**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D. C.** **20549**
 
 **FORM
        10 - K**
  (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,
                  2008.**
 
 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 of
                incorporation
                  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
              
              NoneSecurities
                  registered pursuant to Section 12 (g) of the Exchange Act
              
              Common
                  Stock
                $.01
                  par valueIndicate
                  by check mark if the registrant is a well-known seasoned issuer,
                  as
                  defined in Rule 405 of the Securities Act
              
              YesoNoþIndicate
                  by check mark if the registrant is not required to file reports
                  pursuant
                  to Section 13 or 15(d) of the Act
              
              YesoNoþIndicate
                  by check mark whether the registrant (1) has filed all reports
                  required to be filed by Section 13 or 15(d) of the Securities
                  Exchange Act of 1934 during the preceding 12 months (or for such
                  shorter period that the registrant was required to file such reports),
                  and
                  (2) has been subject to such filing requirements for the past
                  90 days
              
              YesþNoo
  
  Indicate
                    by check mark if disclosure of delinquent filers pursuant to
                    Item 405
                    of Regulation S-K is not contained herein, and will not be contained,
                    to the best of registrant’s knowledge, in definitive proxy or information
                    statements incorporated by reference in Part III of this
                    Form 10-K or any amendment to this Form 10-K
                
                þIndicate
                    by check mark whether the registrant is a large accelerated filer,
                    an
                    accelerated filer, a non-accelerated filer, or a smaller reporting
                    company. See the definitions of “large accelerated filer,” “accelerated
                    filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
                    Act.
 
 Large
                    accelerated filero
                  Non-accelerated
                    filero
                Accelerated
                    filero
                  Smaller
                    Reporting Companyþ
 
 Indicate
                    by check mark whether the registrant is a shell company (as defined
                    in
                    Rule 12b-2 of the Exchange Act).
                
                YesoNoþ
  The
        aggregate market value of the voting common stock held by non-affiliates
        of the
        Company as of July 31, 2008 was approximately $13,884,489 based upon 15,777,828
        shares held by such persons and the closing bid price of $.88 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 1, 2008, we had 17,816,248 shares of common stock outstanding.
 
 DOCUMENTS
        INCORPORATED BY REFERENCE:
 
 Portions
        of the definitive Proxy Statement to be furnished to shareholders in connection
        with the Annual Meeting of Shareholders are incorporated by reference into
        Part
        III.
  ii
  
  **ITEX
        CORPORATION**
  **FORM
        10-K**
  **For
        The Fiscal Year Ended July 31, 2008**
  **INDEX**
  
 Page**PART
                    I**ITEM
                    1.
                
                Business
                
                1ITEM
                    1A.
                
                Risk
                    Factors
                
                9ITEM
                    1B.
                
                Unresolved
                    Staff Comments
                
                12ITEM
                    2.
                
                Properties
                
                12ITEM
                    3.
                
                Legal
                    Proceedings
                
                13ITEM
                    4.
                
                Submission
                    of Matters To a Vote of Security Holders
                
                13**PART
                    II**ITEM
                    5.
                
                Market
                    for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                    Purchases of Equity Securities
                
                13ITEM
                    7.
                
                Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operations
                
                14ITEM
                    8.
                
                Financial
                    Statements and Supplementary Data
                
                32ITEM
                    9.
                
                Changes
                    In and Disagreements With Accountants on Accounting and Financial
                    Disclosure
                
                62ITEM
                    9A.
                
                Controls
                    and Procedures
                
                62ITEM
                    9B.
                
                Other
                    Information
                
                63**PART
                    III**ITEM
                    10.
                
                Directors,
                    Executive Officers and Corporate Governance
                
                63ITEM
                    11.
                
                Executive
                    Compensation
                
                63ITEM
                    12.
                
                Security
                    Ownership of Certain Beneficial Owners and Management and Related
                    Stockholder Matters
                
                63ITEM
                    13.
                
                Certain
                    Relationships and Related Transactions, and Director
                    Independence
                
                63ITEM
                    14.
                
                Principal
                    Accountant Fees and Services
                
                64**PART
                    IV**ITEM
                    15.
                
                Exhibits
                    and Financial Statement Schedules
                
                64Signatures
                
                67
  iii
  **PART
        I**
 
 **Special
        Note Regarding Forward-Looking Statements**
 
 In
        addition to current and historical information, this Annual Report on Form
        10-K
        contains forward-looking statements. These statements relate to our future
        operations, prospects, potential products, services, developments, business
        strategies or our future financial performance. Forward-looking statements
        reflect our expectations and assumptions only as of the date of this report
        and
        are subject to risks and uncertainties. Actual events or results may differ
        materially. We have included a discussion of certain risks and uncertainties
        that could cause actual results and events to differ materially from our
        forward-looking statements in the section entitled “Risk
        Factors” (refer to Part I Item 1A) .
        We
        undertake no obligation to update or revise publicly any forward-looking
        statement after the date of this report, whether as a result of new information,
        future events or otherwise.
  **ITEM
        1.**  **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 and franchise network and corporate-owned prototype offices
        (individually, “Broker” and together, the “Broker Network”) in the United States
        and Canada. Our business services and payment systems enable member businesses
        (our “members”) to trade goods and services without exchanging cash. These
        products and services are instead exchanged for ITEX dollars which can only
        be
        redeemed in the Marketplace (“ITEX dollars”). We administer the Marketplace and
        act as a third-party record-keeper for our members’ transactions. We generate
        revenue by charging members percentage-based transaction fees, association
        fees,
        and other fees assessed in United States dollars and Canadian dollars where
        applicable (collectively and as reported on our financial statements, “USD” or
“Cash”).
 
 We
        maintain our executive offices at 3326 160 th Avenue
        SE, Suite 100, Bellevue, Washington 98008-6418. Our telephone number is
        425-463-4000. We routinely post important information on our website under
        the
        Investor Relations tab. Our website address is www.itex.com .
        There
        we also make available, free of charge, our SEC reports including our annual
        report on Form 10-K, quarterly reports on Form 10-Q, 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. 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.
 
 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.
  2
  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”, “2008” for August
        1, 2007 to July 31, 2008, “2007” for August 1, 2006 to July 31, 2007). We report
        our results as of the last day of each calendar month (“accounting cycle”).
 
 Our
        largest sources of revenue 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 fees we charge members are in USD and partially in ITEX dollars. We bill
        members for all fees at the end of each operating cycle. We track all financial
        activity in our internally developed database. Members have the option of
        paying
        USD fees automatically by credit card, by electronic funds transfer or by
        check.
        In the years ended July 31, 2008 and 2007, members made approximately 87%
        and
        86%, respectively, of their payments through electronic funds transfer or
        by
        credit cards using our Preferred Member Autopay System (“Autopay System”). If
        paying 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. Additionally, regardless of a member’s transaction activity,
        each operating cycle we charge most members an association fee of $20 USD
        ($260
        USD annually) and $10 ITEX dollars ($130 ITEX dollars annually). Transaction
        and
        association fees composed 95% and 96% of our total revenue in 2008 and 2007,
        respectively.
 
 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 8 - 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 recognize a small amount of Marketplace
        revenues or expenses of ITEX dollars on our financial statements that meet
        very
        specific criteria. 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 a small amount of ITEX dollars for certain ITEX operating
        expenses.
  3
 
 **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
              *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
                  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.*Our website has a casual, community approach conveying to Marketplace
                  members the variety of businesses that comprise the Marketplace
                  and the
                  benefits that come with their participation. The member business
                  profile
                  section of our website allows 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 member businesses and encourage others to conduct
                  transactions with them in the Marketplace.
 
 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, we have a 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.**
 
 During
        2008, we acquired certain assets of two commercial trade exchange networks
        (refer to “Overview” included in “Management’s
        Discussion and Analysis of Financial Condition and Results of Operations”, Part
        II Item 7) and
        expanded our presence in six U.S. regions, four of which were previously
        not
        served by existing Brokers.
 
 o
              *Excellent
                  customer service by the Broker Network and our corporate office.*We
                  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. We created a national sales manager position to work
                  with
                  Brokers to implement various strategies and methods for obtaining
                  new
                  members and a business development position to execute partnerships
                  with
                  national organizations to create more members within our trading
                  community.
 
 o
              Develop
                  a web based Software as a Service (SaaS) model. This potential
                  new revenue
                  stream is targeted at midsized businesses to enable them in creating
                  reward communities within their employee and customer base, using
                  the ITEX
                  proprietary exchange platform.
  4
 
 **Members**
 
 The
        Marketplace has approximately 24,000 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:
 
 *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 products or 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 business members.
  5
 
 *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.
  ·
              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. There are several hundred single office Exchanges in the United
        States and Canada.
 
 **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.
  6
  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.
 
 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 software. 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
        could
        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.
  7
 
 **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.
 
 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. Except for our three corporate-owned offices, 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.
  8
  **Employees**
 
 As
        of
        July 31, 2008, we had 31 full-time, contract and temporary employees - 20
        in our
        corporate headquarters and 11 in our corporate prototype offices. 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.
 
 **ITEM
        1A.**  **RISK
        FACTORS**
 
 This
        Annual Report on Form 10-K 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”, Part
        II Item 7 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.
 
 ***Our
        future revenue growth and profitability remains uncertain.***
 
 During
        2008, we increased revenues by 13% through organic growth and through
        acquisitions. We cannot assure you that our revenues will continue to increase
        in future quarters or future years. We may continue to add revenue through
        acquisitions, but we cannot assure you that we will be successful in our
        acquisition efforts or that financing for these endeavors will be available.
        We
        have sustained profitable operations for five years. However, our prospects
        for
        the future must be considered in light of the uncertainty of revenues and
        markets. We cannot assure you 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.
 
 ***Acquisitions
        could result in operating difficulties, dilution and other harmful consequences;
        Our evaluation of new strategic directions may not result in viable new
        alliances, mergers or acquisitions, may not enhance shareholder value, and
        may
        create a distraction for our management and uncertainty that may adversely
        affect our operating results and business.***
 
 We
        completed our acquisition of BXI in 2005, the Intagio assets on August 1,
        2007
        and ATX The Barter Company on March 1, 2008. Subsequent to year-end, we
        completed an acquisition of Intagio Media Services. Despite these acquisitions,
        three of which were with the same company, we have a limited amount of
        experience acquiring companies. We have evaluated, and expect to continue
        to
        evaluate, other potential strategic transactions. In May 2008, we retained
        the
        investment bank Montgomery & Co, LLC as our financial advisor to assist us
        in evaluating a range of strategic alternatives and opportunities and update
        us
        regarding prevailing market conditions for mergers and acquisitions. Strategic
        alternatives may include, without limitation, continued execution of our
        operating plan, the sale of some or all of our continuing operations, partnering
        or other collaboration agreements, or a merger or other strategic transaction.
        Our exploration of strategic alternatives may not result in any additional
        agreements or transactions, or ensure that, if completed, any agreements
        or
        transactions will be successful, on attractive terms or enhance shareholder
        value. It is possible that nothing may result from our exploration or that
        we
        may acquire, be acquired or enter into some other strategic relationship,
        and
        that in consummating or further exploring such avenues, we may incur additional
        costs. Furthermore, we may enter into letters of intent and other non-definitive
        agreements that do not culminate in a completed transaction, engage in contract
        negotiations, or incur due diligence expenses which affect our quarterly
        earnings prior to or without entering into a material definitive agreement
        required to be disclosed publicly. We do not intend to disclose developments
        with respect to this process unless and until the evaluation of strategic
        alternatives has been completed or we have entered into a material definitive
        agreement. The mere negotiation or the consummation of any of these transactions
        could be material to our financial condition and results of operations. In
        addition, the process of integrating an acquired company, business or technology
        may create unforeseen operating difficulties and expenditures and is risky.
        The
        areas where we may face risks include:
  9
  ·
              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 alliance,
                  merger or acquisition integration
                  challenges.
  ·
              Cultural
                  challenges associated with integrating employees from the acquired
                  company
                  into the acquiring organization.
  ·
              Retaining
                  employees from the businesses
                  acquired.
  ·
              The
                  need to integrate each company’s accounting, management information, human
                  resource and other administrative systems to permit effective
                  management.
 
 The
        expected benefit of any of these strategic relationships may not materialize
        and
        the cost of these efforts may negatively impact our financial results. Future
        alliances, mergers or 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 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 our 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.
  10
  ***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
        current core operations reflect a scalable business strategy, which will
        allow
        our business model to be executed with limited outside financing. However,
        we
        also may expand our operations, enter into a strategic transaction, or acquire
        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 dependent on our Broker Network and franchise
        model***
  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.
 
 ***We
        are dependent on the value of foreign currency.***
 
 We
        transact business in Canadian dollars as well as US dollars. Revenues
        denominated in Canadian dollars comprised 7.7% and 7.3% in the years ended
        July
        31, 2008 and 2007, respectively. While foreign currency exchange fluctuations
        are not believed to materially adversely affect our operations at this time,
        changes in the relation of the Canadian dollar to the US dollar could continue
        to affect our revenues, cost of sales, operating margins and result in exchange
        losses.
  11
  ***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 and SEC rules, we are required
        to furnish a report by our management assessing the effectiveness of our
        internal control over financial reporting. This assessment must include
        disclosure of any material weaknesses in our internal control over financial
        reporting identified by management. In addition, we must comply with Section
        404(b) requirements to provide an auditor’s attestation report on internal
        control over financial reporting beginning with our Annual Report on Form
        10-K
        for our year ending July 31, 2010. The Committee of Sponsoring Organizations
        of
        the Treadway Commission (COSO) provides a framework for companies to assess
        and
        improve their internal control systems. The Public Company Accounting Oversight
        Board’s (“PCOAB”) Auditing Standard No. 5, adopted by the SEC on July 27, 2007,
        provides the professional standards and related performance guidance for
        auditors to report on the effectiveness of our internal controls over financial
        reporting under Section 404. Our assessment of internal controls over financial
        reporting requires us to make subjective judgments and, particularly because
        Standard No. 5 is newly effective, some of the judgments will be in areas
        that
        may be open to interpretation.
 
 While
        we
        have determined in our Management Report on Internal Control over Financial
        Reporting included in this Form 10-K, that our internal control over financial
        reporting was effective as of July 31, 2008, we must continue to monitor
        and assess our internal control over financial reporting. If we identify
        one or
        more future material weaknesses in our internal control over financial reporting
        and such weakness remains uncorrected at fiscal year end, we will be unable
        to
        assert our internal control is effective. If we are unable to assert that
        our
        internal control over financial reporting is effective for a particular year
        (or
        if our auditors are unable to attest that we have maintained, in all material
        respects, effective internal controls), we could lose investor confidence
        in the
        accuracy and completeness of our financial reports. That would likely have
        an
        adverse effect on our stock price.
  **ITEM
        1B.**  **UNRESOLVED
        STAFF COMMENTS**
 
 Not
        applicable
  **ITEM
        2.**  **PROPERTIES**
 
 Our
        corporate and administrative headquarters offices are located in Bellevue,
        Washington. We lease properties in the following locations that are utilized
        by
        our sales and marketing, and general and administrative personnel :
 
 **Area
                  leased**
              
              **Monthly****Location**
              
              **(sq.
                  feet)**
              
              **rent**
              
              **Lease
                  expiration**Bellevue,
                  Washington
              
              
              7,035
              
              $
              12,898
              
              April
                30, 2010Solon,
                  Ohio (1)
              
              
              1,250
              
              
              1,779
              
              May
                31, 2009Oakbrook
                  Terrace, Illinois (1)(2)
              
              
              5,086
              
              
              8,901
              
              October
                31, 2011
  12
  (1)
              This
                  facility is utilized for our prototype office.
 
 (2)
              We
                  entered into this lease subsequent to year-end as part of the acquisition
                  of Intagio media assets (refer to “Overview” included in “Management’s
                  Discussion and Analysis of Financial Condition and Results of Operations”,
                  Part II Item 7.)
  We
        believe that our current facilities are adequate and suitable for their current
        use, and that all of the leased space and all property maintained within
        are
        adequately insured. For additional information regarding our obligations
        under
        leases, refer to****Note
        8
―“Commitments”
        included in the “Notes to Consolidated Financial Statements”, Item 8 - Financial
        Statements.
  **ITEM
        3.**  **LEGAL
        PROCEEDINGS**
 
 For
        information regarding legal proceedings, refer to ****Note
        11 ―
“Legal Proceedings” included
        in
        the “Notes to Consolidated Financial Statements”, Item 8 - 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, 2008.
 
 **PART
        II**
 
 **ITEM 5.**
              **MARKET
                  FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS****AND
                  ISSUER PURCHASES OF EQUITY
                  SECURITIES.**
 
 **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,
              
              2008
              
              2007High
              
              Low
              
              High
              
              LowFirst
                  Quarter
              
              $
              1.01
              
              $
              0.66
              
              $
              0.97
              
              $
              0.47Second
                  Quarter
              
              $
              1.02
              
              $
              0.65
              
              $
              0.85
              
              $
              0.64Third
                  Quarter
              
              $
              0.98
              
              $
              0.79
              
              $
              0.81
              
              $
              0.67Fourth
                  Quarter
              
              $
              0.98
              
              $
              0.50
              
              $
              0.84
              
              $
              0.68
  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 880 holders of record of our common stock as of July 31,
        2008. Most shares of our common stock are held by brokers and other institutions
        on behalf of shareholders.
  13
  We
        have
        not paid any cash dividends and do not intend to pay any cash dividends in
        the
        foreseeable future.
 
 **Purchases
        of Equity Securities by the Issuer and Affiliated
        Purchasers**
 
 No
        repurchases of common stock were made during the fourth quarter of
        2008.
  **ITEM 7.**
              **MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**
  The
        following discussion is provided as a supplement to the accompanying
        consolidated financial statements and notes (refer to Item
        8 -
        Financial Statements) and is
        intended to help provide information we believe is relevant to an assessment
        and
        understanding of our results of operations and financial condition. In addition
        to our consolidated financial statements and notes, it should be read in
        conjunction the section entitled “Risk
        Factors” (refer to Part I Item 1A) and the
        cautionary statement regarding forward-looking information on page 1.
 
 **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 and franchise network and corporate-owned prototype offices
        (individually, “Broker” and together, the “Broker Network”) in the United States
        and Canada. Our business services and payment systems enable member businesses
        (our “members”) to trade goods and services without exchanging cash. These
        products and services are instead exchanged for ITEX dollars which can only
        be
        redeemed in the Marketplace (“ITEX dollars”). We administer the Marketplace and
        act as a third-party record-keeper for our members’ transactions. We generate
        revenue by charging members percentage-based transaction fees, association
        fees,
        and other fees assessed in United States dollars and Canadian dollars where
        applicable (collectively and as reported on our financial statements, “USD” or
“Cash”).
 
 For
        each
        calendar year, we divide our operations into 13 four-week billing and commission
        cycles always ending on a Thursday (“operating cycle”). For financial statement
        purposes, our fiscal year is from August 1 to July 31 (“year”, “2008” for August
        1, 2007 to July 31, 2008, “2007” for August 1, 2006 to July 31, 2007). We report
        our results as of the last day of each calendar month (“accounting cycle”).
  **2008
        Accomplishments**
 
 **Achieved
        Fifth Consecutive Year of Profitable Operations**
 
 Since
        2004, we have sustained our profitability and net cash flows from operating
        activities by focusing our business model on cashless transaction processing
        and
        supporting our Broker Network. During 2008, we continued our profitability,
        increased our stockholders’ equity, and generated positive cash flows from
        operating activities. We had net operating loss carryforwards of approximately
        $19,362,000 at the beginning of 2008 which was reduced to $17,545,000 as
        of July
        31, 2008. This amount remains available to offset future taxable
        income.
  14
 
 **Accelerated
        Revenue Growth**
 
 For
        the
        year ended July 31, 2008 compared to 2007, our Marketplace revenues increased
        13% from $14,171,000 to $15,964,000. We are seeking to increase our revenues
        and, correspondingly, our net income by:
  ·
              Adding
                  experienced members to our sales and marketing
                  team.
 ·
              Minimizing
                  the barriers to join and transact in the
                  Marketplace.
 ·
              Increasing
                  the benefits to members participating in the
                  Marketplace.
 ·
              Improving
                  and enhancing our internet applications and electronic
                  marketing.
 ·
              Adding
                  new franchisees.
 ·
              Managing
                  corporate-owned prototype offices.
 
 **Acquisitions
        Funded by Our Cash Flows from Operating Activities**
 
 In
        2008,
        we continued to execute growth within our self-funding abilities. In the
        first
        and third quarters of 2008, we completed the acquisition of two separate
        trading
        communities, expanding into San Francisco, Chicago and Cleveland, in addition
        to
        adding members in New York, New Jersey and Connecticut. Together, the aggregate
        cash purchase price of $3,462,000 at the acquisition dates were funded with
        $1,700,000 from our cash flows from operating activities, $200,000 from our
        line
        of credit and $1,136,961 from seller financing. On August 1, 2008, we made
        an
        additional cash payment of $150,000 using our cash flow from operating
        activities. We expect to complete our remaining debt payments by the end
        of 2009
        using our cash flows from operating activities.
 
 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, (iii) if certain revenue targets were achieved, additional cash
        payments totaling up to $150,000, and (iv) the assumption of 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 (“2007 Note”) to Intagio in the aggregate principal amount of
        $1,136,961 due August 31, 2010. The 2007 Note is a secured obligation and
        ranks
        senior to all of our other obligations, except any U.S. Bank debt. Principal
        and
        interest on the 2007 Note is payable in twenty-four equal monthly installments
        of $51,422 which commenced on August 31, 2007. Our total principal repayments
        during 2008 were $546,000 leaving an outstanding balance as of July 31, 2008
        of
        $591,000.
 
 On
        February 1, 2008, we acquired from ATX The Barter Company, Inc. (“ATX The Barter
        Company”) certain assets of a commercial trade exchange network including a
        membership list of approximately four hundred member businesses for $325,000,
        paid in full with our cash reserves. These new member businesses are located
        in
        or near Cleveland, Ohio.
 
 **Improved
        Visibility and Positioning**
 
 During
        the second quarter of 2008, we retained an outside technology firm to work
        on
        the search engine optimization (SEO) of www.itex.com in
        addition to selective search engine marketing (SEM) through Google. In the
        second quarter we also retained two marketing firms to gain ITEX further
        media
        exposure, which has generated additional press coverage for the
        Company.
  15
 
 In
        the
        third quarter, we retained the investor relations firm Genesis Select to
        assist
        us in enhancing our investor relations programs and creating more awareness
        among investors. Our CEO presented at investor conferences and to more than
        two
        dozen institutions and equity funds on behalf of the Company. We are hopeful
        these activities will result in increased investor and market awareness of
        ITEX.
 
 During
        the second and third quarters of 2008, our stockholders rebuffed an unsolicited
        exchange offer from a third party seeking control of ITEX. In the fourth
        quarter
        of 2008, we retained the investment bank Montgomery & Co, LLC as our
        financial advisor to assist our Board of Directors and management in evaluating
        a range of strategic alternatives and opportunities to enhance shareholder
        value.
 
 **Current
        Developments**
 
 On
        August
        1, 2008, we acquired certain assets of a media services business from Intagio.
        The advertising and media sector is currently the largest component of
        transaction volume in the ITEX Marketplace. The purchase price was (i) cash
        in
        the amount of $68,421 and (ii) a secured promissory note in the aggregate
        principal amount of $687,500. We also assumed certain liabilities of
        approximately $109,000. The $687,500 subordinated secured promissory note
        (“2008
        Note”) to Intagio bears an interest rate of 8.0% with eleven equal monthly
        installments of $65,208 which commenced on August 31, 2008. At the closing,
        we
        paid Intagio the $68,421 cash purchase price as well as a prepayment of $150,000
        to satisfy, in full, our maximum post-closing obligation to Intagio for the
        August 1, 2007 transaction (see “Acquistions Funded by Our Cash Flows from
        Operating Activities” above).
 
 With
        this
        acquisition we enhanced the most active sector of our trading community with
        potentially high-volume media and hospitality clients. We now have the ability
        to offer a variety of new media opportunities directly to the ITEX Marketplace.
        Our media specialists will offer enhanced media planning and expanding our
        clients’ budgets by enabling them to fund part of their media plan through their
        own goods and services. In addition, we plan to use our expanded media base
        to
        register more member businesses in the hospitality, travel, and restaurant
        industries.
  **RESULTS
        OF OPERATIONS (in thousands except per share amounts unless otherwise
        indicated)**
  **Condensed
        Results**
 
 Year
                  Ended July 31,2008
              
              2007Marketplace
                  and other revenue
              
              $
              15,964
              
              $
              14,171Costs
                  and expenses
              
              
              14,463
              
              
              12,666Income
                  from operations
              
              
              1,501
              
              
              1,505Other
                  income - net
              
              
              16
              
              
              156Income
                  before income taxes
              
              
              1,517
              
              
              1,661Income
                  tax expense (benefit)
              
              
              583
              
              
              (2,843
              )Net
                  income
              
              $
              934
              
              $
              4,504Net
                  income per common shareBasic
              
              $
              0.05
              
              $
              0.25Diluted
              
              $
              0.05
              
              $
              0.25
  16
 
 ***Year
        ended July 31, 2008 and 2007.*** Marketplace and other revenue for year ended July 31, 2008, increased $1,793
        or
        13% to $15,964 from $14,171 during the prior year. We attribute this increase
        primarily to our acquisition in 2008 of certain assets of commercial trade
        exchanges from Intagio and ATX The Barter Company. Combined revenues from
        acquired Intagio and ATX The Barter Company assets retained as corporate
        prototype offices totaled $1,485 in 2008 or 83% of our revenue increase.
        Additionally, $225 or 13% of the increase resulted from our use, beginning
        in
        2008, of ITEX dollars to acquire goods and services for corporate use. The
        remaining 4% of our revenue increase was due to organic growth.
 
 Income
        before income taxes for the year ended July 31, 2008 was $1,517, a decrease
        of
        $144 or 9% from income before income taxes in 2007 of $1,661. We attribute
        this
        decrease primarily to an increase in expenses of $291 incurred to address
        an
        unsolicited third-party tender offer, investments to increase shareholder
        value
        and other costs of being a public company. Also contributing were increases
        in
        amortization of intangible assets of $308 in connection with our acquisitions
        and certain gains in 2007 of $80 included in other income.
 
 Basic
        and
        diluted income per common share for the year ending July 31, 2008 and 2007
        was
        $0.05 and $0.25, respectively. In 2007, 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.
  **Selected
        Quarterly Financial Results**
 
 Year
                  ended July 31, 2008
              
              First
                Quarter
              
              Second
                Quarter
              
              Third
                Quarter
              
              Fourth
                Quarter
              
              TotalMarketplace
                  and other revenue
              
              
              3,853
              
              
              4,175
              
              
              3,871
              
              
              4,065
              
              
              15,964Income
                  from operations
              
              
              272
              
              
              482
              
              
              408
              
              
              339
              
              
              1,501Net
                  cash flows from operating activities
              
              
              767
              
              
              1,018
              
              
              (15
              )
              
              604
              
              
              2,374Total
                  stockholders' equity
              
              
              12,341
              
              
              12,754
              
              
              13,008
              
              
              13,319
              
              
              13,319
 
 Year
                  ended July 31, 2007
              
              First
                Quarter
              
              Second
                Quarter
              
              Third
                Quarter
              
              Fourth
                Quarter
              
              TotalMarketplace
                  and other 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
              
              
              12,330
              
              
              12,330
  In
        the
        first quarter of 2008, we expanded the Marketplace **** by
        acquiring certain assets of a commercial trade exchange network from Intagio.
        The acquisition added approximately 2,000 members.
 
 During
        the third quarter, we acquired from ATX The Barter Company certain assets
        of a
        commercial trade exchange network including a membership list of approximately
        400 member businesses.
 
 **Revenue,
        Costs and Expenses**
 
 The
        following table summarizes our selected consolidated financial information
        for
        the years ended July 31, 2008 and 2007, with amounts expressed as a percentage
        of total revenues:
  17


Years Ended July 31,2008
            
            2007Amount
            
            Percent of
              Revenue
            
            Amount
            
            Percent of
              RevenueRevenue:Marketplace
                and other revenue
            
            $
            15,964
            
            
            100
            %
            $
            14,171
            
            
            100
            %Costs
                and expenses:Cost
                of Marketplace revenue
            
            
            10,335
            
            
            65
            %
            
            9,660
            
            
            68
            %Salaries,
                wages and employee benefits
            
            
            1,634
            
            
            10
            %
            
            1,448
            
            
            10
            %Selling,
                general and administrative
            
            
            1,869
            
            
            12
            %
            
            1,257
            
            
            9
            %Depreciation
                and amortization
            
            
            625
            
            
            4
            %
            
            301
            
            
            2
            %14,463
            
            
            91
            %
            
            12,666
            
            
            89
            %Income
                from operations
            
            
            1,501
            
            
            9
            %
            
            1,505
            
            
            11
            %Other
                income, net
            
            
            16
            
            
            0
            %
            
            156
            
            
            1
            %Income
                before income taxes
            
            
            1,517
            
            
            10
            %
            
            1,661
            
            
            12
            %Income
                tax expense (benefit)
            
            
            583
            
            
            4
            %
            
            (2,843
            )
            
            -20
            %Net
                income
            
            $
            934
            
            
            6
            %
            $
            4,504
            
            
            32
            %




***Revenue***




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





Year
                Ended July 31,2008
            
            Percent
              change
            
            2007Broker
                offices:Association
                fees
            
            $
            4,119
            
            
            4
            %
            $
            3,960Transaction
                fees
            
            
            10,323
            
            
            3
            %
            
            10,020Other
                fees
            
            
            202
            
            
            6
            %
            
            191Corporate
                prototype offices:Association
                fees
            
            
            314
            
            
            
            
            
            -Transaction
                fees
            
            
            747
            
            
            
            
            
            -Other
                fees
            
            
            34
            
            
            
            
            
            -Marketplace
                revenue
            
            $
            15,739
            
            
            11
            %
            $
            14,171ITEX
                dollar revenue
            
            $
            225
            
            
            
            
            $
            -Total
                revenue
            
            $
            15,964
            
            
            13
            %
            $
            14,171




***Year
      ended July 31, 2008 and 2007.*** Revenue
      increased by $1,793 or 13% for the year ended July 31, 2008 compared to 2007.
      We
      attribute this increase primarily to the contribution of $1,095 from our
      corporate prototype offices which we acquired during 2008. Acquisitions during
      2008 contributed an additional $390 to Broker offices. Our strategic plans
      to
      increase revenue successfully contributed $83 in organic growth. During 2008,
      we
      utilized our ITEX dollars to purchase goods and services for our corporate
      use.
      ITEX dollar revenue contributed $225 to our revenue growth in 2008. Our plans
      to
      continue to increase revenue in future periods are discussed in the previous
      section under “Overview.”


18




***Cost
      of Marketplace revenue***




Cost
      of
      Marketplace revenue consists of commissions paid to Brokers, salaries and
      employee benefits of our corporate offices and expenses directly correlated
      to
      Marketplace revenue. The following are the components of cost of Marketplace
      revenue that are included in the consolidated statements of income:





Year Ended July 31,2008
            
            Percent
              change
              from 2007
            
            2007Association
                fee commissions
            
            $
            1,663
            
            
            -1
            %
            $
            1,688Transaction
                fee commissions
            
            
            7,757
            
            
            2
            %
            
            7,579Corporate
                prototype office salaries, wages, employee benefits, and independent
                contractor expenses
            
            
            594
            
            
            
            
            
            -Other
                Marketplace expenses
            
            
            321
            
            
            -18
            %
            
            393$
            10,335
            
            
            7
            %
            $
            9,660




***Year
      ended July 31, 2008 and 2007.*** Cost of
      Marketplace revenue increased by $675 or 7% to $10,335 from $9,660 for the
      year
      ended July 31, 2008 and 2007, respectively. This increase correlates to an
      11%
      increase in Marketplace revenue. Also, costs related to our corporate prototype
      offices contributed $594 or 88% of the increase.




The
      following shows the commissions and corporate prototype office costs separately
      as a percent of their related revenue:




Year
                Ended July 31,2008
            
            %
                of
              Related
              Revenue
            
            2007
            
            %
                of
              Related
              RevenueAssociation
                fee commissions
            
            $
            1,663
            
            
            40
            %
            $
            1,688
            
            
            43
            %Transaction
                fee commissions
            
            
            7,757
            
            
            75
            %
            
            7,579
            
            
            76
            %Corporate
                prototype office salaries, wages, employee benefits, and independent
                contractor expenses
            
            
            594
            
            
            54
            %
            
            -
            
            
            n/a




***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:


19





Year
                Ended July 31,2008
            
            Percent
              change
              from
                2007
            
            2007Corporate
                salaries, wages and employee benefits
            
            $
            1,634
            
            
            13
            %
            $
            1,448Percentage
                of revenue
            
            
            10
            %
            
            
            
            
            10
            %





***Year
      ended July 31, 2008 and 2007.*** Corporate salaries, wages and employee benefits for 2008 increased by $186
      or
      13% to $1,634 from $1,448 as compared with 2007. This increase was primarily
      due
      to an increase of $185 of wages and salaries for four additional full-time
      equivalent employees added in our corporate office.





***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:




Year
                Ended July 31,2008
            
            Percent
              change
              from
                2007
            
            2007Selling,
                general and administrative expenses
            
            $
            1,869
            
            
            49
            %
            $
            1,257Percentage
                of revenue
            
            
            12
            %
            
            
            
            
            9
            %





***Year
      ended July 31, 2008 and 2007.*** Selling,
      general and administrative increased by $612 or 49% to $1,869 from $1,257 for
      2008 as compared to 2007. Primary contributors to this increase include: $182
      for ITEX dollar expenses, $153 for investor relations, $121 for bad debts
      expense, and $88 for corporate prototype office expenses. During 2008, we
      utilized our ITEX dollars to purchase goods and services for our corporate
      use.
      During 2008, we significantly increased expenses for investor relations (see
      “Improved Visibility and Positioning” above).





***Depreciation
      and Amortization***





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




Year
                Ended July 31,2008
            
            Percent
              change
              from
                2007
            
            2007Depreciation
                and amortization
            
            $
            625
            
            
            108
            %
            $
            301Percentage
                of revenue
            
            
            4
            %
            
            
            
            
            2
            %





***Year
      ended July 31, 2008 and 2007.*** Depreciation and amortization increased by $324 or 108% to $625 from $301 for
      2008 as compared to 2007. Amortization increased by $316 in 2008 primarily
      in
      connection with our acquisition related intangible assets including membership
      lists and non-compete agreements. The remaining increase was due to added
      depreciation on fixed assets purchased during 2008.


20





***Other
      Income***





Other
      income includes interest received on notes receivable and promissory notes,
      certain one-time gains and offsetting interest expense on notes payable.
      Comparative results are as follows:





Year
                Ended July 31,2008
            
            Percent
              change
              from
                2007
            
            2007Other
                income
            
            $
            16
            
            
            -90
            %
            $
            156Percentage
                of revenue
            
            
            0
            %
            
            
            
            
            1
            %





***Year
      ended July 31, 2008 and 2007.*** Other
      income for 2008 decreased by $140 or 90% to $16 from $156 for the same period
      in
      2007. The decrease is primarily caused by a decrease of $16 in interest income
      due to lower notes receivable balances combined with an increase of $44 in
      interest expense due to the issuance of a note payable in the amount of $1,137
      on August 1, 2007 in connection with our acquisition of certain assets of
      Intagio (see “Acquisitions Funded by Our Cash Flows from Operating Activities”
above). Other income in 2007 included $80 in 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 2008 and 2007, respectively, we utilized $1,817 and $2,262 of our
      available NOLs. As of July 31, 2008, we have approximately $17,545 of NOLs
      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 of 2008, we performed
      an
      assessment of our available NOLs because of an additional year of increased
      profitability and our anticipated acquisition of certain assets of a media
      services company which was completed subsequent to July 31, 2008 on August
      1,
      2008. In that assessment, we concluded that it was more likely than not that
      additional NOLs would result in realizable deferred tax assets. As of July
      31,
      2008 and 2007, we have no valuation allowance on available Federal or State
      NOLs.





**FINANCIAL
      CONDITION (in thousands)**




Our
      total
      assets were $16,149 and $14,304 at July 31, 2008 and 2007, respectively,
      representing an increase of $1,845 or 13%. This increase resulted primarily
      due
      to acquisition acquired assets of $1,510 on August 1, 2007 net of $1,700 USD
      paid. We have continued to generate positive cash flows from operations. Our
      cash and cash equivalents totaled $1,061 and $1,753 as of July 31, 2008 and
      2007, respectively, representing a decrease of $692, or 39%. Our cash flow
      activity is described in more detail below (see “Liquidity and Capital
      Resources”).




Accounts
      receivable balances, net of allowances of $361 and $265, were $1,331 and $1,113
      as of July 31, 2008 and 2007 respectively, representing an increase of $218
      or
      20%.


21





July 31, 2008
            
            % of Gross
              Accounts
              Receivable
            
            July 31, 2007
            
            % of Gross
              Accounts
              ReceivableGross
                accounts receivable
            
            $
            1,692
            
            
            100
            %
            $
            1,378
            
            
            100
            %Less:
                allowance
            
            
            361
            
            
            21
            %
            
            265
            
            
            19
            %Net
                accounts receivable
            
            $
            1,331
            
            
            79
            %
            $
            1,113
            
            
            81
            %





Gross
      accounts receivable increased by $314 or 23% due to increased
      revenues.





Our
      total
      current liabilities were $2,822 and $1,955 at July 31, 2008 and 2007,
      respectively, representing an increase of $867 or 44%. The increase is due
      primarily to an increase of $591 in the current portion of debt and a $101
      increase in accrued taxes.





As
      a
      result of our continued profitability, our stockholders’ equity increased by
      $989 or 8% to $13,319 at July 31, 2008, compared to $12,330 at July 31, 2007.
      We
      have increased our stockholders’ equity by 18%, on average, every quarter for
      the last five years.




**LIQUIDITY
      AND CAPITAL RESOURCES (in thousands)**




Our
      principal sources of liquidity are our cash provided by operating activities,
      cash and cash equivalents on hand, and a $1,000 line of credit. Net cash
      provided by operating activities was $2,374 and $2,057 for the years ended
      July
      31, 2008 and 2007, respectively. Our cash and cash equivalents balance as of
      July 31, 2008 totaled $1,061. Additionally, we have a revolving credit agreement
      to establish a $1,000 line of credit facility from our primary banking
      institution, US Bank (“line of credit”). We have no outstanding balance on our
      line of credit as of July 31, 2008.




On
      August
      1, 2007 and February 1, 2008, we acquired from The Intagio Group, Inc. and
      ATX
      The Barter Company, Inc., respectively, certain assets of commercial trade
      exchange networks including membership lists and other intangibles. We used
      $2,381 of our cash and cash equivalents on these acquisitions inclusive of
      acquisition related expenses.





Changes
      in cash and cash equivalents for the years ended July 31, 2008 and 2007 were
      as
      follows in thousands):




Year
                Ended July 31,2008
            
            2007Net
                cash provided by operating activities
            
            $
            2,374
            
            $
            2,057Net
                cash provided by (used in) investing activities
            
            
            (2,358
            )
            
            453Net
                cash used in financing activities
            
            
            (708
            )
            
            (1,071
            )Increase
                (decrease) in cash and cash equivalents
            
            $
            (692
            )
            $
            1,439





We
      have financed our operational needs over the last two years through cash flow
      generated from operations. During 2008, we used the $2,374 net cash provided
      by
      operating activities primarily for acquisitions, routine operating expenses,
      and
      debt re-payments. Subsequent to July 31, 2008, we utilized $218 of our cash
      to
      acquire certain assets of a media services business (refer to “Current
      Developments” included in “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”, Part
      II Item 7.)


22


As
      part
      of our contemplated future expansion activities or as part of our evaluation
      of
      strategic alternatives and opportunities, we may seek to acquire certain
      competitors or other business to business enterprises, or consider partnering
      or
      other collaboration agreements, or a merger or other strategic transaction.
      We
      expect that our current working capital would be adequate for this purpose.
      However, we may seek 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. 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, 2008. In
      the
      first quarter of 2009, 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.





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 2008 and 2007:





Year
                ended July 31, 2008
            
            First
              Quarter
            
            Second
              Quarter
            
            Third
              Quarter
            
            Fourth
              Quarter
            
            TotalNet
                cash provided by operating activities
            
            $
            767
            
            $
            1,018
            
            $
            (15
            )
            $
            604
            
            $
            2,374Net
                cash provided by (used in) investing activities
            
            
            (1,972
            )
            
            (45
            )
            
            (345
            )
            
            4
            
            
            (2,358
            )Net
                cash used in financing activities
            
            
            (294
            )
            
            (136
            )
            
            (138
            )
            
            (140
            )
            
            (708
            )$
            (1,499
            )
            $
            837
            
            $
            (498
            )
            $
            468
            
            $
            (692
            )





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
            )$
            646
            
            $
            85
            
            $
            610
            
            $
            98
            
            $
            1,439





*Operating
      Activities*





For
      the
      year ended July 31, 2008, net cash provided by operating activities was $2,374
      compared with $2,057 in 2007, an increase of $317 or 15%. We have had positive
      net cash provided by operating activities for sixteen of the past nineteen
      quarters. As described above, for each calendar year, we divide our operations
      into thirteen four-week billing and commission cycles. This sometimes causes
      fluctuations in reporting periods. Due to the differences between our operating
      and reporting periods, four payroll and commission payment periods occurred
      in
      the third quarter of 2008 as compared to three in the fourth quarter of 2008.
      In
      2007, the opposite occurred. In 2007, three payroll and commission payment
      periods occurred in the third quarter of 2007 as compared to four in the fourth
      quarter of 2007.




We
      present our Consolidated Statements of Cash Flows using the indirect method
      as
      outlined and permitted by SFAS No. 95, *Statement
      of Cash Flows.* Under
      this method, cash provided by operations net of scheduled commission payments
      is
      a function of our operating cycles, not our accounting cycles, and payments
      for
      operating expenses, the timing of which is discretionary. The total cash we
      received exclusively from our members, net only of credit card returns,
      electronic fund transfer returns, and return checks is as
      follows:


23





Year Ended July 31,2008
            
            Percent of
              total
            
            2007
            
            Percent of
              totalCredit
                cards, net
            
            $
            9,299
            
            
            61
            %
            $
            7,883
            
            
            56
            %Electronic
                fund transfers, net
            
            
            4,036
            
            
            26
            %
            
            4,136
            
            
            29
            %Checks
                and cash, net
            
            
            2,025
            
            
            13
            %
            
            2,020
            
            
            14
            %Cash
                received from Marketplace members, net
            
            $
            15,360
            
            
            100
            %
            $
            14,039
            
            
            100
            %





*Investing
      Activities*





During
      2008, we used $1,700 and $325 for acquisitions exclusive of acquisition related
      costs in the first and third quarter, respectively. We did not have any
      acquisitions in 2007. Differences in cash provided by (used in) investing
      activities resulted primarily from payments received on notes and loans
      receivable offset to a lesser extent by advances on additional
      loans.





*Financing
      Activities*





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





Year
                ended July 31, 2008
            
            First
              Quarter
            
            Second
              Quarter
            
            Third
              Quarter
            
            Fourth
              Quarter
            
            TotalContractual
                debt repayments
            
            $
            (132
            )
            $
            (136
            )
            $
            (138
            )
            $
            (140
            )
            $
            (546
            )Discretionary
                accelerated debt repayments
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Discretionary
                repurchase of common stock
            
            
            (162
            )
            
            -
            
            
            -
            
            
            -
            
            
            (162
            )$
            (294
            )
            $
            (136
            )
            $
            (138
            )
            $
            (140
            )
            $
            (708
            )





Year
                ended July 31, 2007
            
            First
              Quarter
            
            Second
              Quarter
            
            Third
              Quarter
            
            Fourth
              Quarter
            
            TotalContractual
                debt repayments
            
            $
            (52
            )
            $
            -
            
            $
            -
            
            $
            -
            
            $
            (52
            )Discretionary
                accelerated debt repayments
            
            
            (697
            )
            
            -
            
            
            -
            
            
            -
            
            
            (697
            )Discretionary
                repurchase of common stock
            
            
            -
            
            
            (296
            )
            
            -
            
            
            (26
            )
            
            (322
            )$
            (749
            )
            $
            (296
            )
            $
            -
            
            $
            (26
            )
            $
            (1,071
            )





We
      repurchased 203 and 438 shares of ITEX stock in 2008 and 2007, respectively.
      In
      2007, we repaid notes related to our 2005 acquisition of BXI.





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 7),we borrowed $300 under our Revolving Credit Agreement with
      U.S. Bank and issued an 8.0% subordinated secured promissory note (“2007 Note”)
      to Intagio in the aggregate principal amount of $1,137 due August 31, 2009.
      The
      2007 Note is a secured obligation and ranks senior to all of our other
      obligations except that the 2007 Note is subordinated to the U.S. Bank debt.
      Principal and interest on the 2007 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 2007 Note are secured by security
      interests in our accounts receivable, general intangibles, and all inventory
      and
      equipment. The 2007 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 2007 Note to be accelerated and become
      immediately due and payable. The 2007 Note can be prepaid at any time. In 2008,
      we repaid the $300 balance on our line of credit in full and we have no balance
      outstanding. In 2008, we also repaid $546 on the 2007 Note leaving an
      outstanding balance of $591 as of July 31, 2008. This amount is due within
      one
      year and is shown as a component of current liabilities on our consolidated
      balance sheet as of July 31, 2008.


24


**Commitments
      and Contingencies**




We
      utilize leased facilities in the normal course of our business. As of July
      31,
      2008, the future minimum commitments in both United States dollars (“U.S.
      dollars”) and ITEX dollars under these operating leases are as
      follows:





Executive office
            
            Prototype office
            
            TotalLocation:
            
            Bellevue, Washington
            
            Solon, OhioExpiration date:
            
            April 30, 2010
            
            May 31, 2009Lease commitments for
              the year ending July 31,
            
            U.S.
              dollars
            
            ITEX
              dollars
            
            U.S.
              dollars
            
            ITEX
              dollars
            
            U.S.
              dollars
            
            ITEX
              dollars2009
            
            $
            155
            
            $
            -
            
            $
            18
            
            $
            10
            
            $
            173
            
            $
            102010
            
            
            116
            
            
            -
            
            
            -
            
            
            -
            
            
            116
            
            
            -Total
            
            $
            271
            
            $
            -
            
            $
            18
            
            $
            10
            
            $
            289
            
            $
            10




The
      lease
      expense, inclusive of utilities included in our lease payments, for our
      executive office space and corporate prototype offices for the years ended
      July
      31, 2008 and 2007 was $232 and $149, respectively.




We
      have
      not leased any equipment in 2008 or 2007.




We
      have
      purchase commitments for telecommunications and data communications as well
      as
      for promotion and advertising. As of July 31, 2008, the future minimum
      commitments in both U.S. dollars and ITEX dollars under these purchase
      commitments are as follows:





Telecommunications
              and data
              communications
            
            Promotion and
              advertising
            
            TotalPurchase
                commitments for
              the
                year ending July 31,
            
            U.S.
              dollars
            
            ITEX
              dollars
            
            U.S.
              dollars
            
            ITEX
              dollars
            
            U.S.
              dollars
            
            ITEX
              dollars2009
            
            $
            28
            
            $
            -
            
            $
            90
            
            $
            17
            
            $
            118
            
            $
            17Thereafter
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            28
            
            $
            -
            
            $
            90
            
            $
            17
            
            $
            118
            
            $
            17


25





**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 8 – Financial
      Statements.





*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” or “Cash”). 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 revenue 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 in USD and partially in ITEX dollars
      (see below, “Accounting for ITEX Dollar Activity”). We bill members for all fees
      at the end of each operating cycle. We track all financial activity in our
      internally developed database. Members have the option of paying USD fees
      automatically by credit card, by electronic funds transfer or by check. In
      the
      years ended July 31, 2008 and 2007, members made approximately 87% and 86%,
      respectively, of their payments through electronic funds transfer or by credit
      cards using our Preferred Member Autopay System (“Autopay System”). If paying
      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. Additionally, regardless of a member’s transaction activity, each
      operating cycle we charge most members an association fee of $20 USD ($260
      USD
      annually) and $10 ITEX dollars ($130 ITEX dollars annually). Transaction and
      association fees composed 95% and 96% of our total revenue in 2008 and 2007,
      respectively.





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.




26


As
      discussed below, we generally do not record revenues or expenses in our
      financial statements for ITEX dollars we receive from or expend to members
      or
      Brokers, but we do record revenues and expenses for ITEX dollars we spend on
      various products or services where the value of those ITEX dollars is readily
      determinable (see below, “Accounting for ITEX Dollar Activity”). Comparative
      results are as follows (in thousands):




ITEX
                Dollar Summary
            
            Year
                Ended July 31,2008
            
            2007Fees
                received from the Marketplace
            
            $
            5,179
            
            $
            4,370Expenditures
                to and for the Marketplace
            
            
            (5,193
            )
            
            (4,366
            )Increase
                (decrease)
            
            $
            (14
            )
            $
            4





*Gross
      versus Net Revenue Recognition*





In
      the
      normal course of business, we act as administrator of 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
      on
      our Statements of 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 Marketplace
      members directly pursuant to contractual agreements with them for which we
      establish the terms, 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. Our policy is to
      record transactions at the fair value of products or services received when
      those values are readily determinable. Most of our ITEX dollar transactions
      during the periods presented in the accompanying financial statements lacked
      readily determinable fair values and were recorded at the cost basis of the
      trade dollars surrendered which we have determined to be 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. In addition, there is no cost basis to us for ITEX
      dollars. Our conclusion may change if we could convert ITEX dollars into USD
      in
      the near term, as evidenced by a historical practice of converting ITEX dollars
      into USD shortly after receipt, or if quoted market prices in USD existed for
      the ITEX dollar.


27




We
      expend
      ITEX dollars primarily on the following items:





·  Co-op
      advertising with Marketplace members;


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


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





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 generally does not
      exist.





Because
      of all the above stated reasons, we believe that most of our ITEX dollar
      transactions during the periods presented in the accompanying financial
      statements lacked readily determinable fair values and were recorded at the
      cost
      basis of the trade dollars surrendered, which was zero. However, we have
      reflected in our financial statements those items that meet non-monetary
      recognition by having readily determinable fair values. Our consolidated
      statements of income include ITEX dollar expenses for corporate expenses for
      certain products or services we purchased at prices comparable to what we would
      have expended had we paid in USD.





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





*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.


28





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*





We
      account for income taxes in accordance with SFAS No. 109, *Accounting
      for Income Taxes* .
      Under
      SFAS No. 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.





We
      also
      account for income taxes in accordance with FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109* (“FIN
      48”). Under the provisions of FIN 48, we recognize the tax benefits of tax
      positions only if it is more like than not that the tax positions will be
      sustained, upon examination by the applicable taxing authorities, based on
      the
      technical merits of the positions. FIN 48 also requires that we record potential
      interest and penalties associated with our tax positions. We have opted to
      record interest and penalties as a component of income tax expense.





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 become 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 deductible.





On
      July
      31, 2008, we had NOLs of approximately $17,545 available to offset future
      taxable income. When circumstances warrant, we re-assess the realizability
      of
      our available NOLs for future periods. When this occurs, if we determine that
      the realizability of our NOLs has changed, we record the impact of that change
      as a component of our consolidated statements of income in that
      period.





The
      deferred tax assets recorded at July 31, 2008 represent our current estimate
      of
      all deferred tax benefits to be utilized in the current year and future periods
      beyond 2008.





*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”) No. 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, 2008 and we did not identify any
      impairment.


29





*Accounting
      for Acquisitions*





We
      account for acquisitions as a purchase in accordance with the provisions of
      SFAS
      No. 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
      No. 123(R), *Share-Base
      Payment* .
      Under
      the fair value recognition provisions of SFAS No. 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
      account for stock-based non-employee compensation in accordance with the
      provisions of SFAS No. 123, *Accounting
      for Stock-Based Compensation* and EITF
      Issue No. 96-18, *Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* .
      We use
      the Black-Scholes model to value such compensation and recognize the expense
      over the period we receive the respective services. Additionally, we re-measure
      any unvested portion of an award at each measurement date and record the
      adjustment over the remaining period we receive the services.





*Recent
      Accounting Pronouncements*





In
      June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
      Staff Position No. EITF 03-6-1, *Determining
      Whether Instruments Granted in Share-Based Payment Transactions Are
      Participating Securities* .
      EITF
      03-6-1 gives guidance as to the circumstances when unvested share-based payment
      awards should be included in the computation of EPS. EITF 03-6-1 is effective
      for us beginning August 1, 2009, the beginning of our 2010 reporting periods.
      We
      are currently assessing the impact of EITF 03-6-1 on our results of operations,
      cash flows and financial position.





In
      April 2008, the FASB issued FASB Staff Position No. FSP 142-3, *Determining
      the Useful Life of Intangible Assets* .
      FSP
      142-3 amends the factors to be considered in determining the useful life of
      intangible assets. Its intent is to improve the consistency between the useful
      life of an intangible asset and the period of expected cash flows used to
      measure its fair value. FSP 142-3 is effective for us beginning August 1, 2009,
      the beginning of our 2010 reporting periods. We are currently assessing the
      impact of FSP 142-3 on our results of operations, cash flows and financial
      position.


30





In
      March 2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities — an amendment to FASB
      Statement No. 133* .
      SFAS
      No. 161 enhances the disclosure requirements for derivative instruments and
      hedging activities under FASB Statement No. 133. Entities are required to
      provide disclosures about (i) how and why an entity uses derivative
      instruments, (ii) how derivative instruments and related hedged items are
      accounted for under Statement No. 133 and its related interpretations, and
      (iii) how derivative instruments and related hedged items affect an
      entity’s financial position, financial performance and cash flows. SFAS No. 161
      is effective for us beginning August 1, 2009, the beginning of our 2010
      reporting periods, though early adoption encouraged. We are currently assessing
      the impact of SFAS No. 161 on our results of operations, cash flows and
      financial position.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), *Business
      Combinations* ,
      which
      replaces SFAS No. 141 and amends several others. The statement retains the
      purchase method of accounting for acquisitions but changes the way we will
      recognize assets and liabilities. It also changes the way we will recognize
      assets acquired and liabilities assumed arising from contingencies, requires
      us
      to capitalize in-process research and development at fair value, and requires
      us
      to expense acquisition-related costs as incurred. SFAS No. 141R is
      effective for us on, but not before, August 1, 2009, the beginning of our
      2010 reporting periods.  SFAS No. 141R will apply prospectively to our
      business combinations completed on or after August 1, 2009 and will not require
      us to adjust or modify how we recorded any acquisition prior to that date.





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB
      51* ,
      which
      changes the accounting and reporting requirements for minority interests. Under
      the provisions of SFAS No. 160, minority interests will be re-characterized
      as
“noncontrolling interests” and reported as a component of equity separate from
      our equity.  Subsequently, we would be required to record all changes in
      interests that do not result in changes in control as equity transactions.
      In
      addition, we would report net income attributable to noncontrolling interests
      on
      the face of our consolidated Statements of Income.  Upon a loss of control,
      we would record the interest sold, as well as any interest retained, at fair
      value with recognition of any gain or loss in earnings. SFAS No. 160 is
      effective for us on, but not before, August 1, 2009, the beginning of our
      2010 reporting periods.  SFAS No. 160 will apply prospectively, except for
      the presentation and disclosure requirements, which will apply retrospectively.
      We do not expect the adoption of SFAS No. 160 will have a material impact
      on our results of operations, cash flows or financial position.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* ,
      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. We adopted
      certain provisions of SFAS No. 157 on August 1, 2008, the beginning of our
      2009
      reporting periods. The adoption of SFAS No. 157 affected our accounting policy
      regarding ITEX dollar activities but there will be no impact on future results
      of operations, cash flows and financial position. In February 2008, the FASB
      issued FASB Staff Position FAS 157-2, "Effective Date of FASB Statement No.
      157". FSP SFAS No. 157-2 delays the effective date SFAS No. 157 for
      non-financial assets and non-financial liabilities, except for items that are
      recognized or disclosed at fair value in the financial statements on a recurring
      basis. The non-financial assets and non-financial liabilities for which the
      Company has not applied the fair value provisions of SFAS No. 157 include
      goodwill and other intangible assets. Full adoption of SFAS No. 157 is effective
      for us beginning August 1, 2009, the beginning of our 2010 reporting periods.
      We
      are currently assessing the impact of the adoption of FSP SFAS No. 157-2 on
      our
      results of operations, cash flows and financial position.


31





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Liabilities — Including an Amendment
      of FASB Statement No. 115* ,
      which
      permits an entity to choose to measure many financial instruments and certain
      other items at fair value. Most of the provisions of SFAS No. 159 are elective;
      however the amendment to SFAS No. 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 No. 159 are
      effective for us on August 1, 2008, the beginning of our 2009 reporting periods.
      We have chosen not to adopt the fair value measurement provisions of SFAS No.
      159, so the impact of SFAS No. 159 will not have a significant impact on our
      results of operations, cash flows and financial position.




**ITEM
          8.** **FINANCIAL
          STATEMENTS AND SUPPLEMENTARY DATA**





The
      following financial statements of ITEX Corporation are included in Item
      8:





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, 2008 and 2007, 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, 2008 and 2007, and the consolidated results of their
      operations and their cash flows for each of the years ended July 31, 2008 and
      2007 in conformity with accounting principles generally accepted in the United
      States of America.





/s/
                Ehrhardt Keefe Steiner & Hottman PCEhrhardt
                Keefe Steiner & Hottman PC





Denver,
      Colorado


October
      1, 2008


33





**ITEX
      CORPORATION**


**CONSOLIDATED
      BALANCE SHEETS**


**(In
      thousands)**





July 31, 2008
            
            July 31, 2007ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            
            1,061
            
            
            1,753Accounts
                receivable, net of allowance of $361 and $265
            
            
            1,331
            
            
            1,113Prepaid
                expenses
            
            
            238
            
            
            141Loans
                and advances
            
            
            67
            
            
            94Deferred
                tax asset
            
            
            819
            
            
            614Notes
                receivable - corporate office sales
            
            
            204
            
            
            202Other
                current assets
            
            
            13
            
            
            19Total
                current assets
            
            
            3,733
            
            
            3,936Property
                and equipment, net of accumulated depreciation of $151 and
                $85
            
            
            176
            
            
            133Goodwill
            
            
            3,168
            
            
            1,740Deferred
                tax asset, net of current portion
            
            
            6,061
            
            
            6,735Intangible
                assets, net of amortization of $1,078 and $521
            
            
            2,093
            
            
            991Notes
                receivable - corporate office sales, net of current
                portion
            
            
            886
            
            
            680Other
                long-term assets
            
            
            32
            
            
            89Total
                assets
            
            
            16,149
            
            
            14,304LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                liabilities:Accounts
                and other expenses payable
            
            
            215
            
            
            122Commissions
                payable to brokers
            
            
            666
            
            
            -Accrued
                commissions to brokers
            
            
            713
            
            
            1,287Accrued
                expenses
            
            
            445
            
            
            333Deferred
                revenue
            
            
            75
            
            
            98Advance
                payments
            
            
            117
            
            
            115Current
                portion of notes payable
            
            
            591
            
            
            -Total
                current liabilities
            
            
            2,822
            
            
            1,955Long-term
                liabilities:Other
                long-term liabilities
            
            
            8
            
            
            19Total
                Liabilities
            
            
            2,830
            
            
            1,974Commitments
                and contingenciesStockholders’
                equity:Common
                stock, $.01 par value; 50,000 shares authorized; 17,816 shares and
                17,929
                shares issued and outstanding, respectively
            
            
            178
            
            
            179Additional
                paid-in capital
            
            
            28,908
            
            
            28,852Accumulated
                deficit
            
            
            (15,767
            )
            
            (16,701
            )Total
                stockholders' equity
            
            
            13,319
            
            
            12,330Total
                liabilities and stockholders’ equity
            
            
            16,149
            
            
            14,304





The
      accompanying notes are an integral part of these Consolidated Balance
      Sheets.


34





**ITEX
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**(In
      thousands except per share amounts)**





Year ended July 31,2008
            
            2007Revenue:Marketplace
                and other revenue
            
            $
            15,964
            
            $
            14,171Costs
                and expenses:Cost
                of Marketplace revenue
            
            
            10,335
            
            
            9,660Corporate
                salaries, wages and employee benefits
            
            
            1,634
            
            
            1,448Selling,
                general and administrative
            
            
            1,869
            
            
            1,257Depreciation
                and amortization
            
            
            625
            
            
            30114,463
            
            
            12,666Income
                from operations
            
            
            1,501
            
            
            1,505Other
                income:Interest,
                net
            
            
            16
            
            
            76Gain
                on sales of corporate-owned offices
            
            
            -
            
            
            70Other
            
            
            -
            
            
            1016
            
            
            156Income
                before income taxes
            
            
            1,517
            
            
            1,661Income
                tax expense (benefit), net
            
            
            583
            
            
            (2,843
            )Net
                income
            
            $
            934
            
            $
            4,504Net
                income per common share:Basic
            
            $
            0.05
            
            $
            0.25Diluted
            
            $
            0.05
            
            $
            0.25Weighted
                average shares outstanding:Basic
            
            
            17,643
            
            
            17,737Diluted
            
            
            17,858
            
            
            18,103





The
      accompanying notes are an integral part of these Consolidated Statements of
      Income.


35





**ITEX
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**(In
      thousands)**





Common Stock
            
            Additional
            
            AccumulatedShares
            
            Amount
            
            paid in capital
            
            Deficit
            
            TotalBalance, July
                31, 2006
            
            
            18,246
            
            $
            182
            
            $
            28,991
            
            $
            (21,205
            )
            $
            7,968Share-based
                board compensation
            
            
            120
            
            
            1
            
            
            82
            
            
            
            
            
            83Repurchase
                and retirement of common Share
            
            
            (438
            )
            
            (4
            )
            
            (318
            )
            
            
            
            
            (322
            )Share-based
                employee compensation
            
            
            
            
            
            
            
            
            97
            
            
            
            
            
            97Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            4,504
            
            
            4,504Balance,
                July 31, 2007
            
            
            17,929
            
            $
            179
            
            $
            28,852
            
            $
            (16,701
            )
            $
            12,330Share-based
                board compensation
            
            
            90
            
            
            1
            
            
            83
            
            
            
            
            
            84Repurchase
                and retirement of common Share
            
            
            (203
            )
            
            (2
            )
            
            (160
            )
            
            
            
            
            (162
            )Share-based
                employee compensation
            
            
            
            
            
            
            
            
            67
            
            
            
            
            
            67Share-based
                non-employee compensation
            
            
            
            
            
            
            
            
            66
            
            
            
            
            
            66Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            934
            
            
            934Balance,
                July 31, 2008
            
            
            17,816
            
            $
            178
            
            $
            28,908
            
            $
            (15,767
            )
            $
            13,319





The
      accompanying notes are an integral part of these Consolidated Statements of
      Stockholders’ Equity.


36





**ITEX
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(In
      thousands)**





Year ended July 31,2008
            
            2007**CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income
            
            $
            934
            
            $
            4,504Items
                to reconcile to net cash provided by operating activities:Depreciation
                and amortization
            
            
            625
            
            
            301Disposal
                of equipment
            
            
            2
            
            
            -Share-based
                compensation
            
            
            187
            
            
            169Increase
                (decrease) in allowance for uncollectible receivables
            
            
            (142
            )
            
            (52
            )Decrease
                (increase) in deferred income taxes
            
            
            469
            
            
            (2,900
            )Recognition
                of imputed interest
            
            
            (12
            )
            
            (12
            )Gain
                on sales of offices
            
            
            -
            
            
            (70
            )Amortization
                of loan issuance costs
            
            
            -
            
            
            24Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            78
            
            
            30Prepaid
                expenses
            
            
            (21
            )
            
            59Other
                current assets
            
            
            6
            
            
            (15
            )Accounts
                and other expenses payable
            
            
            93
            
            
            30Commissions
                payable to brokers
            
            
            666
            
            
            -Accrued
                commissions to brokers
            
            
            (574
            )
            
            119Accrued
                expenses
            
            
            121
            
            
            (80
            )Deferred
                revenue
            
            
            (23
            )
            
            (80
            )Long-term
                liabilities
            
            
            (11
            )
            
            19Advance
                payments
            
            
            (24
            )
            
            11Net
                cash provided by operating activities
            
            
            2,374
            
            
            2,057**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Business
                acquisitions
            
            
            (2,381
            )
            
            (15
            )Business
                sales
            
            
            50
            
            
            -Investment
                in a blogging technology company
            
            
            (30
            )
            
            -Payments
                received from notes receivable - corporate office sales
            
            
            198
            
            
            648Payments
                received from loans
            
            
            341
            
            
            284Advances
                on loans
            
            
            (274
            )
            
            (302
            )BXI
                earnout
            
            
            (150
            )
            
            (62
            )Purchase
                of property and equipment
            
            
            (112
            )
            
            (100
            )Net
                cash provided by (used in) investing activities
            
            
            (2,358
            )
            
            453**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Repayments
                on third party indebtedness
            
            
            (546
            )
            
            (749
            )Reacquired
                shares from non-affiliated parties
            
            
            (162
            )
            
            (322
            )Net
                cash used in financing activities
            
            
            (708
            )
            
            (1,071
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (692
            )
            
            1,439Cash
                and cash equivalents at beginning of period
            
            
            1,753
            
            
            314Cash
                and cash equivalents at end of period
            
            $
            1,061
            
            $
            1,753Supplemental
                cash flow information:Cash
                paid for interest
            
            
            72
            
            
            93Cash
                paid for taxes
            
            
            148
            
            
            157Supplemental
                non-cash investing and financing activitiesFinancing
                included in business acquisitions - see Note 10 -
                Acquisitions
            
            
            300
            
            
            -Non-cash
                amounts included in prepaid expenses due to share-based compensation
                - see
                Note 12 - Share-based compensation
            
            
            31
            
            
            71





The
      accompanying notes are an integral part of these Consolidated Statements of
      Cash
      Flows.


37






ITEX
      CORPORATION


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(In
      thousands, except per share amounts unless otherwise indicated)





NOTE
      1 -
      DESCRIPTION OF OUR COMPANY AND SUMMARY OF OUR SIGNIFICANT ACCOUNTING
      POLICIES




*Description
      of our 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 and corporate-owned prototype offices (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:





*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 in consolidation.




*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
                provisions and valuation allowances


·
            accrued
                commissions and other accruals


·
            litigation
                matters described herein





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





*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”, “2008” for August
      1, 2007 to July 31, 2008, “2007” for August 1, 2006 to July 31, 2007). We report
      our results as of the last day of each calendar month (“accounting
      cycle”).




38


*Accounting
      for Business Acquisitions*





We
      account for acquisitions as a purchase in accordance with the provisions of
      Statement of Financial Accounting Standards (“SFAS”) No. 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.





*Concentrations
      of Credit Risk*





At
      July
      31, 2008, 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 U.S. dollars and by the Canadian
      Deposit Insurance Corporation up to $100 Canadian dollars. Our cash balances
      have exceeded these insurable limits periodically throughout 2008 and 2007.
      At
      July 31, 2008 such balances exceeded these limits by $761.





*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 franchise fee commission structures. The
      aggregate total owed to us on July 31, 2008 is $67. The maximum balance owed
      is
      $30. Payoff dates for the loans are scheduled within one year.




*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. We record an expense for the costs of
      repair and maintenance as incurred.


39


*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 SFAS
      No. 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, 2008 and we did not identify any impairment.





*Intangible
      Assets*





Upon
      acquisition, we amortize costs of acquired intangible assets using the
      straight-line method over the contractual life of two years for non-compete
      agreements and the estimated life of six years for membership lists. 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 SFAS No. 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 2008, we determined no impairment was appropriate.





*Commissions
      Payable to Brokers and Accrued Commissions to Brokers*





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
      payable to brokers on our balance sheet as of July 31, 2008 represents
      commissions payable from the operating cycle ending July 31, 2008. In 2007,
      the
      closest operating cycle ended August 2, 2007 so as of July 31, 2007 all
      commissions owed were estimated and accrued. Accrued commissions to brokers
      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.




40




*Deferred
      Revenue*





We
      bill
      annual dues to certain members acquired as part of the acquisition of BXI.
      We
      defer this revenue and recognized it over the annual period to which it applies.





*Advance
      Payments*





In
      some
      cases, members pre-pay transaction and/or association fees or receive USD
      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, commissions
      payable and accrued commissions and other accruals approximate their fair values
      at July 31, 2008 due to the short-term nature of these instruments. All of
      these
      instruments have terms of less than one year.





The
      fair
      value 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 due to the short-term nature of these
      instruments. We have no debt which is classified as long-term as of July 31,
      2008.





*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” or “Cash”). 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 revenue 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 in USD and partially in ITEX dollars
      (see below, “Accounting for ITEX Dollar Activities”). We bill members for all
      fees at the end of each operating cycle. We track all financial activity in
      our
      internally developed database. Members have the option of paying USD fees
      automatically by credit card, by electronic funds transfer or by check. In
      the
      years ended July 31, 2008 and 2007, members made approximately 87% and 86%,
      respectively, of their payments through electronic funds transfer or by credit
      cards using our Preferred Member Autopay System (“Autopay System”). If paying
      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. Additionally, regardless of a member’s transaction activity, each
      operating cycle we charge most members an association fee of $20 USD ($260
      USD
      annually) and $10 ITEX dollars ($130 ITEX dollars annually). Transaction and
      association fees composed 95% and 96% of our total revenue in 2008 and 2007,
      respectively.




41


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





*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. Our policy is to
      record transactions at the fair value of products or services received when
      those values are readily determinable. Most of our ITEX dollar transactions
      during the periods presented in the accompanying financial statements lacked
      readily determinable fair values and were recorded at the cost basis of the
      trade dollars surrendered, which we have determined to be 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. In addition, there is no cost basis to us for ITEX
      dollars. Our conclusion may change if we could convert ITEX dollars into USD
      in
      the near term, as evidenced by a historical practice of converting ITEX dollars
      into USD shortly after receipt, or if quoted market prices in USD existed for
      the ITEX dollar.





We
      expend
      ITEX dollars primarily on the following items:




·
            Co-op
                advertising with Marketplace
                members;


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


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





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 generally does not
      exist.


42


Because
      of all the above stated reasons, we believe that most of our ITEX dollar
      transactions during the periods presented in the accompanying financial
      statements lacked readily determinable fair values and were recorded at the
      cost
      basis of the trade dollars surrendered, which was zero. However, we have
      reflected in our financial statements those items that meet non-monetary
      recognition by having readily determinable fair values. Our consolidated
      statements of income include ITEX dollar expenses for corporate expenses for
      certain products or services we purchased at prices comparable to what we would
      have expended had we paid in USD.





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





*Advertising
      Expenses*





We
      expense all advertising costs as incurred.





*Share-Based
      Compensation Expense*





We
      account for share-based compensation in accordance with the provisions of SFAS
      No. 123(R), *Share-Base
      Payment* .
      Under
      the fair value recognition provisions of SFAS No. 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
      account for stock-based non-employee compensation in accordance with the
      provisions of SFAS No. 123, *Accounting
      for Stock-Based Compensation* and EITF
      Issue No. 96-18, *Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* .
      We use
      the Black-Scholes model to value such compensation and recognize the expense
      over the period we receive the respective services. Additionally, we re-measure
      any unvested portion of an award at each measurement date and record the
      adjustment over the remaining period we receive the services. 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. During 2008, we issued 100 warrants to a consultant for a fair value
      of
      $66. We did not issue stock options in 2008 or 2007.





*Operating
      Leases*





We
      account for our executive office lease and other property leases in accordance
      with SFAS No. 13, *Accounting
      for Leases* ,
      and
      FASB Technical Bulletin 85-3, *Accounting
      for Operating Leases with Scheduled Rent Increases (as amended)* .
      Accordingly, because our executive office 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.





*Accounting
      for Income Taxes*





We
      account for income taxes in accordance with SFAS No. 109, *Accounting
      for Income Taxes* .
      Under
      SFAS No. 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





We
      also
      account for income taxes in accordance with FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109* (“FIN
      48”). Under the provisions of FIN 48, we recognize the tax benefits of tax
      positions only if it is more like than not that the tax positions will be
      sustained, upon examination by the applicable taxing authorities, based on
      the
      technical merits of the positions. FIN 48 also requires that we record potential
      interest and penalties associated with our tax positions. We have opted to
      record interest and penalties as a component of income tax expense.





*Contingencies*





In
      the
      normal course of our business we are periodically involved in litigation or
      claims. We follow the provisions of SFAS No. 5, *Accounting
      for Contingencies,* to
      record
      litigation or claim-related expenses. We evaluate, among other factors, the
      degree of probability of an unfavorable outcome and the ability to make a
      reasonable estimate of the amount of loss. We accrue for settlements when the
      outcome is probable and the amount or range of the settlement can be reasonably
      estimated. In addition to our judgments and use of estimates, there are inherent
      uncertainties surrounding litigation and claims that could result in actual
      settlement amounts that differ materially from estimates. We expense our legal
      costs associated with these matters when incurred.





*Income
      (Loss) Per Share*





We
      prepare our financial statements in accordance with the provisions of SFAS
      No.
      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, 2008, we had no contracts to
      issue
      common stock, but we did have 100 warrants outstanding.





NOTE
      2 -
      RECENT ACCOUNTING PRONOUNCEMENTS





In
      June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
      Staff Position No. EITF 03-6-1, *Determining
      Whether Instruments Granted in Share-Based Payment Transactions Are
      Participating Securities* .
      EITF
      03-6-1 gives guidance as to the circumstances when unvested share-based payment
      awards should be included in the computation of EPS. EITF 03-6-1 is effective
      for us beginning August 1, 2009, the beginning of our 2010 reporting periods.
      We
      are currently assessing the impact of EITF 03-6-1 on our results of operations,
      cash flows and financial position.





In
      April 2008, the FASB issued FASB Staff Position No. FSP 142-3, *Determining
      the Useful Life of Intangible Assets* .
      FSP
      142-3 amends the factors to be considered in determining the useful life of
      intangible assets. Its intent is to improve the consistency between the useful
      life of an intangible asset and the period of expected cash flows used to
      measure its fair value. FSP 142-3 is effective for us beginning August 1, 2009,
      the beginning of our 2010 reporting periods. We are currently assessing the
      impact of FSP 142-3 on our results of operations, cash flows and financial
      position.


44





In
      March 2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities — an amendment to FASB
      Statement No. 133* .
      SFAS
      No. 161 enhances the disclosure requirements for derivative instruments and
      hedging activities under FASB Statement No. 133. Entities are required to
      provide disclosures about (i) how and why an entity uses derivative
      instruments, (ii) how derivative instruments and related hedged items are
      accounted for under Statement No. 133 and its related interpretations, and
      (iii) how derivative instruments and related hedged items affect an
      entity’s financial position, financial performance and cash flows. SFAS No. 161
      is effective for us beginning August 1, 2009, the beginning of our 2010
      reporting periods, though early adoption encouraged. We are currently assessing
      the impact of SFAS No. 161 on our results of operations, cash flows and
      financial position.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), *Business
      Combinations* ,
      which
      replaces SFAS No. 141 and amends several others. The statement retains the
      purchase method of accounting for acquisitions but changes the way we will
      recognize assets and liabilities. It also changes the way we will recognize
      assets acquired and liabilities assumed arising from contingencies, requires
      us
      to capitalize in-process research and development at fair value, and requires
      us
      to expense acquisition-related costs as incurred. SFAS No. 141R is
      effective for us on, but not before, August 1, 2009, the beginning of our
      2010 reporting periods.  SFAS No. 141R will apply prospectively to our
      business combinations completed on or after August 1, 2009 and will not require
      us to adjust or modify how we recorded any acquisition prior to that date.





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB
      51* ,
      which
      changes the accounting and reporting requirements for minority interests. Under
      the provisions of SFAS No. 160, minority interests will be re-characterized
      as
“noncontrolling interests” and reported as a component of equity separate from
      our equity.  Subsequently, we would be required to record all changes in
      interests that do not result in changes in control as equity transactions.
      In
      addition, we would report net income attributable to noncontrolling interests
      on
      the face of our consolidated Statements of Income.  Upon a loss of control,
      we would record the interest sold, as well as any interest retained, at fair
      value with recognition of any gain or loss in earnings. SFAS No. 160 is
      effective for us on, but not before, August 1, 2009, the beginning of our
      2010 reporting periods.  SFAS No. 160 will apply prospectively, except for
      the presentation and disclosure requirements, which will apply retrospectively.
      We do not expect the adoption of SFAS No. 160 will have a material impact
      on our results of operations, cash flows or financial position.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* ,
      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. We adopted
      certain provisions of SFAS No. 157 on August 1, 2008, the beginning of our
      2009
      reporting periods. The adoption of SFAS No. 157 affected our accounting policy
      regarding ITEX dollar activities but there will be no impact on future results
      of operations, cash flows and financial position. In February 2008, the FASB
      issued FASB Staff Position FAS 157-2, "Effective Date of FASB Statement No.
      157". FSP SFAS No. 157-2 delays the effective date SFAS No. 157 for
      non-financial assets and non-financial liabilities, except for items that are
      recognized or disclosed at fair value in the financial statements on a recurring
      basis. The non-financial assets and non-financial liabilities for which the
      Company has not applied the fair value provisions of SFAS No. 157 include
      goodwill and other intangible assets. Full adoption of SFAS No. 157 is effective
      for us beginning August 1, 2009, the beginning of our 2010 reporting periods.
      We
      are currently assessing the impact of the adoption of FSP SFAS No. 157-2 on
      our
      results of operations, cash flows and financial position.


45





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Liabilities — Including an Amendment
      of FASB Statement No. 115* ,
      which
      permits an entity to choose to measure many financial instruments and certain
      other items at fair value. Most of the provisions of SFAS No. 159 are elective;
      however the amendment to SFAS No. 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 No. 159 are
      effective for us on August 1, 2008, the beginning of our 2009 reporting periods.
      We have chosen not to adopt the fair value measurement provisions of SFAS No.
      159, so the impact of SFAS No. 159 will not have a significant impact on our
      results of operations, cash flows and financial position.





NOTE
      3 -
      CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, COMMISSIONS PAYABLE TO BROKERS
      AND ACCRUED COMMISSIONS TO BROKERS





We
      compute commissions to Brokers as a percentage of USD collections of our
      revenues from association fees, transactions fees, and other fees. Commissions
      payable to brokers include amounts owed for the most recently ended operating
      cycle. We pay commissions in two tranches with approximately 50% paid
      approximately one week after the end of the operating cycle and the remainder
      paid approximately two weeks later. Commissions accrued are the estimated
      commissions on the net accounts receivable balance and USD collections on
      accounts receivable since the most recently ended operating cycle.





Our
      payments for salaries and wages to our employees occur on the same bi-weekly
      schedule as our commission payments to Brokers.





The
      timing differences between our operating cycles and our accounting cycles cause
      fluctuations in the comparative balances of cash and cash equivalents, accounts
      receivable, commissions payable to brokers and accrued commissions to brokers
      presented on the consolidated balance sheets. Depending on the length of time
      between the end of the operating cycle and the end of the accounting cycle,
      members’ payments on accounts receivable balances may vary. The longer the time,
      the greater amount of USD collections causes an increase in the reported cash
      and cash equivalents balance and a decrease in the net accounts receivable
      balance. The difference between our operating cycle ending date and the
      reporting date for July 31, 2007 was 18 business days. In 2008, our operating
      cycle and accounting cycle both ended on July 31, 2008. Therefore, commissions
      earned for that operating cycle were known and payable.





NOTE
      4 -
      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. During 2007, we refinanced a note
      receivable at current market rates, extended the termination dates on some
      notes
      receivable and modified the periodic payments accordingly.





In
      the first quarter of 2008, we purchased a membership list, representing
      approximately two thousand member businesses, from Intagio (see Note
      10 - Acquisitions). These new member businesses are located primarily
      in six regions in the United States, four of which were previously not served
      by
      existing Brokers. We retained three of these regions as new corporate owned
      prototype offices. We combined and sold two of the regions we acquired in the
      Intagio asset purchase to an existing franchisee for $100 ITEX dollars plus
      $260
      USD composed of a one-time payment of $50 and a note receivable for $210 with
      a
      term of approximately seven years. Additionally, we sold a region acquired
      in
      the Intagio asset purchase for $200 to an existing franchisee who already had
      one of the notes receivable issued in 2004. Operating cycle payments remain
      the
      same on the note, but we extended the term to account for the $200 purchase
      price. Originally, the payoff date of the note was scheduled to be 2009, but
      after the sale, the payoff date of the note increased to 2011. We increased
      the
      principal due on that note by the present value of the payments equal to
      $184.


46





The
      aggregate total owed to us on July 31, 2008 is $1,090. Balances owed range
      from
      $14 to $337. Payoff dates for the loans are scheduled between 2008 and 2016.





Original PrincipalBalance on 2004
              Notes
            
            Principal Additions
              in 2008
            
            Balance Receivable
              at
              July 31, 2008
            
            Current Portion
            
            Long-Term
              Portion$
            2,695
            
            $
            394
            
            $
            1,090
            
            $
            204
            
            $
            886





The
      activity for corporate office receivables was as follows:





Balance
                at July 31, 2006
            
            $
            1,448Sale
                of corporate-owned office
            
            
            70Interest
                income at stated rates
            
            
            51Imputed
                interest income
            
            
            12Payments
                received
            
            
            (699
            )Balance
                at July 31, 2007
            
            $
            882Additions
                from sales of Intagio regions
            
            
            394Interest
                income at stated rates
            
            
            66Imputed
                interest income
            
            
            12Payments
                received
            
            
            (264
            )Balance
                at July 31, 2008
            
            $
            1,090




47





NOTE
      5 -
      PROPERTY AND EQUIPMENT





The
      following table summarizes property and equipment:





**July
                31, 2008****Fixed
                Asset Type**
            
            **Estimated
                Useful Life**
            
            **Cost**
            
            **Accumulated
                Depreciation**
            
            **Net Book**
              **Value**Computers
            
            
            3
                years
            
            $
            178
            
            $
            (72
            )
            $
            106Software
            
            
            3
                years
            
            
            60
            
            
            (31
            )
            
            29Equipment
            
            
            7
                years
            
            
            24
            
            
            (13
            )
            
            11Furniture
            
            
            7
                years
            
            
            13
            
            
            (11
            )
            
            2Leasehold
                Improvements
            
            
            3.3
                years
            
            
            52
            
            
            (24
            )
            
            28$
            327
            
            $
            (151
            )
            $
            176





**July
                31, 2007****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
      assets’ estimated useful lives. Depreciation expense for property and equipment
      was $49 and $43 for the years ending July 31, 2008 and 2007,
      respectively.





In
      the
      second quarter of 2007, 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. Amortization expense for leasehold improvements as $16 and $8 for the
      years ending July 31, 2008 and 2007, respectively.




NOTE
      6
– INTANGIBLE
      ASSETS





We
      acquired a membership list as part of our acquisition of BXI in the fourth
      quarter of 2005. We acquired an additional membership list from a franchisee
      in
      the fourth quarter of 2007. In connection with our asset acquisition from
      Intagio in the first quarter of 2008 and ATX The Barter Company in the third
      quarter of 2008 (see Note
      11 - Acquisions), we acquired additional membership lists and
      non-compete agreements. We subsequently sold part of the membership list
      acquired from Intagio. Changes in the carrying amount of the intangible assets
      are summarized as follows:


48





Membership
              Lists
            
            Non-Compete
                Agreement
            
            Total Intagible
                AssetsBalance
                as of July 31, 2006
            
            $
            1,226
            
            $
            -
            
            $
            1,226Acquisition
                of membership list
            
            
            15
            
            
            -
            
            
            15Amortization
            
            
            (250
            )
            
            -
            
            
            (250
            )Balance
                as of July 31, 2007
            
            $
            991
            
            $
            -
            
            $
            991Additions
                from the Intagio acquisition
            
            
            1,350
            
            
            210
            
            
            1,560Sales
                of certain regions acquired in theIntagio
                acquisition
            
            
            (213
            )
            
            -
            
            
            (213
            )Additions
                from the ATX Barter acquisition
            
            
            231
            
            
            81
            
            
            312Amortization
            
            
            (441
            )
            
            (116
            )
            
            (557
            )Balance
                as of July 31, 2008
            
            $
            1,918
            
            $
            175
            
            $
            2,093




The
      following schedule outlines the expected intangible related amortization expense
      over the next six years:




Year
                ending July 31,
            
            Membership List
                Amoritization
            
            Non-Compete
              Agreement
              Amoritization
            
            Total Amoritization2009
            
            $
            480
            
            $
            132
            
            $
            6122010
            
            
            480
            
            
            27
            
            
            5072011
            
            
            460
            
            
            16
            
            
            4762012
            
            
            230
            
            
            -
            
            
            2302013
            
            
            230
            
            
            -
            
            
            2302014
            
            
            38
            
            
            -
            
            
            38Total
            
            $
            1,918
            
            $
            175
            
            $
            2,093




NOTE
      7 -
      NOTES PAYABLE AND LINE OF CREDIT





On
      August 1, 2007, we incurred a $1,137 note payable to The Intagio Group, Inc.
      in
      the form of a senior subordinated secured promissory note (see Note
      10 –
      Acquisitions) with interest at 8.0% and repayments in 24 equal
      monthly installments. Our total principal repayments during 2008 were $546
      leaving an outstanding balance as of July 31, 2008 of $591.





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, 2008. During 2008, we borrowed and
      repaid $300 to fund the Intagio asset acquisition (see Note
      10 – Acquisitions). Additionally, we borrowed and repaid $210 and
      $175 in 2008 and 2007, respectively, to meet our short term cash flow needs.
      There is no outstanding balance under this line of credit as of July 31, 2008.
      We may utilize this credit facility for short-term needs in the
      future.





Subsequent
      to July 31, 2008, we incurred a $688 note payable to The Intagio Group, Inc.
      in
      the form of a senior subordinated secured promissory note (see Note
      19 – Subsequent Events) with interest at 8.0% and repayments in 11
      equal monthly installments.




49




NOTE
      8 -
      COMMITMENTS





We
      utilize leased facilities in the normal course of our business. As of July
      31,
      2008, the future minimum commitments under these operating leases are as
      follows:





Executive
                office
            
            Prototype
                office
            
            Combined
                TotalLocation:
            
            Bellevue,
                Washington
            
            Solon,
                OhioExpiration
                date:
            
            April
                30, 2010
            
            May
                31, 2009Lease
                commitments for
              the
                year ending July 31,
            
            U.S.
              dollars
            
            ITEX
              dollars
            
            U.S.
              dollars
            
            ITEX
              dollars
            
            U.S.
              dollars
            
            ITEX
              dollars2009
            
            $
            155
            
            $
            -
            
            $
            18
            
            $
            10
            
            $
            173
            
            $
            102010
            
            
            116
            
            
            -
            
            
            -
            
            
            -
            
            
            116
            
            
            -Total
            
            $
            271
            
            $
            -
            
            $
            18
            
            $
            10
            
            $
            289
            
            $
            10




The
      lease
      expense for our executive office space and corporate prototype offices for
      the
      years ended July 31, 2008 and 2007 was $232 and $134, respectively.




We
      have
      not leased any equipment in 2008 or 2007.




We
      have
      purchase commitments for telecommunications and data communications as well
      as
      for promotion and advertising. As of July 31, 2008, the future minimum
      commitments in both U.S. dollars and ITEX dollars under these purchase
      commitments are as follows:





Telecommunications
              and data
              communications
            
            Promotion and
              advertising
            
            TotalPurchase
                commitments for
              the
                year ending July 31,
            
            U.S.
              dollars
            
            ITEX
              dollars
            
            U.S.
              dollars
            
            ITEX
              dollars
            
            U.S.
              dollars
            
            ITEX
              dollars2009
            
            $
            28
            
            $
            -
            
            $
            90
            
            $
            17
            
            $
            118
            
            $
            17Thereafter
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            28
            
            $
            -
            
            $
            90
            
            $
            17
            
            $
            118
            
            $
            17





NOTE
      9
– ITEX DOLLAR
      ACTIVITY





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. We record
      transactions at the fair value of products or services received when those
      values are readily determinable. Most of our ITEX dollar transactions during
      the
      periods presented in these financial statements lacked readily determinable
      fair
      values and,  in
      accordance with APB 29,  were
      recorded at the cost basis of the trade dollars surrendered, which we have
      determined to be zero.





In
      2008,
      we utilized ITEX dollars on certain products and services for corporate purposes
      such as legal, consulting and marketing services. We include these ITEX dollar
      activities on our Consolidated Statements of Income. The following ITEX dollar
      activity is included in our Consolidated Statements of Income for the years
      ending July 31, 2008 and 2007 (in thousands):


50





Year
                ended July 31,2008
            
            2007Revenue:Marketplace
                and other revenue
            
            $
            225
            
            $
            -Costs
                and expenses:Cost
                of Marketplace revenue
            
            
            -
            
            
            -Corporate
                salaries, wages and employee benefits
            
            
            1
            
            
            -Selling,
                general and administrative
            
            
            224
            
            
            -Depreciation
                and amortization
            
            
            -
            
            
            -225
            
            
            -Income
                from operations
            
            
            -
            
            
            -




We
      do not
      include any ITEX dollar amounts on our Consolidated Balance Sheets or
      Consolidated Statement of Stockholders’ Equity and we do not include any ITEX
      dollar activities on our Consolidated Statement of Cash Flows.




NOTE
      10 —
ACQUISITIONS




*ATX
      The Barter Company*




On
      February 1, 2008, in order to increase our Marketplace member base, we acquired
      from ATX The Barter Company, Inc. (“ATX The Barter Company”) certain assets of a
      commercial trade exchange network including a membership list of approximately
      four hundred member businesses. These new member businesses are located in
      or
      near Cleveland, Ohio. The total acquisition cost, funded from our existing
      cash
      balances, included:




a)
            USD
                in the amount of $325 paid to ATX The Barter
                Company


b)
            Third
                party acquisition related costs of $9




The
      following table summarizes the purchase consideration and fair values of the
      assets acquired at the date of acquisition:




Purchase
                Price ConsiderationCash
                paid to ATX Barter
            
            $
            325Acquisition
                costs
            
            
            9Total
                consideration paid
            
            $
            334Assets
                AcquiredMembership
                list
            
            $
            231Non-compete
                agreement
            
            
            81Accounts
                receivable
            
            
            17Goodwill
            
            
            5Total
                assets
            
            $
            334




We
      have
      included the results of operations for ATX The Barter Company in our financial
      statements since February 1, 2008. We will amortize the membership list over
      a
      period of six years and the non-compete agreement over three
      years.


51




*Intagio*




On
      August
      1, 2007, in order to increase our Marketplace member base, we acquired from
      The
      Intagio Group, Inc. (“Intagio”) certain assets of a commercial trade exchange
      network including a membership list of approximately two thousand member
      businesses. These new member businesses are located primarily in six regions in
      the United States, four of which were previously not served by existing Brokers.
      The total acquisition cost included:




1.
            USD
                in the amount of $2,000 paid to
                Intagio




2.
            Third
                party acquisition related costs of $47




3.
            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.




4.
            If
                and to the extent we achieve certain revenue targets during the four
                quarters beginning August 1, 2008, additional USD payments totaling
                up to
                $150.





To
      fund
      the $2,000 USD payment, we utilized $1,700 from our cash and cash equivalent
      balances and borrowed $300 on our line of credit. During the first quarter
      of
      2008, we repaid the $300 balance on our line of credit in full and there was
      no
      balance outstanding as of July 31, 2008.





As
      of
      July 31, 2008, we have repaid $546 on the promissory note. Future minimum
      commitments under the promissory note are $591 due in 2009.





After
      the
      acquisition of the Intagio membership list, we sold three of the newly acquired
      regions to two existing franchisees in two separate transactions. On August
      1,
      2007, we sold the greater New York City region comprised of approximately 200
      former Intagio member businesses to our existing franchisee in New Jersey for
      $200. We financed the entire sales price by adding the present value of the
      payments, $184, to an existing note receivable from the franchisee. We modified
      the repayment terms accordingly to repay the entire balance in equal payments
      through 2011. We recorded a reduction of goodwill and membership lists and
      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 franchisee
      in
      Connecticut for $260. We received $50 of the purchase price in USD and financed
      the remaining $210 at 7.5% interest with payments in equal installments through
      2014. We recorded a reduction of goodwill and membership lists and did not
      record a gain or loss on this transaction.




52





The
      following table summarizes the purchase consideration and fair values of the
      assets acquired at the date of acquisition:





Purchase
                Price ConsiderationCash
                paid to Intagio
            
            $
            2,000Acquisition
                costs
            
            
            47Notes
                payable assumed
            
            
            1,137Total
                consideration paid
            
            $
            3,184Assets
                AcquiredMembership
                list
            
            $
            1,350Non-compete
                agreement
            
            
            210Accounts
                receivable
            
            
            137Goodwill
            
            
            1,513Advance
                payments
            
            
            (26
            )Total
                assets
            
            $
            3,184




We
      have
      included the results of operations for Intagio in our financial statements
      since
      August 1, 2007. We will amortize the membership list over a period of six years
      and the non-compete agreement over two years.





If
      we had
      acquired Intagio on August 1, 2006, our pro-forma combined results of operations
      would have been:





Year
                endedJuly
                31, 2007(unaudited)Revenue:Marketplace
                and other revenue
            
            $
            15,577Net
                income
            
            
            4,442Net
                income per common share:Basic
            
            $
            0.25Diluted
            
            $
            0.25




In
      accordance with SFAS No. 141, *Business
      Combinations,* in
      the
      above two acquisitions, we assigned all of the acquired identifiable assets
      and
      liabilities a portion of the cost of the acquisition
      based on their respective fair values. In our allocation of purchase price
      to
      all identifiable assets acquired in connection with both acquisitions, we
      evaluated various criteria and assumptions. When estimating the fair value
      for
      all identifiable intangible assets acquired in connection with theseacquisitions,
      our evaluation included the preparation of financial projections, supporting
      financial data and consideration of a number of factors, including, in the
      case
      of the Intagio acquisition, the analysis of a third-party valuation firm. We
      provided the third-party valuation firm with the data and analysis we utilized
      in our evaluation, and we reviewed drafts of their conclusions prior to making
      the allocations. We are responsible for the appropriateness of the estimated
      fair values allocated to the identifiable intangible assets including membership
      lists, non-compete agreements and goodwill.




53





NOTE
      11 —
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 are seeking 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.  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 to date.  Plaintiffs unsuccessfully appealed
      this decision.  Plaintiff subsequently brought a motion for leave to lift
      the stay of the action and allow it to proceed. In
      December 2007 the plaintiffs' motion was heard and the court ordered that upon
      completion of the costs assessment process and payment of the costs assessed,
      the stay of proceedings is lifted.  In April 2008, we received payment of
      the costs awarded. The **** hearing
      date for our motion to stay or dismiss the claim based on lack of subject matter
      jurisdiction pursuant to the forum selection clause in our Trading Rules was
      held on September 10, 2008. We await a ruling on the motion.





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.





We
      will
      vigorously defend against the 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.


54





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
      12
– SHARE-BASED
      COMPENSATION





We
      account for share-based compensation in accordance with the provisions of SFAS
      No. 123(R), *Share-Base
      Payment* .
      Under
      the fair value recognition provisions of SFAS No. 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
      2008 and 2007, respectively, we issued 30 and 40 shares of fully vested common
      stock to each of our three directors as compensation for their service to ITEX
      Corporation in the calendar years ended December 31, 2008 and 2007. The fair
      value of these shares as of the grant date was $85 and $83, respectively.





As
      of
      July 31, 2008, there are 285 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
            
            
            -Granted
            
            
            (90
            )
            
            90
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -Balance
                at July 31, 2008
            
            
            285
            
            
            1,715
            
            
            -Vesting
                as of July 31, 2008Shares
                Vested
            
            
            
            
            
            1,602
            
            
            -Shares
                Unvested
            
            
            
            
            
            113
            
            
            -Balance
                at July 31, 2008
            
            
            
            
            
            1,715
            
            
            -




55




During
      2008, we retained an outside company for investment advisory and financial
      communications assistance. As partial compensation, we granted the company
      100
      warrants with a seven year life. We calculated the fair value of these warrants
      using the Black-Scholes model with the following assumptions:




AssumptionsContractual
                life (in years)
            
            
            7Annualized
                volatility
            
            
            73.09
            %Dividend
                rate
            
            
            0
            %Average
                risk free interest rate
            
            
            2.93
            %




We
      determined the fair value of these warrants was $66. We defer the fair value
      of
      the warrant issued and amortize the expense over the contractual service period
      of thirteen months.




We
      recorded the following in share-based compensation as a component of selling,
      general and administrative expense on our Consolidated Statements of
      Income:




Year
                  Ended July 31,2008
              
              2007
              
              2006Share-based
                  compensation
              
              $
              187
              
              $
              169
              
              $
              121





NOTE
      13 -
      STOCKHOLDERS’ EQUITY





In
      addition to our common stock activity described in Note
      12
– Share-Based
      Compensation ,
      to
      reduce the number of shares of our common stock outstanding, we repurchased
      a
      total of 203 and 438 shares of ITEX common stock in 2008, 2007,
      respectively




NOTE
      14 -
      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, 2008, we had NOLs of approximately $17,545 available to offset future
      taxable income. These are composed of approximately $15,640 from ITEX operating
      losses and approximately $1,905 from BXI operating losses. SFAS No. 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
      of
      2008, we performed an assessment of our available NOLs because of an additional
      year of increased profitability and our anticipated acquisition of certain
      assets of a media services company which was completed subsequent to July 31,
      2008 on August 1, 2008. In that assessment, we concluded that it was more likely
      than not that additional NOLs would result in realizable deferred tax assets.
      As
      of July 31, 2008 and 2007, we have no valuation allowance on available Federal
      NOLs.


56




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:





Year
                Ended July 31,2008
            
            2007Pre-tax
                financial income
            
            $
            1,517
            
            $
            1,661Federal
                tax expense computed at the statutory rate of 34%
            
            
            516
            
            
            565State
                tax expense
            
            
            81
            
            
            78Change
                in valuation allowance
            
            
            -
            
            
            (3,499
            )Permanent
                and other differences
            
            
            (14
            )
            
            13Net
                tax benefit
            
            $
            583
            
            $
            (2,843
            )




Our
      income tax benefit is composed of the following:





Year
                Ended July 31,2008
            
            2007Deferred
                tax (expense) benefit
            
            $
            (469
            )
            $
            2,901Federal
                tax expense
            
            
            (30
            )
            
            (30
            )State
                tax expense
            
            
            (84
            )
            
            (28
            )Net
                tax (expense) benefit
            
            $
            (583
            )
            $
            2,843





The
      tax
      effects of temporary differences that give rise to significant portions of
      deferred tax assets and liabilities at July 31, 2008 and 2007 are presented
      below:




57







July
                31,2008
            
            2007Deferred
                tax assets:Tax
                deductible BXI goodwill
            
            $
            611
            
            $
            707Net
                operating loss carryforwards
            
            
            6,198
            
            
            6,846Reserve
                for uncollectible receivables
            
            
            126
            
            
            93Other
                temporary differences
            
            
            245
            
            
            124$
            7,180
            
            $
            7,770Deferred
                Tax LiabilitiesMembership
                lists not deductible for tax
            
            $
            253
            
            $
            340Unearned
                stock compensation
            
            
            47
            
            
            81$
            300
            
            $
            421Net
                deferred tax asset before valuation allowance
            
            $
            6,880
            
            $
            7,349Valuation
                allowance
            
            
            -
            
            
            -Net
                deferred tax asset
            
            $
            6,880
            
            $
            7,349





The
      following components are included in net deferred tax assets in the accompanying
      balance sheets:





Current
                Deferred Tax AssetsCurrent
                deferred tax asset
            
            $
            866
            
            $
            696Current
                deferred tax liability
            
            
            (47
            )
            
            (82
            )Valuation
                allowance
            
            
            -
            
            
            -Net
                current deferred tax asset
            
            $
            819
            
            $
            614Non-Current
                Deferred Tax AssetsNon-current
                deferred tax asset
            
            $
            6,314
            
            $
            7,075Non-current
                deferred tax liability
            
            
            (253
            )
            
            (340
            )Valuation
                allowance
            
            
            -
            
            
            -Net
                non-current deferred tax asset
            
            $
            6,061
            
            $
            6,735




ITEX
      Federal NOLs of approximately $15,640 expire, if unused, from 2018 to 2023.
      BXI
      Federal NOLs of approximately $1,905 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 $4,674 which, if unused, expire from 2012 to 2015. Additionally,
      we have AMT credits of $88 available to offset future taxes payable.





On
      August
      1, 2007, we adopted the provisions of FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109* (“FIN
      48”). As of July 31, 2008, in accordance with FIN 48, we have recorded
      unrecognized tax benefits of $193 as follows:




58




Year
                Ended July 31,2008Balance
                upon adoption on August 1, 2007
            
            $
            132Increases
                as a result of tax positions taken during 2008
            
            
            19Increases
                as a result of tax positions taken in prior years
            
            
            42Balance
                at July 31, 2008
            
            $
            193


We
        file
        income tax returns in the United States and Canadian federal jurisdictions
        as
        well as various United States state jurisdictions. The tax years that remain
        subject to examination are 2004 through 2007 in the United States. We also
        have
        available NOLs dating from 1998 which could be subject to examination by
        taxing
        authorities. The tax years that remain subject to examination in Canada are
        2001
        through 2007. We do not believe there will be any material changes in our
        unrecognized tax positions over the next twelve months.
 
 As
        of
        July 31, 2008, accrued expenses for uncertain tax positions related primarily
        to
        state jurisdictions on our consolidated balance sheet of $193 included $49
        for
        interest and penalties associated with unrecognized tax benefits.
 
 NOTE
        15 –
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 $67 and $54 to
        the plan during 2008 and 2007, respectively.
  NOTE
        16 –
GOODWILL
 
 As
        a
        result of our acquisition of BXI in 2005, we recorded $1,689 in goodwill.
        In
        2008, we recorded an additional $1,513 in goodwill as a result of our asset
        purchase from Intagio which included $47 in acquisition costs. We subsequently
        reduced goodwill by $231 for sales of certain assets to existing franchisees
        (see Note 10 – Acquisitions). Pursuant to the terms of the BXI Agreement of
        Merger dated June 30, 2005, to the extent we and our subsidiaries (including
        BXI) achieve certain revenue targets during the first twelve full quarters
        following the signing of the Merger Agreement, a maximum of $450 additional
        payments may be payable based on earnings over these quarters (“BXI earnout”).
        The BXI earnout is calculated on quarterly revenue in excess of $3,000 less
        certain legal expenses. The maximum quarterly BXI earnout payment before
        deductions is $38. The BXI earnout payments can be reduced by one half of
        the
        amount we spend to satisfy certain BXI legal claims we assumed. Pursuant
        to the
        terms of the Asset Purchase Agreement dated July 25, 2007 with Intagio, we
        entered into an additional, but separate, earnout agreement with all of the
        same
        provisions of the BXI earnout except for the term and the payment reduction
        for
        amounts spent on legal claims (“Intagio earnout”). The Intagio earnout is not
        concurrent with the BXI earnout. Instead, the Intagio earnout period begins
        when
        the BXI earnout ends on July 31, 2008. The Intagio earnout term is four full
        quarters ending July 31, 2009. Payments on the Intagio earnout could be a
        maximum of $150.
 
 As
        of
        July 31, 2008, we completed all earnout payments on the BXI earnout. Total
        BXI
        earnout payments we have made since the acquisition were $301. Subsequent
        to
        July 31, 2008, we entered into a new agreement with Intagio to purchase certain
        assets of a media services business on August 1, 2008 (see Note 19 – Subsequent
        Events). At the closing, we paid Intagio the purchase price for the August
        1,
        2008 transaction as well as a prepayment of $150 to satisfy, in full, our
        maximum post-closing obligation to Intagio for the Intagio earnout. After
        this
        payment, we have no further earnout obligations to Intagio.
  59
  Changes
        to goodwill were as follows:
 
 Year
                  Ended July 31,2008
              
              2007Beginning
                  balance
              
              $
              1,740
              
              $
              1,695Adjustments
                  for BXI legal claims
              
              
              (9
              )
              
              (17
              )Additions
                  from the Intagio acquisition
              
              
              1,513
              
              
              -Sales
                  of certain regions acquired in the Intagio acquistion
              
              
              (231
              )
              
              -Additions
                  from the ATX Barter acquisition
              
              
              5
              
              
              -BXI
                  earnout payment
              
              
              150
              
              
              62Ending
                  balance
              
              $
              3,168
              
              $
              1,740
 
 NOTE
        17 –
SELECTED QUARTERLY FINANCIAL RESULTS (unaudited)
 
 Year
                  ended July 31, 2008
              
              First
                Quarter
              
              Second
                Quarter
              
              Third
                Quarter
              
              Fourth
                Quarter
              
              TotalRevenues
              
              $
              3,853
              
              $
              4,175
              
              $
              3,871
              
              $
              4,065
              
              $
              15,964Operating
                  costs and expenses
              
              
              3,581
              
              
              3,693
              
              
              3,463
              
              
              3,726
              
              
              14,463Operating
                  income
              
              
              272
              
              
              482
              
              
              408
              
              
              339
              
              
              1,501Other
                  income - net
              
              
              (1
              )
              
              6
              
              
              5
              
              
              6
              
              
              16Income
                  before taxes
              
              
              271
              
              
              488
              
              
              413
              
              
              345
              
              
              1,517Income
                  tax expense
              
              
              115
              
              
              175
              
              
              183
              
              
              110
              
              
              583Net
                  income
              
              $
              156
              
              $
              313
              
              $
              230
              
              $
              235
              
              $
              934Net
                  income per common shareBasic
              
              $
              0.01
              
              $
              0.02
              
              $
              0.01
              
              $
              0.01
              
              $
              0.05Diluted
              
              $
              0.01
              
              $
              0.02
              
              $
              0.01
              
              $
              0.01
              
              $
              0.05
 
 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
              
              
              359
              
              
              550
              
              
              449
              
              
              303
              
              
              1,661Income
                  tax expense (benefit)(1)
              
              
              122
              
              
              215
              
              
              189
              
              
              (3,369
              )
              
              (2,843
              )Net
                  income
              
              $
              237
              
              $
              335
              
              $
              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**
              **)**
  **(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 2007, we reduced
                  our
                  valuation allowance on available Federal NOLs and increased deferred
                  tax
                  assets by $3,499.
 
 **(2)**
              Total
                  net income per common share does not equal the sum of the quarters
                  due to
                  rounding of each quarter.
 
 60
 
 NOTE
        18 –
RELATED PARTY TRANSACTIONS
 
 We
        have
        periodically engaged related parties for consulting and contract services.
        In
        aggregate, related party transactions did not exceed $50 in the years ended
        July
        31, 2008 or 2007.
  NOTE
        19 –
SUBSEQUENT EVENTS
 
 Subsequent
        to July 31, 2008, on August 1, 2008, we acquired from The Intagio Group,
        Inc.
        certain assets of a media services company including approximately $5,000
        of
        advertising credits. The advertising and media sector is currently the largest
        component of transaction volume in the ITEX Marketplace. With the new media
        services, we will expand our capabilities in this market sector. The acquisition
        cost included:
  a)
              Cash
                  in the amount of $68
 b)
              A
                  secured promissory note in the amount of $688 due to the seller
                  with
                  interest at the rate of 8.00% and eleven equal monthly payments
                  of
                  $65.
  The
        following table summarizes the purchase consideration and fair values of
        the
        assets acquired at the date of acquisition:
 
 Purchase
                  Price ConsiderationCash
                  paid to Intagio
              
              $
              68Notes
                  payable to Intagio
              
              
              688Liabilities
                  assumed
              
              
              109Total
                  consideration paid
              
              $
              865Assets
                  Acquired (Preliminary Purchase Price Allocation)Advertising
                  credits
              
              $
              577Office
                  equipment
              
              
              85Accounts
                  receivable
              
              
              82Membership
                  list
              
              
              80Trade
                  name
              
              
              20Lease
                  security deposit
              
              
              17Non-compete
                  agreement
              
              
              4Total
                  assets
              
              $
              865
  While
        the
        purchase price allocation above is from a third-party valuation, it is
        preliminary and subject to final adjustment. The expected life of the membership
        list is ten years and the non-compete agreement is one year. At the closing,
        we
        paid Intagio the $68 cash purchase price as well as a prepayment of $150
        to
        satisfy, in full, our maximum post-closing obligation to Intagio for the
        August
        1, 2007 transaction (see “Note 10 – Acquisitions”). We will include the results
        of operations for this acquisition in our financial statements beginning
        August
        1, 2008.
 
 61
 
 **Item
                9.**
              **CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON****ACCOUNTING
                  AND FINANCIAL DISCLOSURE**
 
 None.
 
 **Item
                9A(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.
 
 (b)
        Management’s Report on Internal Control over Financial Reporting.
 
 Our
        management is responsible for establishing and maintaining adequate internal
        control over financial reporting (as such term is defined in Rule 13a-15(f)
        and
        15d-15(f) under the Securities Exchange Act of 1934) which are designed to
        ensure that information required to be disclosed in the reports we file or
        submit under the Securities Exchange Act of 1934, as amended, is recorded,
        processed, summarized and reported within the time specified in the Securities
        and Exchange Commission’s rules and forms, and that such information is
        accumulated and communicated to our management including our CEO and our
        CFO, as
        appropriate to allow timely decisions regarding required disclosure.
 
 Management
        conducted an assessment of the effectiveness of the Company’s internal control
        over financial reporting as of July 31, 2008 based on the framework published
        by
        the Committee of Sponsoring Organizations of the Treadway Commission, referred
        to as the Internal Control—Integrated Framework. The objective of this
        assessment is to determine whether the Company’s internal control over financial
        reporting was effective as of July 31, 2008. Based on its assessment using
        the
        criteria in the Internal Control—Integrated Framework, management believes that,
        as of July 31, 2008, the Company’s internal control over financial reporting was
        effective.
 
 This
        Annual Report does not include an attestation report of the Company’s registered
        public accounting firm regarding internal control over financial reporting.
        Management’s report was not subject to attestation by our registered public
        accounting firm pursuant to temporary rules of the Securities and Exchange
        Commission that permit us to provide only management’s report in this Annual
        Report.
 
 There
        are
        inherent limitations to the effectiveness of any system of internal control
        over
        financial reporting. Accordingly, even an effective system of internal control
        over financial reporting can only provide reasonable assurance with respect
        to
        financial statement preparation and presentation in accordance with accounting
        principles generally accepted in the United States of America. Our internal
        controls over financial reporting are subject to various inherent
        limitations, including cost limitations, judgments used in decision making,
        assumptions about the likelihood of future events, the soundness of our systems,
        the possibility of human error and the risk of fraud. Moreover, projections
        of
        any evaluation of effectiveness to future periods are subject to the risk
        that
        controls may become inadequate because of changes in conditions, or that
        the
        degree of compliance with policies or procedures may deteriorate over time.
  62
  (c)
        Changes in internal control over financial reporting.
 
 There
        have been no changes in our internal controls over financial reporting during
        our most recent quarter that have materially affected, or are reasonably
        likely
        to materially affect, our internal controls over financial
        reporting.
 
 **Item
                9B.**
              **OTHER
                  INFORMATION**
 
 None.
 
 **PART
        III**
 
 **Item
                10.**
              **DIRECTORS,
                  EXECUTIVE OFFICERS AND CORPORATE
                  GOVERNANCE**
  Information
        with respect to our Directors and executive officers may be found under the
        captions “Election of Directors” and “Executive Officers” of our Proxy Statement
        for the Annual Meeting of Shareholders (the “Proxy Statement”). Information
        about our audit committee financial expert, audit committee and other committees
        of the Board may be found under the caption “Committees of the Board of
        Directors” in 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.
 
 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 under the Investor Relations tab. 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
                11.**
              **EXECUTIVE
                  COMPENSATION**
 
 The
        information in the Proxy Statement set forth under the captions “Executive
        Compensation” and “Compensation of Directors” is incorporated herein by
        reference.
 
 **Item
                12.**
              **SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND****MANAGEMENT
                  AND RELATED STOCKHOLDER
                  MATTERS**
 
 The
        information in the Proxy Statement set forth under the captions “Securities
        Authorized for Issuance under Equity Compensation Plans” and “Security Ownership
        of Certain Beneficial Owners and Management” is incorporated herein by
        reference.
  **Item
                13.**
              **CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND****DIRECTOR
                  INDEPENDENCE**
 
 The
        information set forth under the captions “Transactions with Related Persons” of
        the Proxy Statement is incorporated herein by reference.
  63
  **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 Ehrhardt Keefe Steiner & Hottman PC” and is
        incorporated herein by reference.
 
 **Item
                15.**
              **EXHIBITS
                  AND FINANCIAL STATEMENT
                  SCHEDULES**
 
 **EXHIBIT
        INDEX**
 
 **Incorporated
                  by Reference****Exhibit**
                **No.**
              **Exhibit
                  Description**
              **Form**
              **SEC**
                **File**
                **No.**
              **Exhibit**
              **Filing**
                **Date**
              **Filed**
                **Herewith**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.
              8-K
              000-18275
              2.1
              7/06/052.2
              Asset
                  Purchase Agreement dated as of July 25, 2007, between ITEX Corporation
                  and
                  The Intagio Group, Inc.
              8-K
              000-18275
              2.1
              7/30/072.3
              Asset
                  Purchase Agreement dated as of August 1, 2008, between ITEX Corporation
                  and The Intagio Group, Inc.
              8-K
              000-18275
              2.1
              8/06/083.1
              Amended
                  and Restated Articles of Incorporation of ITEX Corporation
              10-KSB
              000-18275
              3.1
              11/13/033.2
              Amended
                  and Restated Bylaws of ITEX Corporation
              8-K
              000-18275
              3.2
              2/14/0810.1
              Form
                  of Indemnification Agreement
              10-KSB
              000-18275
              10.9
              11/13/0310.2
              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
              8-K
              000-18275
              10.1
              10/28/0310.3
              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
              8-K
              000-18275
              10.2
              10/28/03
  64
 
 **Incorporated
                  by Reference****Exhibit**
                **No.**
              **Exhibit
                  Description**
              **Form**
              **SEC**
                **File**
                **No.**
              **Exhibit**
              **Filing**
                **Date**
              **Filed**
                **Herewith**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
              8-K
              000-18275
              10.3
              10/28/0310.5
              ITEX
                  Corporation 2004 Equity Incentive Plan
              14A
              000-18275
              Appendix
                  B
              2/13/0410.6
              Form
                  of Restricted Stock Agreement
              8-K
              000-18275
              10.1
              7/10/0610.7
              Sublease
                  dated as of November 3, 2006
              8-K
              000-18275
              10.1
              11/17/0610.8
              Amendment
                  to Loan Agreement and Note, dated as of January 24, 2006
              8-K
              000-18275
              10.2
              11/24/0610.9
              Amendment
                  to Loan Agreement and Note, dated as of November 13, 2007
              10-Q
              000-18275
              10.14
              3/03/0810.10
              Form
                  of Senior Subordinated Secured Promissory Note of ITEX Corporation
                  to The
                  Intagio Group, Inc.
              8-K
              000-18275
              10.1
              7/30/0710.11
              Form
                  of Security Agreement between ITEX and The Intagio Group,
                  Inc.
              8-K
              000-18275
              10.2
              7/30/0710.12
              Change
                  in Control Agreement dated as of February 28, 2008 between Steven
                  White
                  and ITEX Corporation
              10-Q
              000-18275
              10.15
              3/03/0810.13
              Form
                  of Employee Change in Control Agreement
              10-Q
              000-18275
              10.16
              3/03/0810.14
              Form
                  of Senior Subordinated Secured Promissory Note of ITEX Corporation
                  to The
                  Intagio Group, Inc.
              8-K
              000-18275
              10.1
              8/06/0810.15
              Form
                  of Security Agreement between ITEX and The Intagio Group,
                  Inc.
              8-K
              000-18275
              10.2
              8/06/0821
              The
                  only subsidiary of ITEX Corporation is BXI Exchange, Inc., a Delaware
                  corporation
  65
 
 **Incorporated
                  by Reference****Exhibit**
                **No.**
              **Exhibit
                  Description**
              **Form**
              **SEC**
                **File**
                **No.**
              **Exhibit**
              **Filing**
                **Date**
              **Filed**
                **Herewith**31.1
              Certifications
                  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002
              
              
              
              
              **P**31.2
              Certifications
                  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002
              
              
              
              
              **P**32.1
              Certifications
                  of Chief Executive Officer and Chief Financial Officer Pursuant
                  to Section
                  906 of the Sarbanes-Oxley Act of 2002
              
              
              
              
              **P**
  66
 
 **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 1, 2008
              By:
              /s/
                  Steven WhiteSteven
                  White, Chief Executive OfficerInterim
                  Chief Financial Officer
 
 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 1, 2008
              By:
              /s/
                  Steven WhiteSteven
                  White, Chief Executive Officer, Interim
                Chief
                  Financial Officer and Chairman of the BoardDate:
                  October 1, 2008
              By:
              /s/
                  John WadeJohn
                  Wade, Secretary, Treasurer, DirectorDate:
                  October 1, 2008
              By:
              /s/
                  Eric BestEric
                  Best, Director
  67