      development meeting the criteria of SOP 98-1, are included as an element of
      property and equipment in the consolidated balance sheets.





*Share-Based
      Compensation Expense*





We
      account for share-based compensation in accordance with the provisions of SFAS
      123(R), *Share-Base
      Payment* .
      Under
      the fair value recognition provisions of SFAS 123(R), we estimate share-based
      compensation cost at the grant date based on the fair value of the award. We
      recognize the expense ratably over the requisite service period of the award.
      We
      have not issued stock options in the periods reported nor do we have any
      outstanding stock options granted.





27





*Recent
      Accounting Pronouncements*





In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
      159, *The
      Fair Value Option for Financial Assets and Liabilities — Including an Amendment
      of FASB Statement No. 115* (“SFAS
      159”), which permits an entity to choose to measure many financial instruments
      and certain other items at fair value. Most of the provisions of SFAS 159 are
      elective; however the amendment to SFAS 115 applies to all entities with
      available-for-sale and trading securities. The FASB’s stated objective in
      issuing the standard is to improve financial reporting by entities by providing
      them with the opportunity to mitigate volatility in reported earnings caused
      by
      measuring related assets and liabilities differently without having to apply
      complex hedging accounting provisions. The provisions of SFAS 159 are effective
      for fiscal years beginning after November 15, 2007, which for us is effective
      for our fiscal 2009 beginning August 1, 2008. We are currently evaluating the
      impact of the adoption of SFAS 159 on our
      results of operations, cash flows or financial condition.




In
      September 2006, the FASB issued SFAS 157, *Fair
      Value Measurements* (“SFAS
      157”), which is 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.
      The
      provisions of SFAS 157 are effective for fiscal years beginning after November
      15, 2007, which for us is effective for our fiscal 2009 beginning August 1,
      2008. We are currently evaluating the impact of the adoption of SFAS 159 on our
      results of operations, cash flows or financial condition.




In
      July
      2006, the FASB issued FASB Interpretation (“FIN”) 48, *Accounting
      for Uncertainty in Income Taxes,* which
      clarifies the accounting for uncertainty in tax positions. This Interpretation
      requires that we recognize the impact of a tax position in our financial
      statements if that position is more likely than not to be sustained in audit
      based on the technical merits of the position. The provisions of FIN 48 are
      effective for fiscal years beginning after December 15, 2006, which for us
      is
      effective for fiscal 2008 beginning August 1, 2007. Upon adoption, we will
      record the cumulative effect, if any, of the change in accounting principle
      as
      an adjustment to opening retained earnings. We believe the adoption of FIN
      48
      will not have a material impact on our results of operations, cash flows or
      financial condition.





**RISK
      FACTORS**




This
      Annual Report on Form 10-KSB contains statements that are forward-looking such
      as estimates, projections, statements relating to our business plans, objectives
      and expected operating results. These statements are based on current
      expectations and assumptions that are subject to risks and uncertainties. All
      statements that express expectations and projections with respect to future
      matters may be affected by changes in our strategic direction, as well as
      developments beyond our control. We cannot assure you that our expectations
      will
      necessarily come to pass. Actual results could differ materially because of
      issues and uncertainties such as those listed below, in the section entitled
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations,” and elsewhere in this report. These factors, among others, may
      adversely impact and impair our business and should be considered in evaluating
      our financial outlook.





28




***Our
      future revenue growth and profitability remains uncertain.***





We
      have
      sustained profitable operations for four years. While our revenues increased
      in
      the year ended July 31, 2006, our revenues declined by 3% in the year ended
      July
      31, 2007. Despite the decline in revenue, our profitability increased. We cannot
      assure you that we will remain profitable when our revenues are declining.
      Despite our concentrated efforts to increase our revenues in 2007, revenues
      declined. Subsequent to July 31, 2007, we acquired a new membership list of
      approximately two thousand additional member businesses. We believe this
      acquisition will increase revenues in 2008. However, we have not yet been
      successful in increasing revenues within our core business, so we cannot assure
      you that our revenues will increase in 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. 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 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 who may not continue to work for
      us.***




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 its operations. Although we believe we are currently being administered
      capably, we remain substantially dependent on the continued services of our
      key
      personnel and in particular, the services of CEO and interim CFO Steven White.
      Management places heavy reliance on Mr. White’s experience and management
      skills. We have not entered into formal employment agreements with Mr. White
      or
      any of our employees. 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.




29




***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 balances
      and
      operating cash flows provide adequate resources to fund our ongoing operating
      requirements, we have limited funds and may have contractual obligations in
      the
      future. Our existing working capital may not be sufficient to allow us to
      execute our business plan as fast as we would like or may not be sufficient
      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
      acquire certain competitors or other business to business enterprises. We have
      a
      line of credit with our primary banking institution, which will provide
      additional reserve capacity for general corporate and working capital purposes,
      and if necessary, enable us to make certain expenditures related to the growth
      and expansion of our business model. However, if adequate capital were not
      available or were not available on acceptable terms at a time when we needed
      it,
      our ability to execute our business plans, develop or enhance our services,
      make
      acquisitions or respond to competitive pressures would be significantly
      impaired. Further, we cannot assure you that we will be able to implement
      various financing alternatives or otherwise obtain required working capital
      if
      needed or desired.





***We
      are substantially dependent on our Broker Network.***




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





***Dependence
      on the Value of Foreign Currency***





We
      transact business in Canadian dollars as well as United States dollars. During
      2007, approximately 7% of our total revenues were derived from Canadian
      operations. While foreign currency exchange fluctuations are not believed to
      materially affect our operations, changes in the relation of the Canadian dollar
      to the United States dollar could affect our revenues, cost of sales, operating
      margins and result in exchange losses.











30






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




We
      have
      limited experience acquiring companies. We have evaluated, and expect to
      continue to evaluate, potential strategic transactions. From time to time,
      we
      may engage in discussions regarding potential acquisitions. Any of these
      transactions could be material to our financial condition and results of
      operations. In addition, the process of integrating an acquired company,
      business or technology is risky and may create unforeseen operating difficulties
      and expenditures. The areas where we may face risks include:




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




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




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




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




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




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




Pursuant
      to Section 404 of the Sarbanes-Oxley Act of 2002, under current SEC rules,
      we
      will be required to furnish a report by our management assessing the
      effectiveness of our internal control over financial reporting beginning with
      our Annual Report on Form 10-KSB for our fiscal year ending July 31, 2008.
      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-KSB for our fiscal year ending
      July
      31, 2009. 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. We are currently performing the system and process documentation
      and evaluation needed to comply with Section 404.





31




During
      this process, if we identify one or more material weaknesses in our internal
      control over financial reporting we will be unable to assert such internal
      control is effective. If we are unable to assert that our internal control
      over
      financial reporting is effective as of July 31, 2008 (or if our auditors are
      unable to state 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.




We
      cannot
      be certain as to the timing of completion of our evaluation, testing and any
      required remediation due in large part to the fact that there is very little
      precedent available by which to measure compliance with the new Auditing
      Standard No. 5. If we are not able to complete our assessment under Section
      404
      in a timely manner, we would be unable to conclude that our internal control
      over financial reporting is effective as of July 31, 2008.




**ITEM
      7. FINANCIAL STATEMENTS**





The
      following financial statements of ITEX Corporation are included in Item
      7:





Report
      of
      Independent Registered Public Accounting Firm


Consolidated
      Balance Sheets


Consolidated
      Statements of Income


Consolidated
      Statement of Stockholders’ Equity


Consolidated
      Statements of Cash Flows


Notes
      to
      Consolidated Financial Statements




32


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders


ITEX
      Corporation


Bellevue,
      Washington





We
      have
      audited the accompanying consolidated balance sheets of ITEX Corporation as
      of
      July 31, 2007 and 2006, and the related consolidated statements of income,
      stockholders' equity and cash flows for the years then ended. These consolidated
      financial statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of ITEX
      Corporation as of July 31, 2007 and 2006, and the consolidated results of their
      operations and their cash flows for each of the years ended July 31, 2007 and
      2006 in conformity with accounting principles generally accepted in the United
      States of America.


/ s/
      Ehrhardt Keefe Steiner & Hottman PC


Ehrhardt
      Keefe Steiner & Hottman PC





October
      1, 2007





33




**ITEX
                  CORPORATION****CONSOLIDATED
                  BALANCE SHEETS****(In
                  thousands)**July
                  31, 2007
              
              July
                  31, 2006ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              
              1,753
              
              
              314Accounts
                  receivable, net of allowance of $265 and $317
              
              
              1,113
              
              
              1,091Prepaid
                  expenses
              
              
              141
              
              
              169Loans
                  and advances
              
              
              94
              
              
              115Deferred
                  tax asset
              
              
              614
              
              
              509Notes
                  receivable - corporate office sales
              
              
              202
              
              
              297Other
                  current assets
              
              
              19
              
              
              4Total
                  current assets
              
              
              3,936
              
              
              2,499Property
                  and equipment, net of accumulated depreciation of $85 and
                  $42
              
              
              133
              
              
              76Goodwill
              
              
              1,740
              
              
              1,695Deferred
                  tax asset, net of current portion
              
              
              6,735
              
              
              3,939Membership
                  lists, net
              
              
              991
              
              
              1,226Notes
                  receivable - corporate office sales, net of current
                  portion
              
              
              680
              
              
              1,151Other
                  long-term assets
              
              
              89
              
              
              77Total
                  assets
              
              
              14,304
              
              
              10,663LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  and other expenses payable
              
              
              122
              
              
              91Accrued
                  commissions to brokers
              
              
              1,287
              
              
              1,168Accrued
                  expenses
              
              
              333
              
              
              429Deferred
                  revenue
              
              
              98
              
              
              178Advance
                  payments
              
              
              115
              
              
              104Current
                  portion of notes payable
              
              
              -
              
              
              315Total
                  current liabilities
              
              
              1,955
              
              
              2,285Long-term
                  liabilities:Notes
                  payable, net of current portion
              
              
              -
              
              
              410Other
                  long-term liabilities
              
              
              19
              
              
              -Total
                  Liabilities
              
              
              1,974
              
              
              2,695Commitments
                  and contingenciesStockholders’
                  equity:Common
                  stock, $.01 par value; 50,000 shares authorized; 17,929 shares
                and
                  18,246 shares issued and outstanding, respectively
              
              
              179
              
              
              182Additional
                  paid-in capital
              
              
              28,981
              
              
              29,217Unearned
                  stock compensation
              
              
              (129
              )
              
              (226
              )Accumulated
                  deficit
              
              
              (16,701
              )
              
              (21,205
              )Total
                  stockholders' equity
              
              
              12,330
              
              
              7,968Total
                  liabilities and stockholders’ equity
              
              
              14,304
              
              
              10,663
  The
        accompanying notes are an integral part of these consolidated balance
        sheets.




34


**ITEX
                  CORPORATION****CONSOLIDATED
                  STATEMENTS OF OPERATIONS****(In
                  thousands except per share amounts)**Year
                  ended July 31,2007
              
              2006Revenue:Marketplace
                  revenue
              
              $
              14,171
              
              $
              14,646Costs
                  and expenses:Cost
                  of Marketplace revenue
              
              
              9,660
              
              
              10,299Salaries,
                  wages and employee benefits
              
              
              1,448
              
              
              1,298Selling,
                  general and administrative
              
              
              1,257
              
              
              1,433Depreciation
                  and amortization
              
              
              301
              
              
              27512,666
              
              
              13,305Income
                  from operations
              
              
              1,505
              
              
              1,341Other
                  income:Interest,
                  net
              
              
              76
              
              
              15Gain
                  on sales of corporate-owned offices
              
              
              70
              
              
              17Gain
                  on extinguishment of debt
              
              
              -
              
              
              81Other
              
              
              10
              
              
              4156
              
              
              117Income
                  before income taxes
              
              
              1,661
              
              
              1,458Income
                  tax benefit, net
              
              
              (2,843
              )
              
              (1,975
              )Net
                  income
              
              $
              4,504
              
              $
              3,433Net
                  income per common share:Basic
              
              $
              0.25
              
              $
              0.19Diluted
              
              $
              0.25
              
              $
              0.18Weighted
                  average shares outstanding:Basic
              
              
              17,737
              
              
              18,430Diluted
              
              
              18,103
              
              
              18,623





The
      accompanying notes are an integral part of these consolidated statements of
      operations.




35


**ITEX
                  CORPORATION****CONSOLIDATED
                  STATEMENT OF STOCKHOLDERS' EQUITY****For
                  the years ended July 31, 2007 and 2006****(In
                  thousands)**Common
                  Stock
                Shares
                  Amount
              
              Additional
                  paid in capital
              
              Accumulated
                  deficit
              
              Treasury
                  stock
              
              Unearned
                  Compensation
              
              TotalBalance,
                  July 31, 2005
              
              
              18,826
              
              $
              188
              
              $
              29,495
              
              $
              (24,638
              )
              $
              (10
              )
              
              (76
              )
              $
              4,959Stock
                  based board compensation
              
              
              120
              
              
              1
              
              
              77
              
              
              
              
              
              
              
              
              
              
              
              78Repurchase
                  and retirement of common
                stock
              
              
              (1,050
              )
              
              (11
              )
              
              (567
              )
              
              
              
              
              
              
              
              
              
              
              (578
              )Stock
                  based compensation, net of
                cancellations
              
              
              350
              
              
              4
              
              
              212
              
              
              
              
              
              
              
              
              (150
              )
              
              66Retirement
                  of treasury stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10
              
              
              
              
              
              10Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              3,433
              
              
              
              
              
              
              
              
              3,433Balance,
                  July 31, 2006
              
              
              18,246
              
              $
              182
              
              $
              29,217
              
              $
              (21,205
              )
              $
              -
              
              $
              (226
              )
              $
              7,968Stock
                  based board compensation
              
              
              120
              
              
              1
              
              
              82
              
              
              
              
              
              
              
              
              
              
              
              83Repurchase
                  and retirement of common
                stock
              
              
              (438
              )
              
              (4
              )
              
              (318
              )
              
              
              
              
              
              
              
              
              
              
              (322
              )Stock
                  based compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              97
              
              
              97Net
                  Income
              
              
              
              
              
              
              
              
              
              
              
              4,504
              
              
              
              
              
              
              
              
              4,504Balance,
                  July 31, 2007
              
              
              17,929
              
              $
              179
              
              $
              28,981
              
              $
              (16,701
              )
              $
              -
              
              $
              (129
              )
              $
              12,330




The
      accompanying notes are an integral part of these consolidated statements of
      operations.





36
 
  **ITEX
                    CORPORATION****CONSOLIDATED
                    STATEMENT OF CASH FLOWS****(In
                    thousands)**Year
                    ended July 31,2007
                
                2006**CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    income
                
                $
                4,504
                
                $
                3,433Items
                    to reconcile to net cash provided by operating activities:Gain
                    on sales of offices
                
                
                (70
                )
                
                (17
                )Gain
                    on extinguishment of debt
                
                
                -
                
                
                (81
                )Recognition
                    of imputed interest
                
                
                (12
                )
                
                (69
                )Stock
                    based compensation
                
                
                169
                
                
                121Amortization
                    of loan issuance costs
                
                
                24
                
                
                -Depreciation
                    and amortization
                
                
                301
                
                
                275Increase
                    (decrease) in allowance for uncollectible receivables
                
                
                (52
                )
                
                106Increase
                    in deferred income taxes
                
                
                (2,900
                )
                
                (2,098
                )Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                30
                
                
                11Prepaid
                    expenses
                
                
                59
                
                
                (92
                )Other
                    current assets
                
                
                (15
                )
                
                12Accounts
                    and other expenses payable
                
                
                30
                
                
                68Accrued
                    commissions to brokers
                
                
                119
                
                
                (75
                )Accrued
                    expenses
                
                
                (80
                )
                
                (5
                )Deferred
                    revenue
                
                
                (80
                )
                
                143Advance
                    payments
                
                
                11
                
                
                104Long-term
                    liabilities
                
                
                19
                
                
                -Net
                    cash provided by operating activities
                
                
                2,057
                
                
                1,836**CASH
                    FLOWS FROM INVESTING ACTIVITIES:**BXI
                    earnout
                
                
                (62
                )
                
                (90
                )Payments
                    received from notes receivable - corporate office sales
                
                
                648
                
                
                288Advances
                    on notes receivable - corporate office sales
                
                
                -
                
                
                (69
                )Payments
                    received from loans
                
                
                284
                
                
                (16
                )Advances
                    on loans
                
                
                (302
                )
                
                (34
                )Purchase
                    of membership list
                
                
                (15
                )
                
                -Purchase
                    of property and equipment
                
                
                (100
                )
                
                (52
                )Net
                    cash provided by investing activities
                
                
                453
                
                
                27**CASH
                    FLOWS FROM FINANCING ACTIVITIES:**Repayments
                    on third party indebtedness
                
                
                (749
                )
                
                (1,527
                )Reacquired
                    shares from non-affiliated parties
                
                
                (322
                )
                
                (578
                )Loan
                    acquisition costs
                
                
                -
                
                
                (13
                )Net
                    cash used in financing activities
                
                
                (1,071
                )
                
                (2,118
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                1,439
                
                
                (255
                )Cash
                    and cash equivalents at beginning of period
                
                
                314
                
                
                569Cash
                    and cash equivalents at end of period
                
                $
                1,753
                
                $
                314Supplemental
                    cash flow information:Cash
                    paid for interest
                
                
                93
                
                
                97Cash
                    paid for taxes
                
                
                157
                
                
                62Supplemental
                    non-cash investing and financing activitiesCorporate
                    office sales (Note 2)
 The
            accompanying notes are an integral part of these consolidated statements
            of
            operations.
  37
 ITEX
        CORPORATION
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 (In
        thousands, except per share amounts unless otherwise indicated)
 
 NOTE
        1 -
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 *The
        Company*
 
 ITEX
        Corporation (“ITEX”, “Company”, “we” or “us”) was incorporated in October 1985
        in the State of Nevada. Through our independent licensed broker and franchise
        network (individually, “Broker,” and together the “Broker Network”) in the
        United States and Canada, we operate a leading exchange for cashless business
        transactions (the “Marketplace”) where products and services are exchanged for
“currency” only usable in the Marketplace (“ITEX dollars”). We administer the
        Marketplace and act as a third-party record-keeper for our members’
transactions. A summary of significant accounting policies applied in the
        preparation of the accompanying consolidated financial statements follows:
 
 *Operating
        and Accounting Cycles*
 
 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”, “2007” for August
        1, 2006 to July 31, 2007, “2005” for August 1, 2005 to July 31, 2006). We report
        our results as of the last day of each calendar month (“accounting
        cycle”).
 
 *Revenue
        Recognition* **
 
 We
        generate our 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”). We recognize revenue when persuasive evidence of an
        arrangement exists, the transaction has occurred or a cycle period has ended,
        the charges are fixed and determinable and no major uncertainty exists with
        respect to collectibility.
 
 Our
        largest sources of revenues are transaction fees and association fees. We
        charge
        members of the Marketplace an association fee every operating cycle in
        accordance with our members’ individual agreements. We also charge both the
        buyer and the seller a transaction fee based on the ITEX dollar value of
        that
        Marketplace transaction. Additionally, we may charge various auxiliary fees
        to
        members, such as annual membership dues, late fees, and insufficient fund
        fees.
        The total fees we charge to members are substantially in USD and partially
        in
        ITEX dollars. We bill members for all fees at the end of each operating cycle.
        We track ITEX dollar fees in our internally developed database. Members have
        the
        option of paying USD fees automatically by credit card, by electronic funds
        transfer through our Preferred Member Autopay System (“Autopay System”) or by
        personal check. Currently, approximately 67% of member payments are made
        through
        electronic funds transfer or by credit cards using the Autopay System. If
        paying
        by credit card or through our Autopay System, generally, the USD transaction
        fee
        is 5% to 6% 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.
 
 In
        each
        accounting cycle, we recognize as revenue all transaction fees, association
        fees
        and applicable other fees that occurred during that month regardless of which
        operating cycle the fees occurred. We defer annual dues, which are prepaid,
        and
        recognize revenue over the period to which they apply.
  38
  As
        discussed below, we do not record revenues or expenses for ITEX dollars we
        receive from member fees or spend on various services (refer to “Accounting for
        ITEX Dollar Activities”).
 
 *Gross
        versus Net Revenue Recognition*
 
 In
        the
        normal course of business, we act as administrator to execute transactions
        between Marketplace members. We pay commissions to our Brokers after the
        close
        of each operating cycle based on member transaction and association fees
        collected in USD. We report revenue based on the gross amount billed to our
        ultimate customer, the Marketplace member. When revenues are recorded on
        a gross
        basis, any commissions or other payments to Brokers are recorded as costs
        or
        expenses so that the net amount (gross revenues less expenses) is reflected
        in
        Operating Income.
 
 *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. No ITEX dollar
        activity is reflected in the accompanying financial statements. Our policy
        is to
        record transactions at the fair value of products or services received (when
        those values are readily determinable). Further, we believe that all of our
        ITEX
        dollar transactions during the periods presented in the accompanying financial
        statements lacked readily determinable fair values and, thus, were recorded
        at
        the cost basis of the trade dollars surrendered, which was zero.
 
 Our
        accounting policy follows the accounting guidance of the Financial Accounting
        Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) 93-11, *Accounting
        for Barter Transactions Involving Barter Credits* ,
        which
        indicates that transactions in which non-monetary assets are exchanged for
        barter credits should be accounted for under the Accounting Principle Board
        (“APB”) 29, *Accounting
        for Non-monetary Transactions* .
        The
        basic principle of APB 29 is that, generally, exchanges of non-monetary assets
        should be recorded at fair value of the assets (or services) involved. 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. Our position 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 and
                  Brokers;
 ·
              Revenue
                  sharing with Brokers in the form of per operating cycle transaction
                  fees
                  and association fees based upon member transactions
                  consummated;
 ·
              Sales
                  incentives to Brokers based upon new members who have registered
                  in the
                  Marketplace;
 ·
              Resolution
                  of member disputes, essentially reimbursing the members for some
                  or all of
                  their ITEX dollars spent on a transaction in which the member is
                  dissatisfied.
  39
 We
        believe that the fair value of these items lack readily determinable fair
        values
        for several reasons. Under APB 29, 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. Because substantially all items upon which we expend ITEX dollars
        do not have readily determinable fair values, we have determined that meeting
        all of the required criteria for revenue recognition cannot occur as the
        price
        cannot be concluded as being fixed and determinable.
 
 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.
 
 *Principles
        of Consolidation*
 
 The
        consolidated financial statements include the accounts of ITEX Corporation
        and
        its wholly owned subsidiary, BXI Exchange, Inc. All inter-company accounts
        and
        transactions have been eliminated.
 
 *Cash
        and Cash Equivalents*
 
 Cash
        and
        cash equivalents includes all cash and highly liquid investments with original
        maturities at the date of purchase of 90 days or less. At July 31, 2006,
        we had
        certificates of deposit totaling $35. We had no cash equivalents as of July
        31,
        2007.
 
 *Concentrations
        of Credit Risk*
 
 At
        July
        31, 2007, we maintained our cash balances at a U.S. Bank branch in Portland,
        Oregon, a Royal Bank of Canada branch in Vancouver, Canada, and a Bank of
        Montreal branch in Toronto, Canada. The balances are insured by the Federal
        Deposit Insurance Corporation up to $100 United States dollars and by the
        Canadian Deposit Insurance Corporation up to $100 Canadian dollars. Our cash
        balances have exceeded these insurable limits periodically throughout 2007
        and
        2005. At July 31, 2007 such balances exceeded these limits by $1,652.
 
 *Accounts
        and Notes Receivable*
 
 We
        assess
        the collectibility of accounts receivable monthly based on past collection
        history and current events and circumstances. Accordingly, we adjust the
        allowance on accounts receivable to reflect net receivables that we ultimately
        expect to collect.
 
 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 franchisee or independent licensed broker responsible for
        the
        note.
 
 *Loans
        and Advances*
 
 At
        our
        discretion, we occasionally allow members who complete large transactions
        to pay
        the related transaction fee over time, typically three operating cycles.
        Additionally, we occasionally make cash loans and advances to Brokers for
        special purposes or as incentives for beneficial changes such as to convert
        former BXI brokers to lower ITEX association fee commission structures. The
        aggregate total owed to us on July 31, 2007 is $94. The maximum balance owed
        is
        $60. Payoff dates for the loans are scheduled between 2008 and 2009 with
        most
        due within one year.
  40
  *Property
        and Equipment*
 
 We
        report
        property and equipment at cost less accumulated depreciation recorded on
        a
        straight line basis over useful lives ranging from three to seven years.
        Included in property and equipment are additions and improvements that add
        to
        productive capacity or extend useful life of the assets. Property and equipment
        also includes internally developed software (refer to “Software for Internal
        Use”). When we sell or retire property or equipment, we remove the cost and
        related accumulated depreciation from the balance sheet and record the resulting
        gain or loss in the income statement. The costs of repair and maintenance
        are
        charged to expense as incurred.
 
 *Software
        for Internal Use*
 
 We
        have
        developed extensive software to manage and track the ITEX dollar activity
        in the
        Marketplace to calculate USD and ITEX dollar fees accordingly. We have also
        developed software to provide new functionality to access benefits and other
        services that we now provide to our Brokers and members of the Marketplace.
        We
        account for qualifying costs incurred in the development of software for
        internal use in accordance with the American Institute of Certified Public
        Accountants’ Statement of Position (“SOP”) 98-1, *Accounting
        for Costs of Computer Software Developed or Obtained for Internal
        Use* .
        In
        accordance with SOP 98-1, costs incurred in the planning and post-implementation
        stages are expensed as incurred, while costs relating to application development
        are capitalized. Qualifying software development costs, including software
        in
        development meeting the criteria of SOP 98-1, are included as an element
        of
        property and equipment in the consolidated balance sheets.
 
 *Goodwill*
 
 We
        record
        goodwill when the cost of an acquired entity exceeds the net amounts assigned
        to
        identifiable assets acquired and liabilities assumed. In accordance with
        Statement of Financial Accounting Standards (“SFAS”) 142, *Goodwill
        and Other Intangible Assets* ,
        we
        conduct a formal impairment test of goodwill on an annual basis and between
        annual tests if an event occurs or circumstances change that would more likely
        than not reduce the fair value below its carrying value. We analyzed goodwill
        as
        of July 31, 2007 and we did not identify any impairment.
 
 *Intangible
        Assets*
 
 Upon
        acquisition, we amortize costs of member lists using the straight-line method
        over the estimated life of six years. We periodically assess the remaining
        amortizable life when events or circumstances may warrant a revision to such
        lives.
 
 *Long-Lived
        Assets*
 
 In
        accordance with the provisions of Statement of Financial Accounting Standards
        (“SFAS”) 144, *Accounting
        for the Impairment or Disposal of Long-Lived Assets* ,
        we
        review our long-lived assets for impairment whenever events or changes in
        circumstances indicate that the carrying amount of the asset may not be
        recovered. We look primarily at the market values of the assets when available,
        or, alternatively, the undiscounted future cash flows in our assessment of
        whether or not they have been impaired. If impairment is deemed to have
        occurred, we then consider the undiscounted future cash flows to determine
        if an
        adjustment is appropriate. In our most recent review conducted in the fourth
        quarter of 2007, we determined no impairment was appropriate.
  41
 *Accrued
        Commissions*
 
 We
        compute commissions to Brokers as a percentage of cash collections of revenues
        from association fees, transactions fees, and other fees. We pay most
        commissions in two tranches with approximately 50% paid one week after the
        end
        of the operating cycle and the remainder paid two weeks later. Commissions
        accrued on our balance sheets are the estimated commissions on the net accounts
        receivable balance and unpaid commissions on cash already collected as of
        the
        financial statement date.
 
 *Deferred
        Revenue*
 
 Beginning
        in the fourth quarter of 2005 and continuing throughout 2007, we billed annual
        dues to certain members acquired as part of the acquisition of BXI. We deferred
        this revenue and recognized it over the annual period to which it applies.
 
 *Advance
        Payments*
 
 In
        some
        cases, members prepay transaction and/or association fees or receive cash
        credits on their accounts for previously paid fees associated with transactions
        that are subsequently reversed. We defer these payments and recognize revenue
        when these fees are earned.
 
 *Fair
        Value of Financial Instruments*
 
 All
        of
        our significant financial instruments are recognized in our balance sheet.
        The
        carrying amount of our financial instruments including cash, accounts
        receivable, loans and advances, notes receivable, accounts payable, and accrued
        commissions and other accruals approximate their fair values at July 31,
        2007
        due to the short-term nature of these instruments. We deem the long-term
        portion
        of the corporate office receivable carrying amount approximates the fair
        value
        at July 31, 2007 since there has been no significant change in interest rates
        from the origination date of these receivables.
 
 The
        fair
        value of current and long-term portions of notes payable is based on rates
        currently available to us for debt of similar terms and remaining maturities.
        There are no quoted market prices for the debt or similar debt, though we
        believe the fair value approximates the carrying amounts on our balance
        sheets.
 
 *Accounting
        for Acquisitions*
 
 We
        account for acquisitions as a purchase in accordance with the provisions
        of SFAS
        141, *Business
        Combinations* .
        We
        report all acquired tangible and intangible assets and liabilities at fair
        value. We recognize the fair value of the purchased intangible assets as
        operating expenses over the estimated useful life of each separate intangible
        asset. Any excess purchase price over the fair values assigned to identifiable
        tangible and intangible assets is recorded as goodwill.
 
   42
  Use
        of Estimates
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires us 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 our 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 life of intangible assets
 ·
              the
                  value of assets and liabilities acquired through business
                  combinations
 ·
              deferred
                  revenues and costs
 ·
              expected
                  lives of customer relationships
 ·
              tax
                  valuation allowances
 ·
              accrued
                  commissions and other accruals
 ·
              various
                  litigation matters described herein
 
 Actual
        results may vary from estimates and assumptions that were used in preparing
        the
        financial statements.
 
 *Advertising
        Expenses*
 
 We
        expense all advertising costs as incurred.
 
 *Share-Based
        Compensation Expense*
 
 We
        account for stock-based compensation in accordance with the provisions of
        SFAS
        123(R), *Share-Base
        Payment* .
        Under
        the fair value recognition provisions of SFAS 123(R), we estimate stock-based
        compensation cost at the grant date based on the fair value of the award
        as
        determined by the Black-Scholes option-pricing model. We recognize the expense
        ratably over the requisite service period of the award. Determining the
        appropriate fair value model and calculating the fair value of stock-based
        awards, which includes estimates of stock price volatility, forfeiture rates
        and
        expected lives, requires judgment that could materially impact our operating
        results. We have not issued stock options in the periods reported nor do
        we have
        any outstanding stock options granted.
 
 *Operating
        Leases*
 
 We
        account for our executive office lease in accordance with SFAS 13, *Accounting
        for Leases* ,
        and
        FASB Technical Bulletin 85-3, *Accounting
        for Operating Leases with Scheduled Rent Increases (as amended)* .
        Accordingly, because our lease has scheduled rent escalation clauses, we
        record
        minimum rental payments on a straight-line basis over the term of the lease.
        We
        record the appropriate deferred rent liability or asset and amortize that
        deferred rent over the term of the lease as an adjustment to rent
        expense.
 
 *Income
        Taxes*
 
 We
        account for income taxes in accordance with SFAS 109, *Accounting
        for Income Taxes* .
        Under
        SFAS 109, an asset and liability approach is required. Such approach results
        in
        the recognition of deferred tax assets and liabilities for the expected future
        tax consequences of temporary differences between the book carrying amounts
        and
        the tax basis of assets and liabilities. We assess a valuation allowance
        on our
        deferred tax assets if it is more likely than not that a portion of our
        available deferred tax assets will not be realized. We record our deferred
        tax
        assets net of valuation allowances.
 
 43
 
 *Income
        (Loss) Per Share*
 
 We
        prepare our financial statements in accordance with the provisions of SFAS
        128, *Earnings
        per Share* ,
        which
        requires presentation 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 July 31, 2007, we had no outstanding
        stock
        options or contracts to issue common stock.
 
 *Reclassifications*
 
 We
        have
        made certain reclassifications to the financial statements of the prior year
        to
        conform to the July 31, 2007 presentation. Such reclassifications had no
        effect
        on the results of operations, cash flows or financial condition in those
        periods.
 
 *Recent
        Accounting Pronouncements*
 
 In
        February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
        159, *The
        Fair Value Option for Financial Assets and Liabilities — Including an Amendment
        of FASB Statement No. 115* (“SFAS
        159”), which permits an entity to choose to measure many financial instruments
        and certain other items at fair value. Most of the provisions of SFAS 159
        are
        elective; however the amendment to SFAS 115 applies to all entities with
        available-for-sale and trading securities. The FASB’s stated objective in
        issuing the standard is to improve financial reporting by entities by providing
        them with the opportunity to mitigate volatility in reported earnings caused
        by
        measuring related assets and liabilities differently without having to apply
        complex hedging accounting provisions. The provisions of SFAS 159 are effective
        for fiscal years beginning after November 15, 2007, which for us is effective
        for our fiscal 2009 beginning August 1, 2008. We are currently evaluating
        the
        impact of the adoption of SFAS 159 on our
        results of operations, cash flows or financial condition.
 
  In
        September 2006, the FASB issued SFAS 157, *Fair
        Value Measurements* (“SFAS
        157”), which is 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.
        The
        provisions of SFAS 157 are effective for fiscal years beginning after November
        15, 2007, which for us is effective for our fiscal 2009 beginning August
        1,
        2008. We are currently evaluating the impact of the adoption of SFAS 159
        on our
        results of operations, cash flows or financial condition.
  
 In
        July
        2006, the FASB issued FASB Interpretation (“FIN”) 48, *Accounting
        for Uncertainty in Income Taxes,* which
        clarifies the accounting for uncertainty in tax positions. This Interpretation
        requires that we recognize the impact of a tax position in our financial
        statements if that position is more likely than not to be sustained in audit
        based on the technical merits of the position. The provisions of FIN 48 are
        effective for fiscal years beginning after December 15, 2006, which for us
        is
        effective for fiscal 2008 beginning August 1, 2007. Upon adoption, we will
        record the cumulative effect, if any, of the change in accounting principle
        as
        an adjustment to opening retained earnings. We believe the adoption of FIN
        48
        will not have a material impact on our results of operations, cash flows
        or
        financial condition.
  44
  NOTE
        2 -
        NOTES RECEIVABLE - CORPORATE OFFICE SALES
 
 During
        2004, we sold five corporate-owned offices to franchisees and an independent
        licensed broker. We facilitated these sales by issuing notes receivable to
        the
        buyers for part of the purchase prices. In the first quarter of 2007, one
        of
        these offices was sold to another broker by the existing broker. We settled
        the
        note receivable from this office from the selling broker for $328 in cash
        and
        recorded a reserve of $65 on the note. In the first quarter of 2006, we sold
        a
        corporate-owned office we had regained possession of for $17 and recorded
        a gain
        of $17. Additionally, in the first quarter of 2006 we advanced additional
        cash
        on a note receivable in the amount of $69. During 2007 and 2006, we refinanced
        a
        note receivable at current market rates, extended the termination dates on
        some
        notes receivable and modified the periodic payments accordingly.
 
 The
        aggregate total owed to us on July 31, 2007 is $882. Balances owed range
        from
        $14 to $337. Payoff dates for the loans are scheduled between 2008 and 2016.
  Original
                    Principal
                  Balance
                    on Notes
                
                Balance
                    Receivable
                  at
                    July 31, 2007
                
                Current
                    Portion
                
                Long-Term
                    Portion$
                2,695
                
                $
                882
                
                $
                202
                
                $
                680
  The
        activity for corporate office receivables was as follows:
 
 Balance
                  at July 31, 2005
              
              $
              1,581Sale
                  of corporate-owned office
              
              
              17Advances
                  on notes receivable
              
              
              69Accretion
                  of interest income
              
              
              69Payments
                  received
              
              
              (288
              )Balance
                  at July 31, 2006
              
              $
              1,448Sale
                  of corporate-owned office
              
              
              70Accretion
                  of interest income
              
              
              12Payments
                  received
              
              
              (648
              )Balance
                  at July 31, 2007
              
              $
              882
 
 NOTE
        3 -
        PROPERTY AND EQUIPMENT
 
 The
        following table summarizes property and equipment:
 **Fixed
                    Asset Type**
                
                **Estimated
                    Useful Life**
                
                **Cost**
                
                **Accumulated
                    Depreciation**
                
                **Net
                    Book Value**Computers
                
                
                3
                    years
                
                $
                72
                
                $
                (46
                )
                $
                26Software
                
                
                3
                    years
                
                
                57
                
                
                (13
                )
                
                44Equipment
                
                
                7
                    years
                
                
                24
                
                
                (10
                )
                
                14Furniture
                
                
                7
                    years
                
                
                13
                
                
                (8
                )
                
                5Leasehold
                    Improvements
                
                
                3.3
                    years
                
                
                52
                
                
                (8
                )
                
                44$
                218
                
                $
                (85
                )
                $
                133
  We
        depreciate property and equipment using the straight-line method over the
        asset’s estimated useful life. Depreciation expense for property and equipment
        was $43 and $26 for the years ending July 31, 2007 and 2006,
        respectively.
  45
  In
        the
        second quarter, we relocated our principal executive offices. Prior to our
        relocation, we made $52 in improvements to our new location. We amortize
        these
        leasehold improvements using the straight-line method over the term of the
        lease. We amortized $8 of leasehold improvements in 2007.
 
 NOTE
        4 -
        PURCHASED MEMBER LISTS
 
 In
        the
        fourth quarter of 2007, we purchased a membership list from a former franchisee
        for $15. In 2005, in connection with the BXI acquisition, we acquired a
        membership list. Changes in the carrying amount of member lists for the year
        ended July 31, 2007 are summarized as follows:
 BXI
                    Acquisition
                
                $
                1,475Amortization
                
                
                (249
                )Balance
                    as of July 31, 2006
                
                $
                1,226Acquisition
                
                
                15Amortization
                
                
                (250
                )Balance
                    as of July 31, 2007
                
                $
                991
  The
        following schedule outlines the amortization of the member list over the
        next
        five years:
  Year
                    ending July 31,
                
                Amortization2008
                
                $
                2522009
                
                
                2522010
                
                
                2522011
                
                
                2312012
                
                
                2Thereafter
                
                
                2Total
                
                $
                991
  NOTE
        5 -
        NOTES PAYABLE AND LINE OF CREDIT
 
 On
        June
        30, 2005, we borrowed $1.3 million from U.S. Bank in the form of a promissory
        note (“Bank Note”) with interest at 6.48% and repayments in 47 equal monthly
        installments. In addition to normal monthly installment payments, we made
        optional prepayments of principal of $250 and $697 in the second quarter
        of 2006
        and the first quarter of 2007, respectively. We repaid the entire note in
        full
        in the first quarter of 2007.
 
 We
        have a
        revolving credit agreement to establish a $1 million line of credit facility
        from our primary banking institution. The maturity date of this short-term
        debt
        facility is November 30, 2007. During 2007, we borrowed and repaid $175 under
        this line of credit, but there was no outstanding balance as of July 31,
        2007.
        Subsequent to year end, we utilized our line of credit and we intend to utilize
        this credit facility for short term needs in the future (refer to Note
        15 - Subsequent Events .)
 
 46
 
 NOTE
        6 -
        COMMITMENTS AND CONTINGENCIES
 
 We
        utilize leased facilities in the normal course of our business. Certain lease
        agreements provide for payment of insurance, maintenance and other expenses
        related to the leased property. Certain lease agreements also provide an
        option
        for renewal at varying terms. The only lease not under month to month renewal
        terms is for our executive office space. This lease expires on April 30,
        2010.
        As of July 31, 2007, the future minimum commitments under this operating
        lease
        are as follows:
  Year
                    ending July 31,
                
                Lease
                    commitment2008
                
                $
                1552009
                
                
                1552010
                
                
                116Total
                
                $
                426
 
 
 The
        lease
        expense on our executive office space for the periods ended July 31, 2007
        and
        2006 was $149 and $100, respectively. We have not leased any equipment in
        2007
        or 2006.
 
 NOTE
        7 —
LEGAL PROCEEDINGS
 
 In
        October 2005, we were served with a statement of claim in Canada relating
        to a
        Marketplace dispute *(Wembley
        Marketing Ltd. and Ariza Technology Inc. v. ITEX Corporation and Cable Network
        News LPLLP (“CNN”)* ;
        Ontario
        Superior Court of Justice, Canada; Case No. 05-cv-296043PD3). Plaintiff seeks
        damages from us for alleged fraud or deceit or breach of contract in the
        amount
        of $1,300 Canadian. The claim relates primarily to plaintiff’s purchase of CNN
        advertising that plaintiff alleges was never fulfilled together with other
        products or services that plaintiff claims were not delivered. Except for
        one
        transaction representing approximately 26 Canadian ITEX dollars, all
        transactions cited in the claim were between the plaintiff and other members
        in
        the Marketplace. We intend to seek enforcement of our member agreement which
        includes changing the venue of the action to the United States and holding
        us
        harmless from transaction disputes between members. In December 2005, we
        filed a
        motion to stay or dismiss the claim based on lack of subject matter jurisdiction
        pursuant to a forum selection clause in our Trading Rules. In March 2006,
        the
        plaintiffs served responding affidavit material. In June 2006, we filed a
        Supplementary Motion Record with the court requesting that the action be
        dismissed or stayed and that our costs be reimbursed on the grounds that
        the
        corporate status of Wembley had been cancelled at the time it started the
        action. On July 24, 2006, the court stayed the action because Wembley's
        corporate status was cancelled at the time the action started and therefore
        had
        no status to start an action. The court also ordered the Plaintiffs' solicitor
        to pay the costs of the proceeding. The Plaintiffs unsuccessfully appealed
        this
        decision. Plaintiff’s solicitor has since revived Wembley and has now brought a
        motion for leave to lift the stay of the action and allow it to
        proceed.
  47
 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. We moved the
        lawsuit to federal court in July 2006. Plaintiff filed a motion to remand
        the
        lawsuit to Oregon state court in August 2006 and the court ruled in favor
        of the
        motion in January 2007. We appealed the ruling and that appeal is pending
        in
        federal court. In the interim, the matter is stayed in state court except
        for
        discovery purposes. We believe the termination of plaintiff's brokerage was
        for
        proper cause and that plaintiff's claims are without merit.
 
 We
        will
        vigorously defend against these lawsuits discussed above. While it is not
        feasible to predict the exact outcome of the proceedings, in our opinion,
        none
        of the foregoing proceedings should 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 matters. 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. While it is not possible to predict the ultimate outcome
        of
        these matters, historically, we have been successful in defending ourselves
        against claims and suits that have been brought against us, and, generally,
        payments made in such claims and actions have not been material to our
        Consolidated Financial Statements.
  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
        8 -
        SHARE-BASED COMPENSATION
 
 We
        account for share-based compensation in accordance with the provisions of
        SFAS
        123(R), *Share-Base
        Payment* .
        Under
        the fair value recognition provisions of SFAS 123(R), we estimate share-based
        compensation cost at the grant date based on the fair value of the award.
        We
        recognize that expense ratably over the requisite service period of the award.
 
 We
        have
        an equity incentive plan (“2004 Plan”) which allows for grants of nonqualified
        and incentive stock options and stock awards to eligible employees, directors,
        officers or consultants. Our stockholders adopted the 2004 Plan on March
        15,
        2004. Under the 2004 Plan, 2,000 shares of common stock are reserved and
        available for grant and issuance.
 
 During
        2007 and 2006, respectively, we issued 40 shares of fully vested common stock
        to
        each of our three directors, an aggregate total of 120 shares per year, as
        compensation for their service to ITEX Corporation in 2007 and 2006. The
        fair
        value of these 120 shares was $83 and $78, respectively, in 2007 and 2006.
 
 In
        addition, in 2006 we issued 40 shares with a fair value of $24 to certain
        employees and 300 shares with a fair value of $177 of restricted common stock
        to
        Steven White, our Chairman, CEO and interim CFO as equity incentive grants
        under
        the 2004 Plan. The 40 shares vest over a three-year period, with one third
        (1/3)
        of the granted shares vesting in each year. The 300 shares vest over a
        three-year period, with one thirty sixth (1/36) of the granted shares vesting
        each month for three years. Also in 2006, we issued 50 shares with a fair
        value
        of $31 of fully vested common stock to Steven White, our Chairman, CEO and
        interim CFO. During 2006, one employee who was previously issued 40 unvested
        shares of restricted common stock left our employment and forfeited his shares.
        We added these 40 shares back to the 2004 Plan and made them available for
        future grants. The aggregate, net total of shares granted in 2006 is
        470.
  48
 
 As
        of
        July 31, 2007 there were no common stock options outstanding. There are 375
        shares available for future grants under the 2004 Plan.
 Number
                    of Shares/OptionsAvailable
                
                Shares
                    Granted
                
                Options
                    GrantedBalance
                    at July 31, 2005
                
                
                965
                
                
                1,035
                
                
                -Granted
                
                
                (510
                )
                
                510
                
                
                -Forfeited
                
                
                40
                
                
                (40
                )Balance,
                    July 31, 2006
                
                
                495
                
                
                1,505
                
                
                -Granted
                
                
                (120
                )
                
                120
                
                
                -Forfeited
                
                
                -
                
                
                -
                
                
                -Balance
                    at July 31, 2007
                
                
                375
                
                
                1,625
                
                
                -Vesting
                    as of July 31, 2007Shares
                    Vested
                
                
                
                
                
                1,398
                
                
                -Shares
                    Unvested
                
                
                
                
                
                227
                
                
                -Balance
                    at July 31, 2007
                
                
                
                
                
                1,625
                
                
                -
  We
        recorded stock-based compensation expense of $169 and $121 in 2007 and 2006,
        respectively.
 
 NOTE
        9 -
        STOCKHOLDERS’ EQUITY
 
 In
        2007,
        we issued 120 shares of common stock in connection with share-based compensation
        arrangements described in Note
        8 .
        The
        effect of these grants was an increase of $1 to common stock, $82 to additional
        paid-in capital and $38 to unearned stock compensation. Unearned stock
        compensation increase an additional $59 as a result of common stock issued
        in
        prior years.
 
 In
        2006,
        we issued 470 shares of common stock net of 40 unvested shares forfeited.
        The
        effect of these grants was an increase of $5 to common stock, $289 to additional
        paid-in capital and $150 to unearned stock compensation.
  49
  During
        2007, we repurchased a total of 438 shares in two separate transactions from
        two
        shareholders. The effect of these repurchases was a decrease of $4 to common
        stock and $318 to additional paid-in capital. During 2006, we repurchased
        a
        total of 1,050 shares in three separate transactions from a shareholder.
        The
        effect of these repurchases was a decrease of $11 to common stock and $567
        to
        additional paid-in capital. Additionally in 2006, we retired treasury stock
        with
        a cost of $10.
 
 NOTE
        10 -
        INCOME TAXES
 
 Deferred
        tax assets on our balance sheet 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 we 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 its assets and liabilities
        at enacted tax rates expected to be in effect when such assets or liabilities
        are realized or settled.
 
 In
        assessing the recoverability of deferred tax assets, we consider whether
        it is
        more likely that some portion or all of the deferred tax assets will not
        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. We consider the scheduled reversal
        of
        deferred tax liabilities, projected future taxable income and projections
        for
        future taxable income over the periods in which the deferred tax assets are
        expected to be deductible.
 
 On
        July
        31, 2007, we had NOLs of approximately $19,362 available to offset future
        taxable income. These are composed of approximately $17,498 from ITEX operating
        losses and approximately $1,864 from BXI operating losses. SFAS 109 requires
        the
        future utilization to be recorded as a deferred tax asset if management believes
        if it is more likely than not that we will generate future taxable income.
        We
        periodically assess the realizability of our available NOLs to determine
        whether
        we believe we will generate enough future taxable income to utilize some
        portion
        or all of the available NOLs. During the fourth quarter ended July 31, 2007,
        we
        performed an assessment of our available NOLs because of an additional year
        of
        increased profitability and our anticipated purchase of an additional membership
        list which was completed subsequent to July 31, 2007 on August 1, 2007. In
        that
        assessment, we concluded that it was more likely than not that additional
        NOLs
        would result in realizable deferred tax assets. Accordingly, we removed our
        valuation allowance on available NOLs and increased deferred tax assets by
        $3,499 to $7,349 as of July 31, 2007. As of July 31, 2007, we have no valuation
        allowance on available Federal NOLs.
 
 The
        deferred tax assets recorded in 2007 represent our estimate of all deferred
        tax
        benefits to be utilized in the current year and future periods beyond 2007.
        The
        following table reflects the reconciliation of the company’s income tax expense:
 Fourth
                    Quarter Ended July 31,
                
                Year
                    Ended July 31,2007
                
                2006
                
                2007
                
                2006Pre-tax
                    financial income
                
                $
                303
                
                $
                402
                
                $
                1,661
                
                $
                1,458Federal
                    tax expense computed at the statutory rate of 34%
                
                
                103
                
                
                137
                
                
                565
                
                
                496State
                    tax expense
                
                
                14
                
                
                -
                
                
                78
                
                
                -Change
                    in valuation allowance
                
                
                (3,499
                )
                
                (2,501
                )
                
                (3,499
                )
                
                (2,501
                )Permanent
                    differences
                
                
                13
                
                
                30
                
                
                13
                
                
                30Net
                    tax benefit
                
                $
                (3,369
                )
                $
                (2,334
                )
                $
                (2,843
                )
                $
                (1,975
                )
  50
  Our
        income tax benefit is composed of the following:
 Year
                    Ended July 31,2007
                
                2006Deferred
                    tax benefit
                
                $
                2,901
                
                $
                2,098Federal
                    tax expense
                
                
                (30
                )
                
                (32
                )State
                    tax expense
                
                
                (28
                )
                
                (91
                )Net
                    tax benefit
                
                $
                2,843
                
                $
                1,975
  The
        tax
        effects of temporary differences that give rise to significant portions of
        deferred tax assets and liabilities at July 31, 2007 and 2006 are presented
        below:
  July
                    31,2007
                
                2006Deferred
                    tax assets:Tax
                    deductible BXI goodwill
                
                $
                707
                
                $
                785Net
                    operating loss carryforwards
                
                
                6,846
                
                
                7,527Reserve
                    for uncollectible receivables
                
                
                93
                
                
                110Other
                    temporary differences
                
                
                124
                
                
                58$
                7,770
                
                $
                8,480Deferred
                    Tax LiabilitiesMembership
                    lists not deductible for tax
                
                $
                340
                
                $
                417Unearned
                    stock compensation
                
                
                81
                
                
                116$
                421
                
                $
                533Net
                    deferred tax asset before valuation allowance
                
                $
                7,349
                
                $
                7,947Valuation
                    allowance
                
                
                -
                
                
                (3,499
                )Net
                    deferred tax asset
                
                $
                7,349
                
                $
                4,448The
                    following components are included in net deferred tax assets
                    in the
                    accompanying balance sheets:Current
                    Deferred Tax AssetsCurrent
                    deferred tax asset
                
                $
                696
                
                $
                636Current
                    deferred tax liability
                
                
                (82
                )
                
                (127
                )Valuation
                    allowance
                
                
                -
                
                
                -Net
                    current deferred tax asset
                
                $
                614
                
                $
                509Non-Current
                    Deferred Tax AssetsNon-current
                    deferred tax asset
                
                $
                7,075
                
                $
                7,844Non-current
                    deferred tax liability
                
                
                (340
                )
                
                (406
                )Valuation
                    allowance
                
                
                -
                
                
                (3,499
                )Net
                    non-current deferred tax asset
                
                $
                6,735
                
                $
                3,939
  51
  ITEX
        Federal NOLs of approximately $17,498 expire, if unused, from 2018 to 2023.
        BXI
        Federal NOLs of approximately $1,864 expire, if unused, from 2020 to 2024
        and
        are subject to an annual limitation of approximately $172. This limitation
        is
        equal to the long-term federal tax exempt rate multiplied by the total purchase
        price of BXI. Additionally, ITEX has state NOLs for California totaling
        approximately $5,001 which, if unused, expire from 2012 to 2015. Additionally,
        we have AMT credits of $57 available to offset future taxes payable.
 
 NOTE
        11 -
        401(k) SAVINGS PLAN
 
 Effective
        January 1, 2006, we established a 401(k) plan
        offered to all of our full-time employees. Eligible employees may contribute,
        through payroll deductions, up to the statutory limits. We match each dollar
        a
        participant contributes with a maximum contribution of six percent (6%) of
        a
        participant’s eligible compensation. We contributed approximately $54 and $33 to
        the plan during 2007 and 2006, respectively.
  NOTE
        12 -
        BUSINESS COMBINATIONS
 
 On
        July
        29, 2005, we acquired 100% of the stock of BXI Exchange, Inc., a Delaware
        corporation (“BXI”), by merging BXI with and into our wholly-owned subsidiary,
        BXI Acquisition Sub, Inc., a Delaware corporation. As a result of this
        transaction, BXI became our wholly-owned direct subsidiary and it operates
        under
        the name “BXI Exchange, Inc”. The acquisition was consummated pursuant to the
        terms of the Agreement of Merger, dated June 30, 2005, by and among BXI,
        ITEX,
        BXI Acquisition Sub, Inc., and The Intagio Group, Inc., a Delaware corporation.
        The results of BXI’s operations have been included in the consolidated financial
        statements since June 30, 2005.
 
 The
        transaction was accounted for in accordance with SFAS 141, *Business
        Combinations* . As
        such,
        we reported all acquired tangible and intangible assets and liabilities at
        fair
        value. We recognize the fair value of the purchased intangible assets as
        operating expenses over the estimated useful life of each separate intangible
        asset.
 
 We
        received all the assets of BXI, totaling $4,430, and assumed the BXI
        liabilities, totaling $1,304. Pursuant to the Merger Agreement, we acquired
        BXI
        for (i) cash in the amount of $2,035 (including $1,430 consisting of repayments
        of the principal amount and accrued interest on all outstanding promissory
        notes
        held by BXI stockholders and other amounts owed by BXI to the BXI stockholders,
        and a fee for transition services rendered by Intagio in connection with
        the
        Merger), (ii) secured promissory notes in favor of BXI’s stockholders in the
        aggregate principal amount of $1,000, and (iii) if and to the extent we and
        our
        subsidiaries (including BXI) achieve certain per quarter revenue targets
        during
        its first 12 full quarters following the signing of the Merger Agreement,
        additional cash payments totaling up to $450 (collectively, the “Merger
        Consideration”). The earnout payments can be reduced by the amount we spend to
        satisfy certain legal BXI legal claims we assumed. During 2007, we made the
        following earnout payments:
  Year
                    ended July 31, 2007
                
                First
                    Quarter
                
                Second
                    Quarter
                
                Third
                    Quarter
                
                Fourth
                    Quarter
                
                TotalEarnout
                    payment
                
                $
                33
                
                $
                -
                
                $
                6
                
                $
                23
                
                $
                62
  52
 Changes
        to goodwill for the year ended July 31, 2007 are summarized as
        follows:
  Balance
                    as of July 31, 2006
                
                $
                1,695Adjustments
                    for legal expenses
                
                
                (17
                )Earnout
                    payments
                
                
                62Balance
                    as of July 31, 2007
                
                $
                1,740
  NOTE
        13 -
        SELECTED QUARTERLY FINANCIAL RESULTS (unaudited)
 Year
                        ended July 31, 2007
                    
                    First
                        Quarter
                    
                    Second
                        Quarter
                    
                    Third
                        Quarter
                    
                    Fourth
                        Quarter
                    
                    TotalRevenues
                    
                    $
                    3,790
                    
                    $
                    3,665
                    
                    $
                    3,265
                    
                    $
                    3,451
                    
                    $
                    14,171Operating
                        costs and expenses
                    
                    
                    3,495
                    
                    
                    3,137
                    
                    
                    2,842
                    
                    
                    3,192
                    
                    
                    12,666Operating
                        income
                    
                    
                    295
                    
                    
                    528
                    
                    
                    423
                    
                    
                    259
                    
                    
                    1,505Other
                        income - net
                    
                    
                    64
                    
                    
                    22
                    
                    
                    26
                    
                    
                    44
                    
                    
                    156Income
                        before taxes
                    
                    
                    
                    
                    
                    550
                    
                    
                    449
                    
                    
                    303
                    
                    
                    1,661Income
                        tax expense (benefit)(1)
                    
                    
                    122
                    
                    
                    215
                    
                    
                    189
                    
                    
                    (3,369
                    )
                    
                    (2,843
                    )Net
                        income
                    
                    $
                    237
                    
                    $
                    765
                    
                    $
                    260
                    
                    $
                    3,672
                    
                    $
                    4,504Net
                        income per common shareBasic
                    
                    $
                    0.01
                    
                    $
                    0.02
                    
                    $
                    0.01
                    
                    $
                    0.21
                    
                    $
                    0.25Diluted
                    
                    $
                    0.01
                    
                    $
                    0.02
                    
                    $
                    0.01
                    
                    $
                    0.20
                    
                    $
                    0.25
                    **(2)**Year
                        ended July 31, 2006
                    
                    
                    First
                        Quarter
                    
                    
                    Second
                        Quarter
                    
                    
                    Third
                        Quarter
                    
                    
                    Fourth
                        Quarter
                    
                    
                    TotalRevenues
                    
                    $
                    3,714
                    
                    $
                    4,007
                    
                    $
                    3,419
                    
                    $
                    3,506
                    
                    $
                    14,646Operating
                        costs and expenses
                    
                    
                    3,439
                    
                    
                    3,692
                    
                    
                    3,054
                    
                    
                    3,120
                    
                    
                    13,305Operating
                        income
                    
                    
                    275
                    
                    
                    315
                    
                    
                    365
                    
                    
                    386
                    
                    
                    1,341Other
                        income - net
                    
                    
                    10
                    
                    
                    85
                    
                    
                    6
                    
                    
                    16
                    
                    
                    117Income
                        before taxes
                    
                    
                    285
                    
                    
                    400
                    
                    
                    371
                    
                    
                    402
                    
                    
                    1,458Income
                        tax expense (benefit)(1)
                    
                    
                    97
                    
                    
                    136
                    
                    
                    126
                    
                    
                    (2,334
                    )
                    
                    (1,975
                    )Net
                        income
                    
                    $
                    188
                    
                    $
                    536
                    
                    $
                    245
                    
                    $
                    2,736
                    
                    $
                    3,433Net
                        income per common shareBasic
                    
                    $
                    0.01
                    
                    $
                    0.01
                    
                    $
                    0.02
                    
                    $
                    0.15
                    
                    $
                    0.19Diluted
                    
                    $
                    0.01
                    
                    $
                    0.01
                    
                    $
                    0.02
                    
                    $
                    0.15
                    
                    $
                    0.18
                    **(2)****(1)**
                    
                    When
                        circumstances warrant, we review our NOLs to assess whether
                        it is more
                        likely than not that additional NOLs would result in realizable
                        deferred
                        tax assets. Accordingly, in the fourth quarter of both 2007
                        and 2006, we
                        reduced our valuation allowance on available Federal NOLs
                        and increased
                        deferred tax assets by $3,499 and $2,501, respectively.**(2)**
                    
                    Total
                        net income per common share does not equal the sum of the
                        quarters due to
                        rounding of each
                        quarter.
 
  53
 
 NOTE
        14 -
        RELATED PARTY TRANSACTIONS
 
 We
        have
        periodically engaged related parties for services. The following summarizes
        the
        amounts we paid to these related parties:
  Year
                    Ended July 31,2007
                
                2006Amounts
                    paid to:A
                    business owned by a member of our Board of Directors for consulting
                    services
                
                $
                7
                
                $
                38Businesses
                    owned by relatives of our employees or contractors
                
                
                5
                
                
                4A
                    business owned by our CEO and an employee
                
                
                4
                
                
                -Total
                    amounts paid to related parties
                
                $
                16
                
                $
                42
  NOTE
        15 -
        SUBSEQUENT EVENTS
 
 Subsequent
        to July 31, 2007, on August 1, 2007, we acquired from The Intagio Group,
        Inc.
        certain assets of a commercial trade exchange network from Intagio including
        a
        membership list of approximately two thousand member businesses which increased
        our Marketplace to approximately 24 thousand member businesses. These new
        member
        businesses are located in six regions in the United States, four of which
        were
        previously not served by existing Brokers. The acquisition cost
        included:
  a)
              Cash
                  in the amount of $2,000
 b)
              A
                  secured promissory note in the amount of $1,137 due to the seller
                  with
                  interest at the rate of 8.00% and twenty-four equal monthly payments
                  of
                  $51.
 c)
              If
                  and to the extent we achieve certain revenue targets during the
                  four
                  fiscal quarters beginning August 1, 2008, additional cash payments
                  totaling up to $150.
 
 To
        fund
        the $2,000 cash payment, we utilized $1,700 from our cash balances and borrowed
        $300 on our line of credit. As
        of the
        date of this report, we had repaid the $300 balance on our line of credit
        in
        full and there is no balance outstanding.
 
 Future
        minimum commitments under the promissory note are as follows:
  Year
                    ending July 31,2008
                
                $
                5462009
                
                
                591Total
                
                $
                1,137
  After
        the
        acquisition of the Intagio membership list, we sold three of the newly acquired
        regions to two existing Brokers in two separate transactions. On August 1,
        2007,
        we sold the greater New York City region comprised of approximately 200 formerly
        Intagio member businesses to our existing Broker in New Jersey for $198.
        We
        financed the entire sales price by adding the sales price to an existing
        note
        receivable with a principal balance of $109 as of July 31, 2007 from the
        Broker.
        We modified the repayment terms accordingly to repay the entire balance in
        equal
        payments through 2010. We did not record a gain or loss on this
        transaction.
 
 On
        August
        20, 2007, we sold the Connecticut and Massachusetts regions comprised of
        approximately 500 former Intagio member businesses to our existing Broker
        in
        Connecticut for $260. We received $50 of the purchase price in cash and financed
        the remaining $210 at 7.5% interest with payments in equal installments through
        2014. We
        did
        not record a gain or loss on this transaction.
  54
  On
        September 24, 2007, we repurchased 10 shares of our stock from a stockholder.
        Th is
        repurchase had no effect on common stock and an increase of $8 to additional
        paid-in capital.
  **Item
        8.**  **Changes in and Disagreements with Accountants on Accounting and Financial
        Disclosure.**
 
 None.
  **Item
        8A(T). Controls and Procedures**
 
 (a)
        Disclosure controls and procedures.
 
 Under
        the
        supervision and with the participation of our management, including our Chief
        Executive Officer, who is also our 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 Chief Executive Officer and interim Chief
        Financial Officer concluded that our disclosure controls and procedures are
        effective as of July 31, 2007.
 
 (b)
        Changes in internal control over financial reporting.
 
 We
        are
        assessing the effectiveness of our internal controls over financial reporting
        on
        an account by account basis as a part of our on-going accounting and financial
        reporting review process in order to comply with Section 404 of the
        Sarbanes-Oxley Act of 2002 which requires our management to assess the
        effectiveness of our existing internal controls for our fiscal year ended
        July
        31, 2008. This effort includes documenting, evaluating the design of and
        testing
        the effectiveness of our internal controls over financial reporting. We intend
        to continue to refine and improve our internal controls on an ongoing basis.
        During this process, we may identify additional items for review or deficiencies
        in our system of internal controls over financial reporting that may require
        strengthening or remediation.
 
 There
        have been no changes in our internal controls over financial reporting during
        our most recent fiscal quarter that have materially affected, or are reasonably
        likely to materially affect, our internal controls over financial
        reporting.
 
 **PART
        III**
 
 **Item
        9. Directors, Executive Officers, Promoters, Control Persons and Corporate
        Governance; Compliance with Section 16(b) of the Exchange
        Act.**
 
 Information
        with respect to Directors may be found under the captions “Election of
        Directors” and “Management Information” of our Proxy Statement for the Annual
        Meeting of Shareholders (the “Proxy Statement”). This information is
        incorporated herein by reference.
 
 The
        information in the Proxy Statement set forth under the caption “Section 16(a)
        Beneficial Ownership Reporting Compliance” is also incorporated herein by
        reference.
  55
  We
        have
        adopted the ITEX Code of Ethics (the “Code of Ethics”), a code of ethics that
        applies to our executive officers, including financial officers, and other
        finance organization employees. The Code of Ethics is publicly available
        on our
        website at www.itex.com. If we make any substantive amendments to the Code
        of
        Ethics or grant any waiver, including any implicit waiver, from a provision
        of
        the code to our Chief Executive Officer, Chief Financial Officer or Corporate
        Controller, we will disclose the nature of such amendment or waiver on that
        website or in a report on Form 8-K.
  **Item
        10. Executive Compensation**
 
 The
        information in the Proxy Statement set forth under the captions “Information
        Regarding Executive Officer Compensation” and “Information Regarding the Board
        and its Committees - Director Compensation” is incorporated herein by reference.
  **Item
        11. Security Ownership of Certain Beneficial Owners and Management and Related
        Stockholder Matters**
 
 The
        information in the Proxy Statement set forth under the captions “Equity
        Compensation Plan Information” and “Information Regarding Beneficial Ownership
        of Principal Shareholders, Directors, and Management” is incorporated herein by
        reference.
  **Item
        12. Certain Relationships and Related Transactions, and Director
        Independence**
 
 The
        information set forth under the captions “Certain Relationships and Related
        Transactions” of the Proxy Statement is incorporated herein by reference.
  **Item
        13. Exhibits**
  **Exhibit
                  Number**
              **Description**2.1
              
              Agreement
                  of Merger dated as of June 30, 2005, by and among BXI Exchange,
                  Inc., ITEX
                  Corporation, BXI Acquisition Sub, Inc., and The Intagio Group,
                  Inc.(4)2.2
              
              Asset
                  Purchase Agreement dated as of July 25, 2007, between ITEX Corporation
                  and
                  The Intagio Group, Inc.(6)3.1
              
              Amended
                  and Restated Articles of Incorporation of ITEX Corporation(2)3.2
              
              Amended
                  and Restated Bylaws of ITEX Corporation(2)10.1
              
              Form
                  of Indemnification Agreement(2)10.2
              
              Contract
                  for the Purchase of Toronto Corporate Office and Use of ITEX Client
                  Information dated August 7, 2003, between ITEX Corporation and
                  NYTO Trade
                  Incorporated, with Secured Promissory Note and Security
                  Agreement(1)10.3
              
              Contract
                  for the Purchase of New York Corporate Office and Use of ITEX
                  Client
                Information

                  dated August 7, 2003, between ITEX Corporation and 44 Trade Corporation,
                with
                  Secured Promissory Note and Security Agreement(1)10.4
              
              Contract
                  for the Purchase of Sacramento Corporate Office and Use of ITEX
                  Client
                Information
                  dated October 2, 2003, between ITEX Corporation and Direct Business
                Exchange
                  of California, Inc., with Secured Promissory Note and Security
                  Agreement(1)10.5
              
              ITEX
                  Corporation 2004 Equity Incentive Plan(3)10.6
              
              Installment
                  or Single Payment Note, with Security Agreement(4)
  56
  **Exhibit
                  Number**
              **Description**10.7
              
              Amendment
                  to Loan Agreement of December 2, 2004(4)10.8
              
              Form
                  of Restricted Stock Agreement(5)10.9
              
              Sublease
                  dated as of November 3, 2006(6)10.10
              
              Amendment
                  to Loan Agreement and Note, dated as of November 15, 2006(7)10.11
              
              Amendment
                  to Loan Agreement and Note, dated as of January 24, 2006(7)10.12
              
              Form
                  of Senior Subordinated Secured Promissory Note of ITEX Corporationto
                  The Intagio Group, Inc.(8)10.13
              
              Security
                  Agreement(8)14.1
              
              Code
                  of Ethics for CEO and Senior Financial Officers(2)21
              
              The
                  only subsidiary of ITEX Corporation is BXI Exchange, Inc., a Delaware
                  corporation31.1
              
              Certifications
                  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 200231.2
              
              Certifications
                  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 200232.1
              
              Certifications
                  of Chief Executive Officer and Chief Financial Officer Pursuant
                  to Section
                  906 of the Sarbanes-Oxley Act of
                  2002
 
 (1)
              Incorporated
                  by reference to the Report on Form 8-K filed October 28,
                  2003
 (2)
              Incorporated
                  by reference to the Annual Report on Form 10-KSB for the Fiscal
                  Year Ended
                  July 31, 2003, filed on November 13,
                  2003.
 (3)
              Incorporated
                  by reference to the Proxy Statement on Schedule 14A, filed on February
                  13,
                  2004.
 (4)
              Incorporated
                  by reference to our Current Report on Form 8-K, as filed on July
                  6,
                  2005.
 (5)
              Incorporated
                  by reference to our Current Report on Form 8-K, as filed on July
                  10,
                  2006.
 (6)
              Incorporated
                  by reference to our Current Report on Form 8-K, as filed on November
                  17,
                  2006.
 (7)
              Incorporated
                  by reference to our Current Report on Form 8-K, as filed on November
                  24,
                  2006.
 (8)
              Incorporated
                  by reference to our Current Report on Form 8-K, as filed on July
                  30,
                  2007.
  **Item
        14. Principal Accountant Fees and Services**
 
 Information
        concerning principal accountant fees and services appears in the proxy statement
        under the heading “Fees Paid to EKS&H” and is incorporated herein by
        reference.
 
 
 **SIGNATURES**
 
 In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
        this report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  **ITEX
                CORPORATION**Date:
                October 2, 2007
              By:
              /s/
                Steven WhiteSteven
                White, Chief Executive OfficerInterim
                Chief Financial Officer
  57
  In
        accordance with the Exchange Act, this report has been signed below by the
        following persons on behalf of the registrant and in the capacities an on
        the
        dates indicated.
 Date:
                October 2, 2007
              By:
              /s/
                Steven WhiteSteven
                White, Chief Executive Officer, Interim ChiefFinancial
                Officer
                and Chairman of the Board Date:
                October 2, 2007
              By:
              /s/
                John
                WadeJohn
                Wade, Secretary, Treasurer, Director Date:
                October 2, 2007
              By:
              /s/
                Eric
                BestEric
                Best, Director
  58