ITEX CORP - FORM 10-Q - June 14, 2012

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EXCEL - IDEA: XBRL DOCUMENT - ITEX CORP	Financial_Report.xls
EX-32.1 - CERTIFICATION - ITEX CORP	v314670_ex32-1.htm
EX-31.1 - CERTIFICATION - ITEX CORP	v314670_ex31-1.htm
EX-31.2 - CERTIFICATION - ITEX CORP	v314670_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

Mark One)

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

For the quarterly period ended April 30, 2012.

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

For the transition period from to

Commission File Number 0-18275

ITEX CORPORATION

(Exact name of registrant as specified in its charter)

Nevada

93-0922994

(State or other jurisdiction of

incorporation or organization)

(IRS Employer
Identification No.)

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

(Address of principal executive offices)

(425) 463-4000

(Registrant’s telephone number including area code)

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

(Do not check if a smaller

reporting company)

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

As of April 30, 2012, we had 2,964,866 shares of common stock outstanding (including unvested restricted stock).

ITEX CORPORATION

FORM 10-Q

For the Three-month and Nine-month Period Ended April 30, 2012

INDEX

		Page(s)

PART I.	Financial Information

ITEM 1.	Financial Statements

	Consolidated Balance Sheets as of April 30, 2012 (unaudited) and July 31, 2011	1

	Consolidated Statements of Income for the Three and Nine-Months Ended April 30, 2012 and 2011 (unaudited)	2

	Consolidated Statement of Stockholders’ Equity for the Nine-Months Ended April 30, 2012 (unaudited)	3

	Consolidated Statements of Cash Flows for the Nine-Months Ended April 30, 2012 and 2011 (unaudited)	4

	Notes to Consolidated Financial Statements (unaudited)	5

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

ITEM 4T.	Controls and Procedures	35

PART II.	Other Information	36

ITEM 1.	Legal Proceedings	36

ITEM 2.	Unregistered Sales of Equity Securities	36

ITEM 6.	Exhibits	37

	Signatures	38

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ITEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

	April 30, 2012			July 31, 2011
	(unaudited)
ASSETS
Current assets:
Cash	$	922		$	5,386
Accounts receivable, net of allowance of $308 and $354		1,157			805
Prepaid expenses		109			131
Loans and advances		44			10
Prepaid advertising credits		8			60
Deferred tax asset, net of allowance of $22 and $22		798			798
Notes receivable		309			180
Other current assets		26			6
Total current assets		3,373			7,376

Property and equipment, net of accumulated depreciation of $419 and $468		50			89
Goodwill		3,191			3,266
Deferred tax asset, net of allowance of $130 and $130, and net of current portion		4,252			4,681
Intangible assets, net of accumulated amortization of $2,884 and $2,691		586			855
Notes receivable, net of current portion		1,316			729
Other long-term assets		19			25
Total assets		12,787			17,021

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and other expenses payable		66			76
Commissions payable to brokers		-			669
Accrued commissions to brokers		1,393			785
Accrued expenses		371			545
Deferred revenue		28			47
Advance payments		106			133
Total current liabilities		1,964			2,255

Long-term liabilities:
Other long-term liabilities		11			8
Total liabilities		1,975			2,263

Stockholders’ equity:
Common stock, $0.01 par value; 9,000 shares authorized; 2,611 shares and 3,646 shares issued and outstanding, respectively		26			36
Additional paid-in capital		25,114			29,452
Stockholder note receivable		(512	)		(585	)
Accumulated deficit		(13,816	)		(14,145	)
Total stockholders' equity		10,812			14,758
Total liabilities and stockholders’ equity	$	12,787		$	17,021

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

ITEX CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

	Three-months Ended April 30,				Nine-months Ended April 30,
	2012		2011		2012		2011

Revenue:
Marketplace revenue and other revenue	$	3,787	$	3,960	$	11,986	$	12,490

Costs and expenses:
Cost of Marketplace revenue		2,445		2,336		7,763		7,578
Corporate salaries, wages and employee benefits		509		487		1,481		1,504
Selling, general and administrative		435		602		1,655		2,036
Depreciation and amortization		74		147		239		456
		3,463		3,572		11,138		11,574

Income from operations		324		388		848		916

Other income/(expense)
Interest, net		25		13		75		33
Other income/(expense), net		-		-		312		33
		25		13		387		66

Income before income taxes		349		401		1,235		982

Income tax expense		119		162		421		389

Net income	$	230	$	239	$	814	$	593

Net income per common share:
Basic	$	0.07	$	0.07	$	0.23	$	0.17
Diluted	$	0.07	$	0.07	$	0.23	$	0.16

Weighted average shares outstanding:
Basic		3,486		3,611		3,590		3,590
Diluted		3,488		3,634		3,591		3,630

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

ITEX CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE-MONTHS ENDED APRIL 30, 2012

(In thousands)

(Unaudited)

	Common Stock						Additional Paid-in			Stockholder Note			Accumulated
	Shares			Amount			Capital			Receivable			Deficit			Total

Balance at July 31, 2011		3,646		$	36		$	29,452		$	(585	)	$	(14,145	)	$	14,758

Common Stock repurchased and retired		(17	)					(69	)								(69	)

Tender Offer		(1,073	)		(11	)		(4,495	)								(4,506	)

Payments on Broker notes receivables											73						73

Stock based compensation expense		55			1			226									227

Dividend Payment														(485	)		(485	)

Net income														814			814

Balance at April 30, 2012		2,611		$	26		$	25,114		$	(512	)	$	(13,816	)	$	10,812

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

ITEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine-months ended April 30,
	2012			2011
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	814		$	593
Items to reconcile to net cash provided by operations:
Depreciation and amortization		239			456
Stock based compensation		227			55
Increase (decrease) in allowance for uncollectible receivables		(46	)		40
Change in deferred income taxes		429			350
Gain on sale of assets		(318	)		(34	)
Loss on disposal of equipment		6			1
Changes in operating assets and liabilities:
Accounts receivable		(306	)		(319	)
Prepaid expenses		22			(53	)
Prepaid advertising credits		52			145
Loans and advances		(34	)		18
Other assets		(14	)		(23	)
Accounts payable		(12	)		(23	)
Commissions payable to brokers		(669	)		(661	)
Accrued commissions to brokers		608			407
Accrued expenses		(174	)		(83	)
Deferred revenue		(19	)		(279	)
Long-term liabilities		3			4
Advance payments		(27	)		(48	)
Net cash provided by operating activities		781			546

CASH FLOWS FROM INVESTING ACTIVITIES:
Membership list purchase		(175	)		(72	)
Purchase of property and equipment		(13	)		(19	)
Payments received from notes receivable		185			98
Advances on Loans		(255	)		(164	)

Net cash used in investing activities		(258	)		(157	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on Broker notes receivable		73			-
Repurchase of Common stock		(69	)		(415	)
Tender Offer		(4,506	)		-
Cash dividend paid to Common Shareholders		(485	)		(378	)
Net cash used in financing activities		(4,987	)		(793	)
Net decrease in cash		(4,464	)		(404	)
Cash at beginning of period		5,386			5,169
Cash at end of period	$	922		$	4,765

Supplemental cash flow information:
Cash paid for taxes	$	66		$	28

Non-Cash activities:
Sale of media credits		-			86
Notes for asset sales		470			-
Notes for member list		175			-

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

ITEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(In thousands, except per share amounts)

Description of the Company

ITEX Corporation (“ITEX”, “Company”, “we” or “us”) was incorporated in October 1985 in the State of Nevada. Through our independent licensed broker and franchise network, corporate and corporate-owned 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:

Unaudited Interim Financial Information

We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated balance sheets, operating results, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent liabilities as the date of the financial statements and the reported amount of revenue and expenses during the reporting period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our 2011 Annual Report on Form 10-K filed with the SEC on November 18, 2011.

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

Management has made a number of estimates and assumptions relating to the reporting of revenues, expenses, assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements. Actual results could differ from these estimates.

Income (Loss) Per Share

We prepare our financial statements on the face of the income statement for both basic and diluted earnings per share. Basic earnings per share excludes potential dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. As of April 30, 2012, we had no contracts to issue common stock, but we did have 20 warrants outstanding that were anti-dilutive. The Company had 7 unvested restricted stock units that were dilutive and 348 restricted stock units that were anti-dilutive as of April 30, 2012.

The following table presents a reconciliation of the denominators used in the computation of net income per common share basic and net income per common share – diluted for the three and nine-month periods ended April 30, 2012 and 2011 (in thousands, except per share data) (unaudited):

	Three-months Ended April 30,				Nine-months Ended April 30,
	2012		2011		2012		2011

Net income available for shareholders	$	230	$	239	$	814	$	593

Weighted avg. outstanding shares of common stock		3,486		3,611		3,590		3,590
Dilutive effect of restricted shares		2		23		1		40
Common stock and equivalents		3,488		3,634		3,591		3,630
Earnings per share:
Basic	$	0.07	$	0.07	$	0.23	$	0.17
Diluted	$	0.07	$	0.07	$	0.23	$	0.16

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the nine-months ended April 30, 2012, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K, that are of significance, or potential significance to the Company.

NOTE 2 – COMMITMENTS

The Company leases office space under operating leases. Lease commitments include leases for the Company’s corporate headquarters in Bellevue, Washington, and a branch office in Milwaukie, Oregon. These leases expire between October 31, 2012 and April 30, 2015.

Future minimum payments at April 30, 2012 under operating leases, for office space were as follows (in thousands):

	Executive office		Corporate-owned office		Total
Location:	Bellevue, WA		Milwaukie, OR
Expiration date:	April 30, 2015		October 31, 2012

Lease commitments for the year ending July 31,
2012(1)		40		2		42
2013		163		1		164
2014		166		-		166
2015		127		-		127

Total	$	496	$	3	$	499

(1)

The expected payments for 2012 reflect future minimum payments for the three-month period from May 1, 2012 to July 31, 2012.

Rent expense, including utilities and common area charges, was $42 and $76, respectively for the three-month periods ended April 30, 2012 and 2011. Rent expense was $173 and $229 for the nine-month periods ended April 30, 2012 and 2011.

In addition to the foregoing lease commitments, the Company is a party to several non-cancelable and non-refundable purchase commitments. Those purchase obligations consist primarily of arrangements for telecommunications and co-location services for the Company’s network operations.

Future minimum payments at April 30, 2012 under the non-cancelable commitments were as follows (in thousands):

Year ending July 31,
2012 (1)		8
2013		12

Total	$	20

(1)

The expected payments for 2012 reflect future minimum payments for the three-month period from May 1, 2012 to July 31, 2012.

NOTE 3 – LEGAL PROCEEDINGS AND LITIGATION CONTINGENCIES

On September 7, 2011, a lawsuit was filed by one of the Company’s shareholders against our directors, and also ITEX as a nominal defendant, alleging shareholder derivative claims and seeking unspecified damages, costs and attorney’s fees (David Polonitza v. Steve White, Eric Best and John Wade and ITEX Corporation as a nominal defendant, King County Superior Court for the State of Washington, Case No. 11-2-30760-3). The Company is advancing the defense costs of directors under its indemnity obligations. The complaint generally alleges breaches of fiduciary duties by the Company’s directors (as well as abuse of control, gross mismanagement, corporate waste, and unjust enrichment) in connection with the adoption of a Shareholders Rights Plan on March 11, 2011, the amendment of the Company’s Equity Incentive Plan on February 14, 2011 and award of restricted stock grants under the Plan in March 2011, a private placement of common stock to franchisees in March 2011 and our stock repurchase program. In a motion filed on May 1, 2012, plaintiff sought a preliminary injunction to exclude the votes at the annual meeting on May 14, 2012, of both the recipients of restricted stock grants under the Plan as well as the franchisees who participated in the 2011 private placement. On May 11, 2012, the King County Superior Court declined to enjoin the vote of the disputed shares at the annual meeting, but enjoined certification of the election results pending further order.

Management has regular litigation reviews, including updates from outside counsel, to assess the need for accounting recognition or disclosure of contingencies relating to pending lawsuits. The Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable, and the amount can be reasonably estimated. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is reasonably possible and which are significant, the Company discloses the nature of the contingency and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency disclosures, “significant” includes material matters as well as other items which management believes should be disclosed.

Management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. Although management currently believes resolving the foregoing proceeding will not have a material adverse impact on our financial statements, management’s view of these matters may change in the future. A material adverse impact on our financial statements could occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.

As discussed above, plaintiff Polonitza filed a lawsuit against our directors, and also ITEX as a nominal defendant, alleging shareholder derivative claims. ITEX does not believe a favorable result for Mr. Polonitza is likely. However, if Mr. Polonitza were to be successful in electing his two nominees, it would result in a change in control of the Company. Certain employees have change in control agreements, entitling them to immediate vesting of restricted stock awards, and immediate and conditional payments whenever the incumbent directors cease to constitute a majority of ITEX’s board. CEO Steven White would be entitled to a lump sum payment equal to one times his base salary and immediate vesting of all equity-based compensation. As of July 31, 2011, the dollar value of these entitlements would be $250 plus equity-based compensation valued at $822 and additional costs of $85. Other employees would receive equity-based compensation valued at $670 if there were to be a change of control in ITEX’s board. In addition, if plaintiff’s slate of directors were elected and fired Mr. White, either by the Company “without cause,” or by Mr. White “for good reason,” Mr. White would be entitled to a severance payment equal to twice his base salary or an additional $500 as of July 31, 2011. Additional employees would be entitled to aggregate severance payments of $245 if terminated by ITEX within a three-year protection period after a change in control, unless terminated for cause. The total cost to ITEX related to compensatory matters alone could exceed $2,500. A change in control would allow Mr. Polonitza to reimburse his proxy expenses, which he estimated in his proxy materials to be $100. The effect of the Polonitza litigation could be significant and if he were to prevail, it would have a material adverse effect upon the Corporation’s operations, financial condition, and financial statements taken as a whole.

From time to time we are subject to a variety of claims and litigation incurred in the ordinary course of business. In our opinion, the outcome of other pending legal proceedings, individually or in the aggregate, will not have a material adverse effect on our business operations, results of operations, cash flows or financial condition.

NOTE 4 – INCOME TAXES

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The provision for income taxes for the nine-months ended April 30, 2012 and 2011 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 34% to pre-tax income primarily because of state income taxes, estimated permanent differences and change in valuation allowance.

The Federal effective tax rate related to our provision for income taxes in the three and nine-months ended April 30, 2012 is similar to that used in the period ending April 30, 2011. The State effective tax rate related to our provision for income taxes in the three and nine-months ended April 30, 2012 is lower to that used in the three and nine-month periods ending April 30, 2011, due to a reduction in the accrued expenses on our consolidated balance sheet for uncertain tax positions related primarily to state jurisdictions.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.

As of April 30, 2012 we have recognized a net income tax expense of $421 which is our estimated federal and state income tax liability for the nine months ended April 30, 2012 net of the impairment of certain state deferred tax asset recorded during 2011. Realization of our deferred tax asset is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain. As of April 30, 2012 the net deferred tax benefit was $5,050.

Effective January 1, 2009, we account for any uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We measure the tax benefits recognized in the financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, we are required to make subjective assumptions and judgments regarding income tax exposures. The result of the reassessment of our tax positions did not have an impact on the consolidated financial statements.

NOTE 5 – STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)

On March 16, 2012, the Company commenced a partial tender offer to purchase up to 1,000 shares of its common stock, at a price of $4.20 per share. The tender offer expired on April 13, 2012. Based on the final tabulation by OTR, Inc., the depositary for the tender offer, approximately 1,238 shares of ITEX common stock were properly tendered and not withdrawn and not excluded because tendered conditionally. ITEX accepted for purchase 1,073 shares of its common stock, including all “odd lots” properly tendered, at a purchase price of $4.20 per share, for an aggregate cost of $4,506, excluding fees and expenses relating to the tender offer. The total number of shares purchased in the tender offer included an additional 73 shares purchased pursuant to ITEX’s right to increase the number of shares purchased by no more than 2 percent of its outstanding shares, without amending or extending the tender offer. The shares purchased in the tender offer represented approximately 26.5% of ITEX’s outstanding common shares (including shares of unvested restricted stock).

The Company has 5,000 shares of preferred stock authorized at $0.01 par value. No shares were issued or outstanding as of April 30, 2012.

On March 9, 2010, the Company announced a $2,000 stock repurchase program, authorized by the Board of Directors. The program authorizes the repurchase of shares in open market purchases or privately negotiated transactions, has no expiration date and may be modified or discontinued by the Board of Directors at any time. In the nine-month period ended April 30, 2012, 17 shares at an average cost of $3.96 per share were purchased.

NOTE 6 – STOCK-BASED PAYMENTS (in thousands, except per share amounts)

In March 2004 the Company adopted the ITEX Corporation 2004 Equity Incentive Plan (the “2004 Plan”), for which 400 shares of common stock were authorized for issuance. The 2004 Plan provides for the grant of incentive and nonqualified stock options, restricted stock, and stock bonuses to the Company's employees, directors, officers or consultants.

In March 2011, the Company issued 197 restricted shares to thirteen of the Company’s employees, valued at the grant date stock price of $4.25 per share, with a vesting period of five years from the date of grant. The fair value of these shares as of the grant date was $837. The grant is to be amortized to compensation expense over the respective requisite service period of five years.

In March 2011, the Company issued 190 restricted shares to the Company’s CEO, valued at the grant date stock price of $4.25 per share, with a vesting period of eleven and one-half years from the date of grant. The fair value of these shares as of the grant date was $808. The grant first vests 19 shares in October 2013 and then another 19 shares vest annually in October of each subsequent year. The grant is to be amortized to compensation expense over the respective requisite service period of eleven and one-half years.

In March 2011, the Company issued 5 restricted shares to a consultant who is also a Board of Director, valued at the grant date stock price of $4.25 per share, with a vesting period of one year from the date of grant. The fair value of these shares as of the grant date was $21. The grant was amortized to compensation expense over the respective requisite service period of one year.

In February 2011, the Board of Directors of the Company approved an amendment to the 2004 Equity Incentive Plan, as amended and restated (the “Plan”), that increased the number of shares of the Company’s common stock that may be delivered pursuant to awards granted under the Plan by an additional 400 shares to bring the total common shares authorized under the plan to 800 shares. Eight shares remained available for future grants under the 2004 Plan for the period ended April 30, 2012.

In October 2009, the Company issued 39 restricted shares to the Company’s CEO, valued at the grant date stock price of $3.40 per share, with a vesting period of three years from the date of grant. The grant is to be amortized to compensation expense over the respective requisite service period of three years.

We account for stock-based compensation in accordance with the related guidance. Under the fair value recognition provisions, we estimate stock-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.

At April 30, 2012, 354 shares of common stock granted under the 2004 Plan remained unvested. At April 30, 2012, the Company had $1,407 of unrecognized compensation expense, expected to be recognized over a weighted-average period of approximately seven years.

NOTE 7 – SUBSEQUENT EVENTS

On June 1, 2012, the Board of Directors declared a cash dividend in the amount of $0.04 per share, payable on June 20, 2012 to stockholders of record as of the close of business on June 11, 2012.

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

In addition to current and historical information, this Quarterly Report on Form 10-Q contains forward-looking statements. These statements relate to our future operations, prospects, potential products, services, developments, business strategies and 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 detailed discussion of certain risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements in the section titled “Risk Factors” below. We undertake no obligation to update or revise publicly any forward-looking statement after the date of this report, whether as a result of new information, future events or otherwise.

Overview

ITEX, The Membership Trading Community^SM, is a leading exchange for cashless business transactions across North America (the “Marketplace”). We service our member businesses through our independent licensed brokers and franchise network (individually, “broker” and together, the “Broker Network”) in the United States and Canada. Our business services and payment systems enable approximately 25 thousand member businesses (our “members”) to trade products 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” ).

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”, “2012” for August 1, 2011 to July 31, 2012, “2011” for August 1, 2010 to July 31, 2011). Our third quarter is the three-month period from February 1, 2012 to April 30, 2012 (“three-month period ended April 30”). The Company’s first nine months is from August 1, 2011 to April, 30, 2012. We report our results as of the last day of each calendar month (“accounting cycle”). The timing of billing and collection activities after the end of the billing cycle does not correspond with the end of the accounting period, therefore this timing difference results in the fluctuations of the balances of cash, accounts receivable, commissions payable and accrued commissions on the consolidated balance sheet and consolidated statement of cash flows.

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

The following summarizes our operational and financial highlights for the quarter and our outlook:

Comparative Results. For the three-months ended April 30, 2012, as compared to the three-months ended April 30, 2011, our revenue decreased by $173, or 4%, from $3,960 to $3,787, our income from operations decreased by $64, or 16%, from $388 to $324 and our net income decreased by $9, or 4% from $239 to $230. For the nine-month period ended April 30, 2012, as compared to the nine-month period ended April 30, 2011, our revenue decreased by $504, or 4%, from $12,490 to $11,986, our income from operations decreased by $68, or 7%, from $916 to $848 and our net income increased by $221, or 37% from $593 to $814.

Revenue Sources. Our decrease in revenues for the nine-months ended April 30, 2012 was primarily attributable to the reduction in our web services revenue. Our primary source of web services revenue since the third quarter of fiscal 2009 had been derived from subscription fees, transactional, support and consulting fees primarily from one web services client. On February 28, 2011, the web services agreement was terminated by the customer. For the three-months ended April 30, 2012, as compared to the three-months ended April 30, 2011, our web services revenue decreased by $303, from $303 to $0. For the nine-months ended April 30, 2012, as compared to the nine-months ended April 30, 2011, our web services revenue decreased by $695, from $695 to $0.

Revenue from our core business of association and transaction fees increased for the three and nine-month period ending April 30, 2012, by $205 and $403, respectively, when compared to the corresponding 2011 period.

Revenue Trends and Growth. As discussed above, due primarily to the reduction in our web services revenue, we experienced a downturn in overall revenue this quarter compared to 2011, and do not anticipate that any web services revenue will be generated during 2012. Although we seek to increase revenues through organic growth and the development of new revenue sources, the primary driver of revenue growth in recent years has been through our business acquisitions. These acquisitions are intermittent and cannot be relied upon as a future source of revenue growth, because of the absence of acquisition candidates, lack of financing, or unacceptable terms. We have approximately 28% recurring revenues from association fees. Approximately two-thirds of our net revenues each quarter come from transaction fees during that quarter. We believe the expansion of our membership base will increase our recurring revenues. We continue to seek to increase our revenue by:

enhancing our internet applications;

marketing the benefits of participation in the Marketplace;

adding new brokers.

Adding new brokers is an important component of our overall growth plan, and we are increasing our broker recruiting efforts. One recruitment program which has achieved some success is our Broker Mentor program, in which existing brokers recruit prospective brokers and provide ongoing training to the prospective broker until certain performance thresholds are met. Upon meeting the performance thresholds, the prospective broker is offered a franchise for a reduced fee of $5 from our standard broker fee of $20. The mentoring broker receives a 5% commission override on the cash collected per cycle by the new broker. We added 13 new brokers in 2011 and 2012 as a result of this and other initiatives.

Corporate-owned Offices. The ITEX system is approximately 98% broker managed and 2% corporate operated. As a general operating philosophy, we depend on the ability of our brokers to enroll new members, train them in the use of the Marketplace, grow our transactional volume by facilitating business among members, manage member relationships, provide members with information about ITEX products and services, and assure the payment of our fees. Our broker model requires less capital investment and lower operating expenses than if we operated all of the offices in our network directly. From time to time, we complement our Broker Network with corporate-owned locations, acquired either as a result of business acquisitions or as a result of ensuring the orderly transition of broker locations. Part of our strategy when we acquire an exchange’s members is to incubate the asset with corporate direction and assistance, flush out non-performing members, synchronize fee plans, and then transfer certain management rights to these members to new or existing franchisees, with the contractual rights and revenues generated by these members remaining with ITEX. The result is a wider member base, managed by new and existing franchisees, and a member list asset that continues to be owned by ITEX.

Supporting Members, Brokers and Employees. We continually enhance our internet applications and web services to make our online services more user friendly to our employees, brokers and members, and to create confidence in the Marketplace. We are in the process of upgrading our payment processing and team software with .NET technologies.

Geographical expansion. We have acquired eight trade exchange membership lists since 2005 and integrated them into the ITEX system. The acquisitions have contributed to our member counts and revenue and allowed us to expand the breadth of our network by opening offices in several geographic areas in which the ITEX presence was previously weak or nonexistent. In addition, we removed competitors from our industry, strengthening our brand. Part of our strategy when we acquire an exchange’s members is to distribute members to existing franchisees or spin off to new franchisees. We continue to evaluate and consider other potential strategic transactions, if and when such opportunities arise.

Financial Position. We reduced our cash during the quarter as a result of the completion of a partial tender offer in which $4,506 was returned to stockholders through the purchase of 1,073 shares of ITEX common stock. At April 30, 2012, we had a cash balance of $922, compared to a balance of $5,386 at July 31, 2011. Our net cash flows provided by operating activities were $781 for the nine-month period ended April 30, 2012, compared to $546 for the corresponding period the previous year. We intend to continue to strengthen our business model, which has the ability to generate consistent cash flows with low capital expenditure requirements. We seek to maintain a liquidity cushion sufficient to fund our business activity and handle contingencies, while preserving the ability to return cash to our stockholders through dividends and share buybacks.

RESULTS OF OPERATIONS

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

	Three-months ended April 30,				Nine-months ended April 30,
	2012		2011		2012		2011
	(unaudited)				(unaudited)
Revenue	$	3,787	$	3,960	$	11,986	$	12,490

Cost of marketplace revenue	$	2,445	$	2,336	$	7,763	$	7,578
Operating expenses		1,018		1,236		3,375		3,996
Income from operations		324		388		848		916

Other income (expense)		25		13		387		66
Income before income taxes		349		401		1,235		982

Provision for income taxes		119		162		421		389

Net income	$	230	$	239	$	814	$	593

Net income per common share:
Basic	$	0.07	$	0.07	$	0.23	$	0.17
Diluted	$	0.07	$	0.07	$	0.23	$	0.16

Average common and equivalent shares:
Basic		3,486		3,611		3,590		3,590
Diluted		3,488		3,634		3,591		3,630

Revenue for the three-months ended April 30, 2012, as compared to the corresponding period of fiscal 2011 decreased by $173, or 4%. Revenue for the nine-month period ended April 30, 2012, as compared to the corresponding nine-month period of fiscal 2011, decreased by $504, or 4%. The decrease in revenues for the three-months ended April 30, 2012 was primarily due to the reduction in our web service and media initiatives which decreased by $345, offset somewhat by an increase in our transaction fees of $205. The decrease in revenues for the nine-months ended April 30, 2012 was primarily due to the reduction in our web service and media initiatives which decreased by $798, offset somewhat by an increase in our association fees of $46 and an increase in transaction fees of $357.

Cost of Marketplace revenue which includes association and transaction commissions paid to brokers, corporate-owned office expense and other Marketplace related expenses increased by $109, or 5% for the three-month period ended April 30, 2012, compared to the corresponding period of fiscal 2011. Cost of Marketplace revenue increased by $185, or 2% for the nine-month period ended April 30, 2012, compared to the corresponding period of fiscal 2011. The cost of Marketplace revenue increases for both periods were in line with the corresponding increase in transaction revenues.

Operating expenses which include corporate salaries, wages and employee benefits, selling, general and administrative, depreciation and amortization decreased by $218, or 18% for the three-months ended April 30, 2012, compared to the corresponding period of fiscal 2011. Operating expenses decreased by $621, or 16% for the nine-month period ended April 30, 2012, compared to the corresponding period of fiscal 2011.

The decrease in operating expenses in the three-months ended April 30, 2012, as compared to the corresponding period of fiscal 2011, resulted from a $167 decrease in selling, general and administrative expense, and a $73 decrease in depreciation and amortization.

The primary decrease in operating expenses in the nine-month period ended April 30, 2012, as compared to the corresponding period of fiscal 2011, resulted from a $381 decrease in selling, general and administrative expenses which included a $310 decrease in legal expenses.

Income from operations for the three-months ended April 30, 2012, as compared to the corresponding quarter of fiscal 2011, decreased by $64, or 16%. Income from operations for the nine-month period ended April 30, 2012, as compared to the corresponding period of fiscal 2011, decreased by $68, or 7%.

Net income for the three-months ended April 30, 2012, as compared to the corresponding period of fiscal 2011, decreased by $9, or 4%. Net income for the nine-month period ended April 30, 2012, as compared to the corresponding period of fiscal 2011, increased by $221, or 37%. The increase in nine-month period net income is primarily attributable to a gain on the sale of corporate-owned offices during the second quarter of 2012.

Earnings per share, both basic and diluted, were the same per share in the three-months ended April 30, 2012 compared to the three-months ended April 30, 2011. Earnings per share, basic, increased $0.06 to $0.23 per share and earnings per share, diluted, increased $0.07 to $0.23 per share for the nine-month period ended April 30, 2012 compared to the nine-month period ended April 30, 2011.

Revenue, Costs and Expenses

The following table sets forth our selected consolidated financial information for the three-months ended April 30, 2012 and 2011 with amounts expressed as a percentage of total revenues (in thousands) (unaudited):

	Three-months ended April 30,										Nine-months ended April 30,
	2012					2011					2012					2011

	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Revenue:
Marketplace revenue and other revenue	$	3,787		100	%	$	3,960		100	%	$	11,986		100	%	$	12,490		100	%

Costs and expenses:
Cost of Marketplace revenue		2,445		65	%		2,336		59	%		7,763		65	%		7,578		61	%
Salaries, wages and employee benefits		509		13	%		487		12	%		1,481		12	%		1,504		12	%
Selling, general and administrative		435		11	%		602		15	%		1,655		14	%		2,036		16	%
Depreciation and amortization		74		2	%		147		4	%		239		2	%		456		4	%
		3,463		91	%		3,572		90	%		11,138		93	%		11,574		93	%

Income from operations		324		9	%		388		10	%		848		7	%		916		7	%

Interest income, net		25		0	%		13		0	%		75		0	%		33		1	%
Gain on sale of assets, net		0		0	%		0		0	%		312		3	%		33		0	%

Income before income taxes		349		9	%		401		10	%		1,235		10	%		982		8	%

Provision for income taxes		119		3	%		162		4	%		421		3	%		389		3	%

Net income	$	230		6	%	$	239		6	%	$	814		7	%	$	593		5	%

Marketplace revenue

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

	Three-months ended April 30,				Percent			Nine-months ended April 30,				Percent
	2012		2011		increase (decrease)			2012		2011		increase (decrease)

Transaction fees	$	2,567	$	2,362		9	%	$	8,117	$	7,760		5	%
Association fees		1,163		1,163		0	%		3,588		3,542		1	%
Other revenue		57		435		-87	%		281		1,188		-76	%
	$	3,787	$	3,960		-4	%	$	11,986	$	12,490		-4	%

Total revenue decreased by $173, or 4%, for the three-months ended April 30, 2012, as compared to the corresponding period ended April 30, 2011. Total revenue decreased by $504, or 4% for the nine-month period ended April 30, 2012, as compared to the nine-month period ended April 30, 2011. The decrease in revenues for the three-months ended April 30, 2012 was primarily due to the reduction in our web service and media initiatives which decreased by $345, offset somewhat by an increase in our transaction fees of $205. The decrease in revenues for the nine-months ended April 30, 2012 was primarily due to the reduction in our web service and media initiatives which decreased by $798, offset somewhat by an increase in our association fees of $46 and an increase in transaction fees of $357.

Transaction fee revenue for the three-months ended April 30, 2012, as compared to the corresponding quarter of fiscal 2011, increased by $205, or 9%. Transaction fee revenue for the nine-month period ended April 30, 2012, as compared to the corresponding period of fiscal 2011, increased by $357, or 5%. The increase for both the three and the nine-month periods is the result of the increase in the volume of transactions that took place in the ITEX Marketplace.

Association fee revenue for the three-months ended April 30, 2012, as compared to the corresponding quarter of fiscal 2011, was the same at $1,163 per period. Association fee revenue for the nine-month period ended April 30, 2012, as compared to the corresponding period of fiscal 2011, increased by $46, or 1%. The increase for the nine-month periods is the result of an increase in the net members participating in the ITEX Marketplace.

Other revenue for the three-months ended April 30, 2012, as compared to the corresponding quarter of fiscal 2011, decreased by $378, or 87%. Other revenue for the nine-months ended April 30, 2012, as compared to the corresponding quarter of fiscal 2011, decreased by $907, or 76%. The decrease in other revenues was primarily from the reduction of our web services revenues which generated $0 in both the three and nine-months ended April 30, 2012, as compared to $345 and $798, respectively, for the corresponding periods in 2011. In addition, ITEX dollar revenue utilized in the Marketplace during the three and nine-months ended April 30, 2012 decreased by $6 and $51, respectively, when compared to the corresponding periods in 2011.

ITEX Dollar Revenue

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

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

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

We do not sell or purchase ITEX dollars for USD.

We spend ITEX dollars in the Marketplace for our corporate needs. As discussed in the notes to our consolidated financial statements, we record ITEX dollar revenue in the amounts equal to expenses we incurred and paid for in ITEX dollars. We recorded $18 and $24 as ITEX dollar revenue for the three-months ended April 30, 2012 and 2011, respectively. We recorded $142 and $193 as ITEX dollar revenue for the nine-months ended April 30, 2012 and 2011, respectively.

The corresponding ITEX dollar expenses in the three and nine-month periods ending April 30, 2012 were for equipment, legal services, printing, outside services and miscellaneous expenses. We plan to continue to utilize ITEX dollars for our corporate purposes in future periods.

Costs of Marketplace Revenue

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

	Three-months ended April 30,						Percent			Nine-months ended April 30,						Percent
	2012			2011			increase (decrease)			2012			2011			increase (decrease)

Transaction fee commissions	$	1,938		$	1,644			18	%	$	5,944		$	5,416			10	%
Association fee commissions		425			370			15	%		1,268			1,185			7	%
Corporate-owned office costs		17			219			-92	%		292			671			-56	%
Other costs of revenue		65			103			-37	%		259			306			-15	%
	$	2,445		$	2,336			5	%	$	7,763		$	7,578			2	%

Costs of Marketplace revenue as percentage of total revenue		65	%		59	%					65	%		61	%

Costs of Marketplace revenue for the three-months ended April 30, 2012, as compared to the three-months ended April 30, 2011, increased by $109, or 5%. Costs of Marketplace revenue for the nine-month period ended April 30, 2012, as compared to nine-month period ended April 30, 2011, increased by $185, or 2%. The overall increase in costs of Marketplace revenue corresponds to the increase in total revenue for the same periods. Costs of Marketplace revenue as a percentage of total revenue also increased for both the three and nine-month periods ended April 30, 2012, respectively because of the increase in commissions paid out due to the sale of corporate-owned offices to new brokers. Corporate-owned offices have no associated commissions due ─ however, transaction and association fee commissions are paid out once a corporate-owned office is sold.

Transaction fee commissions increased by $294, or 18% for the three-months ended April 30, 2012, as compared to the corresponding period of fiscal 2011. Transaction fee commissions increased by $528 or 10% for the nine-month period ended April 30, 2012 as compared to the corresponding period of fiscal 2011. The increase in transaction fee commissions for both the three and nine-month periods is due to increases in the transaction fee revenue and the 2012 sale of corporate-owned offices.

Association fee commissions increased by $55 and $83, or 15% and 7%, respectively for the three and nine-month periods ended April 30, 2012 as compared to the corresponding periods of fiscal 2011. The increase in association commissions was due to the increase in association fee revenue for the same periods and due to the impact from the sale of corporate-owned offices.

Corporate-owned office costs consist of compensation and operating expenses. Corporate-owned office costs decreased by $202 and $379, or 92% and 56%, respectively for the three and nine-month periods ended April 30, 2012 as compared to the corresponding periods of fiscal 2011. The decrease is due to decreased expenses associated with managing a portion of the web services initiatives out of our corporate-owned stores, the expiration of an office lease and ancillary costs as a result of the sale of corporate-owned offices.

Other costs of revenue consist of miscellaneous Marketplace-related expenses such as broker computer upgrades, marketing and credit card processing fees along with other commissions not associated with association or transaction revenue. Other costs of revenue decreased by $38 and $47 or 37% and 15%, respectively for the three and nine-month periods ended April 30, 2012 as compared to the corresponding periods of fiscal 2011.

Corporate Salaries, Wages and Employee Benefits

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

	Three-months ended April 30,						Percent			Nine-months ended April 30,						Percent
	2012			2011			increase			2012			2011			decrease

Corporate salaries, wages and employee benefits	$	509		$	487			5	%	$	1,481		$	1,504			-2	%

Corporate salaries, wages and employee benefits as percentage of total revenue		13	%		12	%					12	%		12	%

Salaries, wages and employee benefits increased by $22, or 5%, for the three-month period ended April 30, 2012 and decreased by $23, or 2%, for the nine-month period ended April 30, 2012 as compared to the corresponding period of fiscal 2011. The increase for the three-month period is primarily related to a full quarter of expense related to employee stock grants whereas in 2011 only one month of similar expense was incurred. The decrease in the nine-month period is primarily related to decreased headcount costs from the planned reduction in the staff required to manage the terminated web services. This is offset somewhat, by an increase in stock-based compensation of $37 and $158 as compared to the corresponding three and nine-months, respectively in 2011.

Selling, General and Administrative Expenses

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

	Three-months ended April 30,						Percent			Nine-months ended April 30,						Percent
	2012			2011			decrease			2012			2011			decrease

Selling, general and administrative expenses	$	435		$	602			-28	%	$	1,655		$	2,036			-19	%

Selling, general and administrative expenses as percentage of total revenue		11	%		15	%					14	%		16	%

Selling, general and administrative expenses decreased by $167 and by $381, or 28% and 19%, respectively, for the three and nine-month periods ended April 30, 2012, as compared to the three and nine-month periods ended April 30, 2011. Our selling, general and administrative expenses also decreased as a percentage of total revenues in the periods presented.

The decrease is due primarily to a decrease in legal fees. Legal fees for the three and nine-month periods ended April 30, 2012 decreased by $174 and by $310, or 66% and 41%, respectively, compared to the three and nine-months ended April 30, 2011. The primary decrease in legal fees was due to the Company prevailing and ending its defense of a litigation matter initiated in 2003. This decrease was offset by $155 in legal fees incurred as a result of a stockholder derivative claim expensed in the nine-months ended April 30, 2012.

Additionally, rent expense for the three-months ended April 30, 2012 decreased by $34, or 45% to $42 as compared to $76 for the three-months ended April 30, 2011. Bad debt expense for the nine-months ended April 30, 2012 decreased by $70, or 25% to $207 as compared to $277 for the nine-months ended April 30, 2011.

Depreciation and Amortization

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

	Three-months ended April 30,						Percent			Nine-months ended April 30,						Percent
	2012			2011			decrease			2012			2011			decrease

Depreciation and amortization	$	74		$	147			-50	%	$	239		$	456			-48	%

Depreciation and amortization as percentage of total revenue		2	%		4	%					2	%		4	%

Depreciation and amortization decreased by $73 and $217, or 50% and 48%, respectively for the three and the nine-month periods ended April 30, 2012, as compared to the three and the nine-month periods ended April 30, 2011. Depreciation and amortization also decreased as a percentage of total revenues in the three and nine-month periods ended April 30, 2012 compared to the corresponding periods in 2011. There have been no material additions of property and equipment and intangible assets in 2012, which along with expiring intangible asset amortization periods has resulted in a decreased amount of depreciation and amortization.

Other income

Other income includes interest received on notes receivable and promissory notes, and certain one-time gains.

Comparative results are as follows (in thousands) (unaudited):

	Three-months ended April 30,						Percent			Nine-months ended April 30,						Percent
	2012			2011			increase			2012			2011			increase

Interest income	$	25		$	13			92	%	$	75		$	33			127	%
Gain on sale of assets	$	-		$	-			-		$	312		$	33			845	%
Other income	$	25		$	13			92	%	$	387		$	66			486	%

Other income, as percentage of total revenue		1	%		0	%					3	%		1	%

Interest income is derived primarily from our notes receivable for corporate office sales and general loans to brokers. As part of our initiative to support brokers and as a way to generate return on capital, we have increased the amount of outstanding loans to our brokers. Since the end of fiscal 2011, these loans have increased to $1,625 from $909. Each loan is primarily secured by the broker’s ITEX office. Other income for the nine-month period ended April 30, 2012 includes a $318 gain on the sale of corporate-owned offices offset by a loss of $6 on the disposition of fixed assets. Other income for the nine-month period ended April 30, 2011 includes a $35 gain on the sale of advertising credits offset by a loss of $1 on the disposition of fixed assets.

Income Taxes

Comparative results are as follows (in thousands) (unaudited):

	Three-Months ended April 30											Nine-months ended April 30,
	2012						2011					2012						2011
	Amount			Rate			Amount		Rate			Amount			Rate			Amount		Rate
Expected tax provison at federal statutory rate	$	121			35	%	$	146		35	%	$	429			35	%	$	350		35	%
State income taxes		(2	)		-1	%		16		4	%		(8	)		-1	%		39		4	%

Provision for income taxes	$	119			34	%	$	162		39	%	$	421			34	%	$	389		39	%

We recognized a $119 and $421 provision for income taxes, in the three and nine-month periods ended April 30, 2012, respectively, as compared to the $162 and $389 provision for income taxes in the three and nine-month periods ended April 30, 2011. Provision for income taxes decreased by $43 for the three-months ended April 30, 2012, as compared to the corresponding period of fiscal 2011. The decrease was due to a decrease in taxable income in the three-months ended April 30, 2012. The provision for income taxes increased by $32 for the nine-month period ended April 30, 2012, as compared to the corresponding period of fiscal 2011, due to the corresponding increase in pre-tax income.

LIQUIDITY AND CAPITAL RESOURCES

We finance ongoing operations primarily with cash provided by our operating activities. Our principal sources of liquidity are cash flows provided by operating activities, existing cash and cash equivalents, and a line of credit facility. As of April 30, 2012 and July 31, 2011, we had $922 and $5,386, respectively, in cash. Additionally, we have a revolving credit agreement to establish a $3,000 line of credit facility from our primary banking institution, U.S. Bank (“line of credit”). The current line of credit agreement expires in November 2012. We have no outstanding balance on our line of credit as of April 30, 2012.

The following table presents a summary of our cash flows for the nine-months ended April 30, 2012 and 2011 (in thousands) (unaudited):

	Nine-months ended April 30,
	2012			2011

Cash provided by operating activities	$	781		$	546
Cash used in investing activities		(258	)		(157	)
Cash used in financing activities		(4,987	)		(793	)
Decrease in cash	$	(4,464	)	$	(404	)

Our business model has historically proven to be successful in providing positive cash flow from operating activities. This positive cash flow enabled us, in large part, to complete three trade exchange membership list acquisitions in fiscal 2011 and one in the first quarter of 2012. We feel that our cash flows from operating activities will remain adequate to fund ongoing operating requirements.

As part of our future expansion activities or as part of our evaluation of strategic opportunities, we may seek to acquire certain competitors or other business to business enterprises, consider partnering or other collaborative agreements, or a merger or other strategic transaction. In the meantime, we plan to continue to use capital to fund our stock repurchase plan and to pay quarterly dividends. We expect that our current working capital would be adequate for these purposes. However, we may seek external financing for a portion of any strategic transaction, subject to the consent of any secured creditors.

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

Operating Activities

For the nine-months ended April 30, 2012, net cash provided by operating activities was $781 compared with $546 in the nine-months ended April 30, 2011 an increase of $235, or 43%. The increase in net cash provided by the operating activities is primarily the result of an increase in net income.

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

	Nine-months ended April 30,
	2012			2011

Net income	$	814		$	593
Add: non-cash expenses		537			868
Add: changes in operating assets and liabilities		(570	)		(915	)
Net cash provided by operating activities	$	781		$	546

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

Changes in operating assets and liabilities primarily reflect changes in working capital components of the balance sheet apart from cash and cash equivalents. Net cash provided by operating activities also reflects changes in some non-current components of the balance sheet, such as long-term deferred rent and non-current prepaid expenses and deposits.

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

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

	Nine-months ended April 30,
	2012					2011
	Amount		Percent of total			Amount		Percent of total

Credit cards	$	7,868		68	%	$	7,432		65	%
Electronic funds transfer		2,907		25	%		2,928		26	%
Cash and checks		876		7	%		975		9	%
Cash received from Marketplace members	$	11,651		100	%	$	11,335		100	%

Investing Activities

Net cash used in investing activities was primarily the result of a business acquisition, purchase of property and equipment and intangible assets, and advances on loans offset by the collections on notes receivable.

For the nine-months ended April 30, 2012, net cash used by investing activities was $258 compared with $157 used in investing activities in the nine-months ended April 30, 2011, an increase of $101, or 64%. In the nine-months ended April 30, 2012, the net cash used in investing activities was primarily related to $175 purchase of a member list that was subsequently sold to a broker, $255 in loans made to brokers, $13 in purchases of property and equipment, offset by $185 in payments on existing notes receivables. In the nine-months ended April 30, 2011, the net cash used in investing activities was primarily related to $164 in loans made to brokers, $72 cash consideration paid for the acquisition of a trade exchange membership list and $19 in purchases of new equipment, offset by $98 in payments received from notes during the period.

Financing Activities

Our net cash used in financing activities typically consists of cash dividends to stockholders and discretionary repurchases of our common stock. During the three-months ended April 30, 2012, we utilized $4,506 to complete a partial tender offer in which 1,073 shares of ITEX common stock were purchased.

For the nine-months ended April 30, 2012, net cash used in financing activities was $4,987 compared with $793 used in financing activities in the nine-months ended April 30, 2011, an increase of cash used in financing activities of $4,194, or 529%. The increase is primarily due to the tender offer purchase of 1,073 shares of our common stock and an increase of our cash dividend paid out to stockholders from $378 in the nine-months ending April 30, 2011 to $485 paid in the nine-months ending April 30, 2012. In addition, we also repurchased 17 shares of our common stock during the nine-months ending April 30, 2012 through the stock repurchase program.

Commitments

We lease office space under operating leases. Lease commitments include leases for the Company’s corporate headquarters in Bellevue, Washington, and a branch office in Milwaukie, Oregon. These leases expire between October 31, 2012 and April 30, 2015.

In addition to the lease commitments, we are a party to several non-cancelable and non-refundable purchase commitments. Those purchase obligations consist primarily of arrangements for telecommunications and co-location services for our network operations. Our contractual commitments at April 30, 2012 are presented below (in thousands) (unaudited):

Year ending July 31,	Operating leases		Purchase commitments		Total

2012 (1)		42		8		50
2013		164		12		176
2014		166		-		166
2015		127		-		127

Total	$	499	$	20	$	519

(1)

The expected payments for 2012 reflect future minimum payments for the nine-month period from May 1, 2012 to July 31, 2012.

Critical Accounting Policies and Estimates

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

revenue recognition, including allowances for uncollectible accounts;

accounting for ITEX dollar activities;

the allocation of purchase price in business combinations

accounting for goodwill and other long-lived intangible assets;

accounting for income taxes

share-based compensation; and

litigation matters

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

For a summary of all of our significant accounting policies, including the critical accounting policies discussed above, see Note 1, Summary of Significant Accounting Policies, to our consolidated financial statements filed with our 2011 annual report on Form 10-K.

Recent Accounting Pronouncements

For a discussion of new accounting pronouncements and their impact on the Company, see Note 1 of the Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q.

FACTORS THAT MAY AFFECT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 revenue growth and success is tied to the operations of our independent Broker Network, and as a result the loss of our brokers or the financial performance of our brokers can negatively impact our business

We service our member businesses primarily through our independent licensed broker and franchise network (individually, “broker”, together, the “Broker Network”) as well as through a corporate-owned office, and our financial success primarily depends on our brokers and the manner in which they operate and develop their offices. We depend on the ability of our brokers to enroll new members, train them in the use of the Marketplace, grow our transactional volume by facilitating business among members, manage member relationships, provide members with information about ITEX products and services, and assure the payment of our fees. Brokers are independently owned and operated and have a contractual relationship with ITEX, typically for a renewable five-year term. Our inability to renew a significant portion of these agreements on terms satisfactory to our brokers and us could have a material adverse effect on our business, financial condition and results of operations. Further, our brokers may not be successful in increasing the level of revenues generated compared to prior years, or even sustaining their own business activities, which depends on many factors, including the success of their marketing activities, control of expense levels, the employment and management of personnel, and being able to secure adequate financing to operate their businesses. There can be no assurance that our brokers will be successful in adding members or increasing the volume of transactions through the Marketplace, or that if they do not renew their agreements or terminate operations we will be able to attract new brokers at rates sufficient to maintain a stable or growing revenue base. If our brokers are unsuccessful in generating revenue, enrolling new members to equalize the attrition of members leaving the Marketplace, or if a significant number of brokers become financially distressed and terminate operations, our revenues could be reduced and our business operating results and financial condition may be materially adversely affected.

Future revenue growth remains uncertain and our operating results and profitability may decline

For the nine-months ended April 30, 2012, our revenue decreased 4% compared to the same period in 2011. Although we seek to increase revenues through organic growth and the development of new revenue streams, we cannot assure you that our revenues will increase in future quarters or future years. We may be unable to add revenue through acquisitions, either because of the absence of acquisition candidates, lack of financing, or unacceptable terms. Other than extrapolating from historical data based on the size of the Marketplace, it is difficult for us to project the level of our revenues accurately. We have approximately 28% recurring revenues. We do not have an order backlog, and approximately two-thirds of our net revenues each quarter come from transaction fees during that quarter. Our operating results in one or more future quarters may fall below the expectations of investors.

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. We are currently subject to increased expense levels as a result of responding to a proxy contest, litigation and other actions by dissident stockholders. We invest in marketing, broker and member support, technology and further development of our operating infrastructure. Some of this investment may entail long-term commitments. As a result, we may be unable to adjust our spending rapidly enough to compensate for any unexpected revenue shortfall, which may harm our profitability. Market information for the barter industry is difficult to ascertain. Despite our efforts to expand our revenues, we may not be successful. We experience a certain amount of attrition from members leaving the Marketplace. If new member enrollments do not continue or are insufficient to offset attrition, we will increasingly need to focus on keeping existing members active and increasing their activity level in order to maintain or grow our business. We cannot assure you that this strategy would be successful to offset declining revenues or profits.

Our brokers could take actions that could harm our business, our reputation and adversely affect the ITEX Marketplace

Our agreements with our brokers require that they understand and comply with all laws and regulations applicable to their businesses, and operate in compliance with our Marketplace Rules. Brokers are independently owned and operated and are not our employees, partners, or affiliates. We set forth operational standards and guidelines; however, we have limited control over how our broker businesses are run. Our brokers have individual business strategies and objectives, and may not operate their offices in a manner consistent with our philosophy and standards. We cannot assure that our brokers will avoid actions that adversely affect the reputation of ITEX or the Marketplace. Improper activity stemming from one broker can generate negative publicity which could adversely affect our entire Broker Network and the Marketplace. Our image and reputation and the image and reputation of other brokers may suffer materially, and system-wide sales could significantly decline if our brokers do not operate their businesses according to our standards. While we ultimately can take action to terminate brokers and franchisees that do not comply with the standards contained in our agreements, and even though we may implement compliance and monitoring functions, we may not be able to identify problems and take action quickly enough and, as a result, our image and reputation may suffer, causing our revenues or profitability to decline. Further, the success and growth of our Broker Network depends on our maintaining a satisfactory working relationship with our existing brokers and attracting new brokers to our network. Lawsuits and other disputes with our brokers could discourage our brokers from expanding their business or lead to negative publicity, which could discourage new brokers from entering our network or existing brokers from renewing their agreements, and could have a material adverse effect on our business, financial condition and results of operations.

We could be negatively affected as a result of a proxy fight and related litigation.

In July 2010, a dissident shareholder group led by Mr. Polonitza declared its intention to change the management structure of ITEX. It nominated an opposition slate of individuals for election to replace our Board of Directors at the annual meeting of stockholders held in December 2010. Although unsuccessful in 2010, Mr. Polonitza again nominated an opposition slate of individuals to replace a majority of our directors at the annual meeting held on May 14, 2012. In addition, Mr. Polonitza has filed a shareholder derivative lawsuit against the Company’s Board of Directors, and is also seeking to set aside the vote of certain shareholders who voted at the annual meeting. (See Note 3 ― “Legal Proceedings and Litigation Contingencies” included in the “Notes to Consolidated Financial Statements.”) A proxy contest and related litigation could negatively affect us because:

Responding to proxy contests, litigation and other actions by dissident shareholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees;

Perceived uncertainties as to our future direction may divert the attention of, damage morale and create instability among members of our Broker Network as well as our management and employees, and adversely impact our existing and potential strategic and operational relationships and opportunities;

We may experience difficulties in hiring, retaining and motivating personnel during the resulting uncertain and turbulent times;

If individuals are elected to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our current business plan which could have a material adverse effect on our results of operations and financial condition;

If certain corporate governance proposals are implemented that are not scaled to the size of our company or do not provide a benefit commensurate with their cost, our profitability as well as the value creation capabilities of our organization may be adversely affected;

Increases in legal fees, administrative and associated costs incurred in connection with responding to a proxy contest and related litigation are substantial;

A proxy contest, or the threat of one, could cause our stock price to experience periods of volatility or stagnation;

A successful election outcome by a dissident shareholder could result in a change in control of the Company, which would trigger employee change in control agreements and immediate vesting of restricted stock awards, resulting in substantial compensation charges and other expenses. (See Note 3 ― “Legal Proceedings and Litigation Contingencies” included in the “Notes to Consolidated Financial Statements.”) A change in control would allow Mr. Polonitza to reimburse his proxy expenses. The effect of a change in control would have a material adverse effect upon the Corporation’s operations, financial condition, and financial statements taken as a whole; and

A successful election outcome by a dissident shareholder who is also engaged in litigation against ITEX could further adversely affect the Company by resulting in an “insured v. insured exclusion” under our D&O insurance policy, which excludes indemnification for claims against directors and officers alleged by other directors and officers or policyholders under the same policy. There is a risk that our insurer would decline to cover claims, or that defense costs advanced by the Company during the pendency of the claim would later be determined to be not covered under the policy and would not be repaid or recovered. We cannot assure you that an adverse determination would not be made by our insurer which could have a material adverse effect on our business, financial condition and results of operations.

We may be held responsible by members, third parties, regulators or courts for the actions of, or failures to act by, our brokers or their employees, which exposes us to possible adverse judgments, other liabilities and negative publicity

From time to time we are subject to claims for the conduct of our brokers in situations where a broker has caused injury to a member as a result of a transaction in the Marketplace. Third parties, regulators or courts may seek to hold us responsible for the actions or failures to act by our brokers or their employees. Failure to comply with laws and regulations by our brokers, or litigation involving potential liability for broker activities could be costly and time consuming for us, divert management attention, result in increased costs of doing business, lead to adverse judgments, expose us to possible fines and negative publicity, or otherwise harm our business.

Failure to deal effectively with member disputes could result in costly litigation, damage our reputation and harm our business

ITEX faces risks with respect to transactional disputes between members of the Marketplace. From time to time we receive complaints from members who may not have received the products or services that they had purchased, concerning the quality of the products or services, or who believe they have been defrauded by other members or ITEX brokers. We also receive complaints from sellers because a buyer has changed his or her mind and decided not to honor the contract to purchase the item. While ITEX does, in some cases, as part of its transaction dispute resolution process reverse transactions, reduce or eliminate credit lines, suspend accounts, or take other measures with members who fail to fulfill their payment or delivery obligations to other members, the determination as to whether a transaction is reversed or how to resolve a specific dispute is made by ITEX in its sole discretion. Measures we may take to resolve transactional disputes or combat risks of fraud have the potential to damage relations with our members or brokers or decrease transactional activity in the Marketplace by restricting the activities of certain members. Furthermore, negative publicity and member sentiment generated as a result of member complaints or fraudulent or deceptive conduct by members of our Marketplace could damage our reputation, or reduce our ability to attract new members or retain our current members.

We occasionally receive communications from members requesting reimbursement or threatening or commencing legal action against us if no reimbursement is made. In addition, because we service our member businesses through our Broker Network, we are subject to claims and could potentially be found liable for the conduct of our brokers in a situation where that broker has caused injury to a member. Litigation involving disputes between members and liability for broker actions could be costly and time consuming for us, divert management attention, result in increased costs of doing business, lead to adverse judgments, or otherwise harm our business. In addition, affected members may complain to regulatory agencies that could take action against us, including imposing fines or seeking injunctions.

Use of our services for illegal purposes could damage our reputation and harm our business

Our members, typically small businesses, actively market products and services through the Marketplace and our website. The law relating to the liability of providers of online services for the activities of users or members of their service is often the subject of litigation. We may be unable to prevent our members from selling unlawful or stolen goods or unlawful services, or selling goods or services in an unlawful manner, and we could be subject to allegations of civil or criminal liability for unlawful activities carried out by users through our services. It is possible that third parties, including government regulators and law enforcement officials, could allege that our services aid and abet certain violations of certain laws, for example, laws regarding the sale of counterfeit items, the fencing of stolen goods, selective distribution channel laws, and the sale of items outside of the U.S. that are regulated by U.S. export controls.

Although we have prohibited the listing of illegal goods and services and implemented other protective measures, we may be required to spend substantial resources to take additional protective measures or discontinue certain service offerings, any of which could harm our business. Any costs incurred as a result of potential liability relating to the alleged or actual sale of unlawful goods or services could harm our business. In addition, negative media publicity relating to the listing or sale of unlawful goods and stolen goods using our services could damage our reputation, diminish the value of our brand names, and make members reluctant to use our services.

ITEX’s trade dollar currency is also susceptible to potentially illegal or improper uses. Recent changes in law have increased the penalties for intermediaries providing payment services for certain illegal activities. Despite measures taken by ITEX as administrator and as a third-party record-keeper to detect and lessen the risk of this kind of conduct, illegal activities could still be funded using ITEX dollars. Any resulting claims or liabilities could harm our business.

Our business is subject to online security risks, including security breaches and identity theft

We host confidential information as part of our client relationship management and transactional processing platform. Our security measures may not detect or prevent security breaches that could harm our business. Currently, a significant number of our members authorize us to bill their credit card accounts directly for fees charged by us. We take a number of measures to ensure the security of our hardware and software systems and member and client information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being breached or compromised. Other large Internet companies have been the subject of sophisticated and highly targeted attacks on portions of their sites. In addition, any party who is able to illicitly obtain a members’ password could access the members’ transaction data. An increasing number of websites have reported breaches of their security. Any compromise of our security could harm our reputation and, therefore, our business, and could result in a violation of applicable privacy and other laws. In addition, a party that is able to circumvent our security measures could misappropriate proprietary information, cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation and business. Under credit card rules and our contracts with our card processors, if there is a breach of credit card information that we store, we could be liable to the credit card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow credit card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option of using credit cards to pay their fees. If we were unable to accept credit cards, our business would be seriously damaged.

We continue to enhance our systems for data management and protection, and intrusion detection and prevention. However, our servers may be vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach by us or by parties with which we have commercial relationships that result in the unauthorized release of our members’ personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry coverage limits which may not be adequate to reimburse us for losses caused by security breaches.

Unplanned system interruptions or system failures could harm our business and reputation

Any interruption in the availability of our transactional processing services due to hardware and operating system failures will reduce our revenues and profits. Our revenue depends on members using our processing services. Any unscheduled interruption in our services results in an immediate, and possibly substantial, loss of revenues. Frequent or persistent interruptions in our services could cause current or potential members to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our websites or services, and could permanently harm our reputation. Furthermore, any system failures could result in damage to our members’, clients’ or brokers’ businesses. These persons could seek compensation from us for their losses. Even if unsuccessful, this type of claim likely would be time-consuming and costly for us to address.

Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks, and similar events or disruptions. Some of our systems are not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities. Our systems are also subject to break-ins, sabotage, and intentional acts of vandalism. Despite any precautions we may take, the occurrence of a natural disaster, a decision by any of our third-party hosting providers to close a facility we use without adequate notice for financial or other reasons, or other unanticipated problems at our hosting facilities could cause system interruptions, delays, and loss of critical data, and result in lengthy interruptions in our services. Our business interruption insurance may not be sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures.

Failure to comply with laws and regulations that protect our members’ personal and financial information could result in liability and harm our reputation

We store personal and financial information for members of the Marketplace. Privacy concerns relating to the disclosure and safeguarding of personal and financial information have drawn increased attention from federal and state governments. Federal and state law requires us to safeguard our members’ and clients’ financial information, including credit card information. Although we have established security procedures to protect against identity theft and the theft of this personal and financial information, breaches of our privacy may occur. To the extent the measures we have implemented are breached or if there is an inappropriate disclosure of confidential or personal information or data, we may become subject to litigation or administrative sanctions, which could result in significant fines, penalties or damages and harm to our brand and reputation. Even if we were not held liable, a security breach or inappropriate disclosure of confidential or personal information or data could harm our reputation. In addition, we may be required to invest additional resources to protect us against damages caused by these actual or perceived disruptions or security breaches in the future. Changes in these federal and state regulatory requirements could result in more stringent requirements and could result in a need to change our business practices. Establishing systems and processes to achieve compliance with these new requirements may increase our costs and could have a material adverse effect on our business, financial condition and results of operations.

We have claims and lawsuits against us that may result in adverse outcomes

From time to time we are subject to a variety of claims and lawsuits. (See Note 3 ― “Legal Proceedings and Litigation Contingencies” included in the “Notes to Consolidated Financial Statements”) Adverse outcomes in one or more of these claims may result in significant monetary damages that could adversely affect our ability to conduct our business. Although management currently believes resolving all of these matters, individually or in the aggregate, will not have a material adverse impact on our financial statements, the litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. A material adverse impact on our financial statements also could occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.

If we lose the services of our chief executive officer, our business could suffer

Our performance depends substantially on the continued services of our Chief Executive Officer, Steven White. Mr. White also currently fills the executive positions of Interim Chief Financial Officer and Chief Accounting Officer. Our board places heavy reliance on Mr. White’s experience and management skills. We have not entered into a formal employment agreement with Mr. White, other than an agreement to receive a payment in connection with a “change of control,” as defined in the agreement. If we were to lose the services of Mr. White, we could face substantial difficulty in hiring a qualified successor or successors, and could experience a loss in performance while any successor obtains the necessary training and experience. Corporate staff and our franchisees and brokers could lose confidence in the direction and stability of the Company and choose to pursue other opportunities. In addition, in connection with a management transition we may need to attract, train, retain and motivate additional financial, technical, managerial, marketing or 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, financial condition and results of operations will be adversely affected.

Alliances, mergers and acquisitions could result in operating difficulties, dilution and other harmful consequences

We have acquired eight trade exchange membership lists since 2005 and integrated them into the ITEX system. We expect to continue to evaluate and consider other potential strategic transactions, including business combinations, acquisitions and dispositions of businesses, technologies, services, products and other assets and strategic investments. At any given time we may be engaged in discussions or negotiations with respect to one or more of these types of transactions. Any of these transactions could be material to our financial condition and results of operations. 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 difficulties include:

	•	Diversion of management time, as well as a shift of focus from operating the businesses to challenges related to integration and administration;

	•	Challenges associated with integrating employees from the acquired company into the acquiring organization. These may include declining employee morale and retention issues resulting from changes in, or acceleration of, compensation, or changes in management, reporting relationships, future prospects, or the direction of the business;

	•	The need to integrate each company’s accounting, management, information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;

	•	The need to implement controls, procedures and policies appropriate for a public company at companies that prior to acquisition had lacked such controls, procedures and policies;

	•	The need to transition operations, members, and customers onto our existing platforms; and

	•	Liability for activities of the acquired company before the acquisition, including violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities.

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 expenditure of our cash or the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could adversely affect our results of operations and dilute the economic and voting rights of our stockholders. Future acquisitions may require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all.

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 strategic 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 be certain that we will be able to implement various financing alternatives or otherwise obtain required working capital if needed or desired.

We are dependent on the value of foreign currency.

We transact business in Canadian dollars as well as U.S. dollars. Revenues denominated in Canadian dollars comprised 7.8% and 7.0% in the years ended July 31, 2011 and 2010, 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 U.S. dollar could continue to affect our revenues, cost of sales, operating margins and result in exchange losses.

If we fail to maintain an effective system of internal controls, we may not be able to detect fraud or report our financial results accurately, which could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price

Effective internal controls are necessary for us to provide reliable financial reports and to detect and prevent fraud. We periodically assess our system of internal controls to review their effectiveness and identify potential areas of improvement. These assessments may conclude that enhancements, modifications or changes to our system of internal controls are necessary. Performing assessments of internal controls, implementing necessary changes, and maintaining an effective internal controls process is expensive and requires considerable management attention. Internal control systems are designed in part upon assumptions about the likelihood of future events, and all such systems, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. We face the risk that the design of our controls and procedures may prove to be inadequate or that our controls and procedures may be circumvented, thereby causing delays in detection of errors or inaccuracies in data and information. It is possible that any lapses in the effective operations of controls and procedures could materially affect earnings, that we could suffer losses, that we could be subject to costly litigation, that investors could lose confidence in our reported financial information and our reputation, and that our operating results could be harmed, which could have a negative effect on the trading price of our common stock.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must certify the effectiveness of our internal controls over financial reporting annually. If we are unable to assert that our internal control over financial reporting is effective for a particular year we could lose investor confidence in the accuracy and completeness of our financial reports. That could adversely affect our competitive position in our business, and the market price for our common stock.

Our Brokers may default on their loans

From time to time we finance the operational and expansion activities of our brokers. We loan brokers funds for general operational purposes, to acquire the management rights to select member accounts, and for other reasons. These loans are repaid from regular deductions from broker commissions. We have increased the amount of our loans to brokers from $605 in 2010 to $909 in 2011 and $1,625 at April 30, 2012. In the event one or more brokers default on their loans, it may adversely affect our financial condition.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures.

Under the supervision and with the participation of our management, including the Chief Executive Officer, who is also the Interim Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our CEO and Interim CFO concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.

(b) Changes in internal control over financial reporting.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 3 – Legal Proceedings and Litigation Contingencies of the Notes to consolidated financial statements (Item 1) for information regarding legal proceedings.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information about shares of our common stock purchased by us during the three-months ended April 30, 2012.

	(a)		(b)		(c)		(d)
Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
02/01/12 - 02/28/12		-		-		-		-
03/01/12 – 03/31/12		-		-		-		-

04/01/12 - 04/30/12⁽¹⁾		1,072,808	$	4.20		-	$	1,639,550

⁽¹⁾	On March 16, 2012, we commenced a partial tender offer to purchase for cash up to 1,000,000 shares of our common stock at a price of $4.20 per share. This tender offer closed on April 13, 2012, after which we purchased and canceled a total of 1,072,808 shares at a cost of $4,505,831. This purchase represented approximately 26.5% of the outstanding common shares (including shares of unvested restricted stock).

⁽²⁾	On March 9, 2010, we announced that our Board of Directors authorized the repurchase of up to $2.0 million of our common stock. The stock repurchase program authorizes the repurchase of shares in open market purchases or privately negotiated transactions, has no expiration date and may be modified or discontinued by the Board of Directors at any time. During the three months ended April 30, 2012, no shares were repurchased under this program. Amounts shown in column (d) reflect amounts remaining under the $2.0 million stock repurchase program.

Item 6. Exhibits

Exhibit Number		Description


31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

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

		ITEX CORPORATION
		(Registrant)

Date: June 14, 2012	By:	/s/ Steven White
		Steven White
		Chief Executive Officer
		Interim Chief Financial Officer

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