UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-K/A

           (Amendment No. 1 to Form 10-K as amended December 6, 1996)


               (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                            For the Fiscal Year Ended

                                  July 31, 1996

                         Commission File Number 0-18275

                                ITEX CORPORATION

             (Exact Name of Registrant as Specified in its Charter)

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

           10300 SW Greenburg Road, Suite 370, Portland, Oregon 97223
           -----------------------------------------------------------
           (Address of principal executive offices including zip code)

                                 (503) 244-4673
                                ----------------
               (Registrant's telephone number including area code)

Indicate by check whether the Registrant:  (1) 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 if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by  reference  in Part III of this Form 10K/A or any  amendment of
this  Form  10K/A.  [  ]

The  approximate  market value of stock held by  non-affiliates  is  $28,345,000
based upon 6,129,000 shares held by such persons and the close price of $4.63 on
November 11, 1996. The number of shares  outstanding of the  Registrant's  $0.01
par  value  common  stock  at  November  11,  1996  was   6,853,000.  

                      DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of Registrant's definitive proxy statement to be filed pursuant
to Regulation 14A in connection with the annual meeting of shareholders:

                Part III, Items 10, 11, 12, and 13 of this report

                       (This Form 10K/A includes 76 pages)
<PAGE>
                                ITEX CORPORATION
                                   FORM 10K/A
                            For the Fiscal Year Ended
                                  July 31, 1996

                                      INDEX


                                                                       Page
                                                                    ----------
                                     PART I

ITEM 1.       DESCRIPTION OF BUSINESS                                     3

ITEM 2.       DESCRIPTION OF PROPERTIES                                  11

ITEM 3.       LEGAL PROCEEDINGS                                          12

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY                13
              HOLDERS


                                     PART II

ITEM 5.       MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S          15
              COMMON EQUITY AND RELATED  STOCKHOLDER MATTERS

ITEM 6.       SELECTED CONSOLIDATED DATA                                 16

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL          17
              CONDITION AND RESULTS OF OPERATIONS

ITEM 8.       FINANCIAL STATEMENTS                                       30


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND                    62
               REPORTS ON FORM 8-K

               SIGNATURES                                                76


                                        2
<PAGE>
                                ITEX CORPORATION
                                   FORM 10-K/A
                            For the Fiscal Year Ended
                                  July 31, 1996

PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

ITEX  Corporation  (hereinafter  referred to "ITEX" or as the  "Company"  or the
"Registrant")  was  incorporated  in the State of  Delaware  on March 8, 1901 as
Magneto-Electric Company. The Registrant became inactive in 1905 and was revived
in the State of Delaware on September 1, 1985. On October 1, 1985,  the domicile
of the Registrant was changed to the State of Nevada and the name was changed to
B.I.G.  Enterprises  Inc.  On  February  14,  1986,  an  Agreement  and  Plan of
Reorganization was entered into between the Registrant and The ITEX Corporation,
an Arizona corporation,  whereby the Registrant became the surviving corporation
under  the name of ITEX  Barter  Systems  Inc.  The name of the  Registrant  was
changed, by means of an amendment to it's Nevada Articles of Incorporation filed
on May 19,  1986 to ITEX  Barter  Systems  Inc.  The  name was  changed  to ITEX
Corporation on April 12, 1991.

The business practice of bartering has been used by individuals,  companies, and
countries  throughout the world for centuries.  In recent years,  companies like
ITEX have  developed  barter into an  organized  business  practice  that brings
benefits to participating businesses.

The barter industry represents the exchange of goods or services for other goods
or services  rather than for cash.  The retail  industry is typically a group of
merchants and  professionals  who purchase goods and services from others in the
group.  In lieu of using  cash the  members  of the  group  operate  with  trade
dollars,  sometimes referred to as trade units, or trade credits. A trade dollar
is a ledger  entry,  or medium of  exchange,  by which goods and services can be
bought and sold. The Company handles  transaction  accounting between members of
the group including the allocation of trade dollars and the Company  attempts to
maximize trade through promotion of barter transactions.

Organized  commercial  barter plays an  increasingly  important  role in the way
American companies do business. Barter is becoming an integral part of strategic
planning  for  companies  from small  family-owned  and operated  businesses  to
Fortune 500 companies.  The International Reciprocal Trade Association (IRTA) is
the barter industry's leading trade association. According to IRTA, an estimated
300,000 U.S.  companies  participate in organized  commercial barter through the
services of a barter company. Currently, IRTA estimates that barter represents a
$7.5 billion a year industry which is growing at an annual rate of 8%. There are
over 600 barter  exchanges in the U.S.  Most are small  operations  limited to a
specific  city,  state,  or  region.  ITEX is one of only three  companies  with
national stature.

Management  believes  that the Company is the largest of the six hundred  barter
exchanges in the United States,  calculated  either by number of offices,  total
customer  count,  client trade  volume,  or cash service fees billed.  Financial
comparisons  are  not  available.  BarterNews,  the  barter  industry's  primary
magazine, has referred to the Company as the "World's Largest Exchange".

                                       3
<PAGE>
THE COMPANY

The Company is engaged in  international  operations  in both the retail  barter
exchange and  corporate  barter areas of the  commercial  barter  industry.  The
Company administers the ITEX Retail Barter Exchange (the Exchange),  which is an
association of business  owners and  professionals  who trade goods and services
with other members of the Exchange.  The Company  promotes the  maximization  of
trade through barter  transactions  that benefit members within the Exchange by:
(a) generating  incremental new business,  (b) conserving members' cash by their
ability to spend ITEX trade dollars,  (c) serving  effectively as an alternative
source of financing,  (d) enhancing the lifestyles of members,  and (e) enabling
the sale of slow  moving or excess  inventories  at  better  values  than can be
realized in cash markets.

The Company acts as a third-party  record-keeper  of members'  transactions  and
balances,  which are denominated in ITEX trade dollars.  An ITEX trade dollar is
an  accounting  unit  used by the  Exchange  to  record  the  value of trades as
determined by the buying and selling parties in barter transactions.  ITEX trade
dollars  denote  the right to receive  goods or  services  available  from other
Exchange  members  or the  obligation  to  provide  goods or  services  to other
Exchange  members.  ITEX trade dollars may not be redeemed for cash.  ITEX trade
dollars may be used only in the manner and for the purpose set forth in the ITEX
Trading Rules that govern the Exchange. ITEX trade dollars are not legal tender,
securities, or commodities.

Members of the Exchange pay cash and ITEX trade dollar fees and  commissions  to
the  Company.  For  these  services,  the  Company  typically  receives  a  cash
commission  of 5% or 6% on the  purchases  and  sales  made  by  members  of the
Exchange.  In addition to administering the activities and record-keeping of the
Exchange, the Company, as a member of the Exchange,  trades as a principal party
in barter  transactions  with  other  members.  The  Company  also  engages as a
principal  party in  trade  transactions  in the  corporate  barter  area of the
industry. In these transactions, the Company acquires goods and services that it
either sells for cash or ITEX trade  dollars or holds in  inventory  for further
trades in the corporate barter area or for trading to members of the Exchange.

The Company owns and operates  retail barter  offices in Portland,  Oregon;  St.
Louis,  Missouri; and Orange County,  California.  All other ITEX broker offices
are  independently  owned  and  operated  by ITEX  Licensed  Brokers.  There are
presently 124 broker offices located in 36 states.  In addition,  there are also
approximately  20 foreign  broker  offices,  including 14 in Canada.  One of the
Company's current objectives is aggressive  international  expansion of the ITEX
retail trade  network.  The Company  bears no financial  responsibility  for the
financing of an independent broker office.

The Company  acts as an  intermediary  for the  exchange  of goods and  services
between major  companies,  through the formation of ITEX USA,  Inc., a corporate
barter management company,  which is the Company's exclusive agent for marketing
the  Company's  corporate  and  industrial  trading  business  of the  Company's
corporate barter  division.  ITEX USA negotiates  corporate  barter  agreements,
services  these  agreements  and  sells  the  inventory  it  acquires  in  these
transactions.  In these  transactions,  ITEX USA  issues  ITEX  Cash  Equivalent
Credits,  which are separate and apart from the ITEX Retail  Trade  Dollar,  now
used in accounting for  transactions  in the ITEX Retail Trade Exchange  System.
The revenues generated from those inventories when sold for cash will be divided
between the Company and ITEX USA. This is the first and primary profit center in
each ITEX  corporate  barter  transaction.  The  second  profit  center is a 12%
transaction fee paid by the ITEX Corporate  Barter client on the Cash Equivalent
Credit portion of each purchase.  This revenue will also be divided  between the
Company and ITEX USA.

                                       4
<PAGE>
The Company operates with the objectives of long-term equity-building while also
ensuring  availability  of sufficient cash for current  operating  requirements.
Accordingly,  the Company may in any period report significant revenue, profits,
and increases in net assets from transactions  denominated in ITEX trade dollars
or other  noncash  consideration.  Sometimes,  the  Company  invests  in  equity
securities with ITEX trade dollars that have been earned by the Company in trade
transactions.  The companies  invested in are able to use the ITEX trade dollars
received in payment for the stock issued to purchase  goods and services used in
the operation of their businesses.

As a result of this utilization of trade dollars, the Company has accumulated an
investment  portfolio of equity securities totaling $3,877,000 at July 31, 1996,
stated at the lower of cost or market.  Also at July 31, 1996, the Company owned
inventories of goods and services  totaling  $7,844,000,  stated at the lower of
cost or market,  which was available for corporate trading or trading to members
within the Exchange, which increases cash commissions earned by the Company, for
exchange for equity  securities of other  companies,  or for  consumption by the
Company in providing for its own operating needs.

In 1993 the Company  purchased a 49% interest in Associated  Reciprocal  Traders
("ART"), a trading company located in Zug, Switzerland.  ART acts as a buyer and
seller of goods and services using barter,  usually dealing with parties outside
the U.S.  Through  its  interest  in ART,  the  Company  has a  presence  in the
international  corporate  barter  marketplace.  The Company's share of ART's net
assets  and  results of  operations  are  included  in the  Company's  financial
statements using the equity method of accounting.

All of the  undistributed  earnings of the foreign affiliate were reinvested and
were not  expected  to be remitted  to the  Company  for an  indefinite  period.
However, on November 27, 1996, the majority owner of ART informed the Company of
its intent to take  immediate  steps to distribute  all the assets of ART and to
end the relationship  with the Company.  The Company had previously  intended to
reinvest  its  share  of  the  earnings  of  this  venture   indefinitely   and,
accordingly,  had not provided income taxes on its share of ART's  undistributed
earnings. At July 31, 1995, the cumulative amounts of reinvested income on which
deferred taxes had not been provided was approximately  $1,590,000.  As a result
of the  inability  to  continue  to reinvest  its share of ART's  earnings,  the
Company  recognized a deferred  provision for income taxes of $1,247,000  during
the  fourth  quarter of the fiscal  year  ended  July 31,  1996,  which has been
reported as a reduction of the Company's share of equity in net income (loss) of
foreign  affiliate in the statement of operations.  This decreased net income by
$1,247,000, or $0.17 per share.

The assets of ART as of July 31, 1996 cons-ist  primarily of  available-for-sale
securities, none of which are securities of ITEX Corporation. The majority owner
of ART has agreed to distribute  the assets on a basis expected to result in the
Company  realizing an amount not less than the carrying  value of the  Company's
investment.  The Company expects to be able to meet any  requirements to pay the
current  deferred tax  liability by selling a portion of the  available-for-sale
securities to be received.

During  the last  several  years,  the  Company  started  and  operated  a media
department,  which  exchanged  media products owned by the Company for due bills
for  prepaid  advertising  credits on radio  stations  across the U.S.  The four
Company-owned  products included the Image Audio Music Production Library, , the
Golden Age of Radio Theatre,  the New Rock Countdown,  and Flashback ... Moments
in Time.  During the fourth  quarter of the fiscal year ended July 31, 1996, the
Company  sold  certain  media  inventory  and  reduced  the  scope of its  media
operations in order to improve the Company's ongoing cash flow.

                                       5
<PAGE>
TECHNOLOGY

The Company has developed a comprehensive  training program for its brokers. New
brokers come to the training  center at the  Company's  Portland,  Oregon for an
intensive week of initial training before receiving the credential of "Associate
Broker." They are then permitted to set up offices and act as barter brokers for
the Company.  After  demonstrating  adequate  competence and achieving specified
performance levels, they return to the training center for an additional week of
training before receiving the credential of "ITEX Licensed Broker."

The Company has  developed  the largest and most  innovative  electronic  barter
exchange  in the  industry.  The system is modeled  after the NASDAQ  electronic
market quotation system. In a commercial barter exchange, the exchange acts as a
third  party  recordkeeper  for all  parties  who join the  barter  system.  One
advantage of this system is that it enables multi-lateral trade to take place.

Recent  technological  improvements  include a  software  update of the  Account
Information  Maintenance  program utilized by ITEX Brokers, a software update of
the  BarterWire  program  which is utilized by both ITEX Brokers and ITEX Retail
Trade Exchange Members, and developing access on the Internet.

During Fiscal Year 1995, the Company  completed an agreement with  International
Trade Exchange  Corp, a Vancouver  B.C.  based company,  to operate the Canadian
barter company.  International Trade Exchange Corp does business in Canada under
the  names  ITEX and  Bartercard.  In spite of the  similarity  of  names,  ITEX
Corporation  (U.S.)  and  ITEX/Bartercard  (Canada)  have  never had a  business
relationship  in the past.  Under the terms of the  agreement  ITEX acquired the
rights to the name and trademarks of International  Trade Exchange of Vancouver,
B.C. Canada  together with the right to acquire its client base and assets.  The
addition of the affiliation  with  ITEX/Bartercard  and  TROC/Canada  (described
below) will more fully enable ITEX clients to do business coast-to-coast in both
the U.S. and Canada.

The  Company  has  pioneered  electronic  trading  with its  BarterWire  system,
introduced  by the  Company  nearly a decade  ago.  Using  BarterWire,  Exchange
members can buy and sell products and services  through a personal  computer and
modem from  anywhere  in the world where  telephone  service is  available.  The
Company has continued to enhance its BarterWire software so that users can trade
more efficiently through the Exchange system.  Latest enhanced versions are more
user friendly with features  familiar to those who are accustomed to the Windows
environment.  It  also  includes  color  and  graphic  capabilities  for  better
presentation of products and services offered through the system.

The Company has also made BarterWire  available to clients through the Internet,
complete with its own gateway and web server.  This enables  Exchange members to
enjoy the advantages of the latest  version of BarterWire  together with savings
on long distance charges and a larger electronic marketplace.

Another  electronic  trading  feature  introduced by the Company is a "fax-back"
system for  Exchange  clients,  which  enables  Exchange  members to request and
receive their account  records,  company data, ITEX business forms,  product and
service lists, and other information by fax.

The  ITEX  Express  card   continues  to  enhance   trade  among  ITEX  clients,
particularly  when taken in concert with other electronic  trading  innovations.
The ITEX Express card is the Company's  debit-credit card for barter,  the first
of its kind in the U.S.  The  card  can be used  for  identification  or to make
purchases using a three part voucher form or point-of-sale (POS) 

                                       6
<PAGE>
terminal.  ITEX has encouraged the use of POS terminals as a way to speed barter
transactions and increase the volume of trade.

Management believes that electronic trading systems such as BarterWire, Internet
access, the ITEX Express card, and the fax-back  information and trading service
represent the next major step forward in the development of the barter industry.
By its early involvement in the electronic marketplace, ITEX believes it will be
positioned to take full advantage of future developments in this area.

The  Company  believes  that  new  technologies  and  the  emerging   electronic
marketplace  have  the  potential  to  profoundly  affect  the way  business  is
conducted. As this new marketplace emerges, the Company is positioning itself to
take full advantage of this trend. The Company is already becoming recognized as
an industry leader in this field. As the transition to electronic business takes
place, ITEX intends to play a major role.

Research  and  development  during the past two fiscal years has focused both on
technological  improvements and international expansion.  During the fiscal year
ended July 31,  1996,  the Company  spent a total of  $577,000  on research  and
development for its communication and information systems, of which $560,000 was
capitalized  and $17,000 was charged to expense.  During the fiscal  years ended
July 31, 1995 and 1994,  the Company  spent a total of  $169,000  and  $131,000,
respectively, all of which was charged to expense.

The terms "Barter is Good ... Responsible Barter is Better" and "BarterWire" are
registered service marks of the Company. The ITEX symbol and name are registered
trademark-service marks of the Company.

ACQUISITIONS

In addition to internal  expansion by increasing the Company's  broker  network,
the  Company  has also  expanded  the scope of its  operations  by  acquisition.
Acquisitions of existing barter  exchanges with in-place  membership  groups has
enabled the Company to accelerate the growth of its presence in several  markets
and geographic areas.

Acquisition of Global  Exchange  Network.  During the fiscal year ended July 31,
1996, the Company acquired the assets and business of Global Exchange Network of
Irvine,  California,  including  its  membership  base.  The purchase  price was
$385,000, which was paid $200,000 in cash and by the issuance of a 6% promissory
note for $185,000, payable in monthly installments of $8,331 including principal
and interest,  commencing with the first such payment on September 1, 1996, with
monthly  payments  thereafter  until the final  payment on August 1,  1998.  The
acquisition has been accounted for by the purchase  method.  Pro forma operating
data is not provided  because the effects on  previously  reported data would be
insignificant.

Acquisition of 50% Interest in Business Exchange  International  Corporation and
Related  Litigation.  On January 24,  1996,  the Company  acquired a 100% common
stock interest in SLI, Inc. ("SLI"), a Nevada  corporation,  in exchange for the
issuance to SLI's former  shareholders of 60,000 shares of the Company's  common
stock  valued  at  approximately   $645,000.   The  Company  then  made  a  cash
contribution  to the capital of SLI of $1,750,000 and made a loan of $300,000 to
SLI.  Also on January 24, 1996,  SLI  purchased a 50% common  stock  interest in
Business  Exchange  International  Corporation  ("BXI"),  a Nevada  corporation,
pursuant to rights to purchase  such  interest  that had been assigned to SLI by
the former  shareholders  of SLI. SLI paid $1,750,000 for the common interest in
BXI by the  purchase of newly issued  common stock of BXI and, in addition,  SLI
loaned  $300,000 to BXI.  BXI owns and  operates  one of the  leading  organized
barter exchanges in the United States.

                                       7
<PAGE>
On February  12,  1996,  a complaint  was filed on behalf of the Company and its
wholly owned  subsidiary,  SLI, Inc.,  against Saul Yarmak,  Stephen  Friedland,
Business Exchange  International  Corp., BX International,  Inc., Joel Sens, and
David Lawson.  The complaint,  filed in the Circuit Court of the State of Oregon
for  Multnomah  County  Case No.  9602-01076,  asserted  claims  for  breach  of
contract,   specific  performance,   declaratory  judgment,  fraud,  defamation,
unlawful trade  practices,  and  interference  with economic  relationships.  It
sought to recover damages for allegedly  disparaging  remarks made by certain of
the  defendants  against  ITEX and for a court  ruling  that SLI  acquired a 50%
interest in the BXI trade exchange owned by one or more of the defendants.

On April 30, 1996, defendants Yarmak, Friedland, Business Exchange International
Corp.,  and BX  International,  Inc.,  filed  an  answer  denying  the  material
allegations and asserting a counterclaim for attorney fees.

On  October  11,  1996,  ITEX  Corporation  moved for  dismissal  of its  claims
(business  defamation,  unlawful trade practices and interference  with economic
relationships),  without prejudice,  against  defendants.  On that same date the
motion  was  granted  and  leave  granted  to file an  Amended  Complaint.  That
complaint  is styled  SLI,  Inc. v. Saul  Yarmak,  Stephen  Friedland,  Business
Exchange  International  Corp. and BX International,  Inc. The Amended Complaint
restates  the  claims  against  defendants  for  breach  of  contract,  specific
performance,  declaratory  judgment and fraud. By dismissing ITEX  Corporation's
claims without  prejudice,  ITEX may, if it chooses,  reinstitute its claims for
business  defamation,  unlawful trade practices and  interference  with economic
relationships.  Proceeding  under the  Amended  Complaint  permits an  expedited
determination of the core contract issues raised,  that is, whether BXI breached
its contract with SLI by asserting  that the BXI Trade  Exchange is not an asset
of BXI.

The  potential  outcome  of this  lawsuit is  uncertain.  However,  the  Company
believes that SLI has meritorious  arguments in favor of its contract positions.
The Company believes that a solution will be reached either through  negotiation
or through completion of the litigation process. The trial date has been set for
February 24, 1997.  Legal  counsel is unable to evaluate  the  probability  of a
favorable or unfavorable  outcome or to estimate the range of potential recovery
on  the   plaintiff's   claims  or  any  potential   loss  on  the   defendant's
counterclaims.

Acquisition of Barter Exchange, Inc. (BEI) Trade Exchange. On March 1, 1995, the
Company acquired the barter exchange business of Barter Exchange,  Inc. ("BEI").
BEI has twelve  offices  located  primarily in the Southwest and lower  Midwest.
This acquisition added  significantly to the Company's client base and increased
the number of  Exchange  offices  nationwide  by nearly  10%.  This  acquisition
enabled  the  Company to absorbed a  long-time  competitor  with a well  defined
presence  in the  market.  It also gave the Company  much  improved  presence in
geographic  areas in which the  Company  had not  previously  had a  significant
presence.

Acquisition of Name and Trademarks of International Trade Exchange of Vancouver,
B.C.  In March,  1995 ITEX  acquired  the rights to the name and  trademarks  of
International Trade Exchange (ITEX) Corp., of Vancouver,  B.C. Canada,  together
with the right to acquire its client base and assets.  The  purchase did not add
to the Company's  assets,  but the acquisition had strategic  importance for the
Company's  future plans.  During fiscal 1994,  TROC Canada,  the largest  barter
exchange in Canada,  took steps to join the ITEX barter system as an independent
licensee.  TROC is located in Montreal,  Quebec with most of its  operations  in
eastern Canada. Subsequently,  the Company entered into an International License
Agreement  with 3264076  Canada,  Inc.,  governing the use of the ITEX System in
Canada.  These two actions thus gave ITEX  coast-to-coast  name  recognition  in
Canada as well as in the U.S.

                                       8
<PAGE>
Acquisition of Travel Agents Hotel Guide. In February 1995 the Company  acquired
the Travel  Agents Hotel Guide,  a directory of hotels and resorts  across North
America and the Caribbean  that the Company uses to acquire room nights on trade
in  exchange  for  advertising  in the Guide.  The room  nights are then sold to
Exchange  clients  in  exchange  for  trade  dollars,  thus  providing  a highly
desirable  business  and  vacation  inventory  for  trade to  Exchange  members.
Strategy

The Company plans to continue  focusing on  opportunities  for  acquisitions  of
pre-existing  trade  exchanges  that enable  conversion of a membership  base to
Company-affiliated  independent  brokers and continued expansion and development
of the Company's independent broker network. The Company intends to continue its
programs for improving the performance of brokers.

SEASONALITY

There appear to be no significant seasonal influences which affect the Company's
business.  However,  the barter  industry  as a whole is viewed by some as being
counter-cyclic  to the  regular  business  cycle--that  is,  when the economy is
recessionary,  businesses  tend to barter  more.  Then,  as the  business  cycle
improves,  conventional  wisdom  suggests that companies  barter less since more
cash  business is  available.  However,  the Company has  experienced  continued
growth even during periods viewed as business "up-cycles."

EMPLOYEES

The  Company  employs  51  persons,   of  which  48  are  full  time  employees.
Additionally  each of the  Exchange's  147  broker  offices  mentioned  above is
managed by an ITEX Licensed Broker who is an independent contractor that employs
support staff of their own. This results in a total network of approximately 500
persons working as either consultants,  independent contractors, or employees of
the Company.

MANAGEMENT

The following  table lists the names of all Directors and Executive  Officers of
the Company.  All  Directors  will serve until the next annual  general  meeting
unless his or her office is vacated in  accordance  with the Articles and Bylaws
of the Company.  The Executive  Officers serve at the discretion of the Board of
Directors.

                        Directors and Executive Officers

         Name              Age                     Position
------------------------   ---   ----------------------------------------------

Graham H. Norris            54   Chairman of the Board Of Directors
                                 President and Chief Executive Officer

Mary Scherr                 59   Vice President of Broker Development, Director

Michael A. Neal             27   Vice President of Marketing

Joseph M. Morris, CPA       47   Vice President and Chief Financial Officer

Cynthia Pfaltzgraff, CMA    42   Controller

Donovan Snyder, Esq.        46   Corporate Counsel, Corporate Secretary

Dr. Evan B. Ames            57   Director

                                       9
<PAGE>
Thomas G. Baer              63   Director

Dr. Sherry L. Meinberg      55   Director

Robert Nelson               48   Director

Dr. Charles Padbury         58   Director


Business Experience, Directorships, and Legal Proceedings:
----------------------------------------------------------

   Mr.  Norris,  who was elected  President and Chief  Executive  Officer of the
Company on September 6, 1996,  has over 30 years  experience in  management  and
finance.  Prior  to his  becoming  President  of  the  Company,  he  had  been a
consultant  providing  a variety  of  management  consulting  services  to small
private and public  corporations.  After a period of transition in management of
the  Company,  Mr.  Norris was  elected  Chairman of the Board of  Directors  in
addition to President and Chief Executive  Officer.  Mr. Norris has been a pilot
for United  Airlines  since 1963.  He has been a director  of the Company  since
1986. In 1993, Mr. Norris became an ITEX Broker, operating an independent barter
office in Provo,  Utah, in which  capacity he earned the credential of Certified
Trade Broker.

   Ms. Scherr has over fourteen years of experience  within the barter industry.
Upon joining ITEX in 1984 as an  independent  broker,  Ms. Scherr was recognized
for outstanding sales  performance,  including being recognized as Broker of the
Year. In 1993, Ms. Scherr agreed to join the Company as Vice President of Broker
Development and Director.  Ms. Scherr holds a Masters Degree from the University
of Iowa.

   Mr. Neal has  experience  in many  operational  aspects of the Company,  with
primary focus on travel and media.  Previously,  Mr. Neal served as President of
TravelGuide,  Inc. and as a special  projects  coordinator for IBM  Corporation,
where he was responsible for bidding  contracts to the federal  government.  Mr.
Neal is the son of the founder of the  Company,  Mr. Terry Neal.  Dr.  Sherry L.
Meinberg, a Director of the Company, is his aunt.

   Mr. Morris became Vice President and Chief  Financial  Officer and a Director
in January 1996.  Previously,  he was a consultant to the Company and a Director
since  February  1995. He has over 15 years  experience in and around the barter
industry,  including  serving as  technical  liaison  between the  International
Reciprocal  Trading  Association (IRTA) and the Financial  Accounting  Standards
Board (FASB). He was Vice  President-Controller  of Software-Intercomp,  Inc., a
NASDAQ company, from 1984 through 1995, except for the period 1988 to 1990, when
he was a technical project manager with the FASB. He has authored numerous books
for practicing  accountants and financial  professionals,  several of which have
received recognition as Best Professional  Accounting Practice Book of the Year.
Earlier in his career, Mr. Morris was an audit manager with Coopers & Lybrand.

   Ms.   Pfaltzgraff  has  been  Controller  of  the  Company  since  1991.  Ms.
Pfaltzgraff  is  responsible  for  the  Company's  accounting  operations,  risk
management,  budgeting, cash flow management,  systems, and financial reporting.
She has more than 15 years  experience in accounting  and financial  management.
Ms.  Pfaltzgraff  has a Bachelors of Science in Business  Administration  degree
from Oregon State  University and earned the credential of Certified  Management
Accountant (CMA) in 1993.

   Mr.  Snyder,  who joined  ITEX as  corporate  counsel  in 1995,  has 17 years
experience as an attorney,  including 10 years as corporate  in-house counsel to
several  companies in Salt Lake 

                                       10
<PAGE>
City,  Utah. He is a member of both the Utah and Oregon State Bar  Associations.
He was elected corporate secretary by the Board of Directors in May 1996.

   Dr. Ames received a Ph.D. in 1971 from Princeton University, majoring in near
eastern and soviet studies. He has served with the Central  Intelligence Agency.
In 1985 Mr. Ames became  affiliated with R.L. Ball & Associates as an investment
researcher,  analyst,  and investment  strategist.  He is currently a Registered
Investment Adviser with the U.S. Securities & Exchange Commission. He has been a
Director of the Company since August 1995.

   Mr.  Baer  is  Vice  President  of  Operations  for  Patrick  Industries,   a
manufacturing company headquartered in Elkhart,  Indiana. Mr. Baer has been with
that  company  for 27 years and has served as Vice  President  and member of the
Board since 1970.  Patrick  Industries  is a publicly  held  company with shares
traded on NASDAQ. He attended Indiana  University and is active in community and
charitable  organizations  such as the United Way. He has been a Director of the
Company since August 1995.

   Dr. Meinberg, served as Secretary and a Director of The ITEX Corporation from
1982 to 1986,  when the  Company  acquired  the assets and  liabilities  of that
company.  She served as Secretary and a Director of the Company from 1986 to May
3, 1996,  and  continues  to serve as a Director.  Dr.  Meinberg has two masters
degrees and a Ph.D.  in  Instructional  Science.  She is a published  author and
appears widely as a professional  speaker. Dr. Meinberg retired in January, 1995
after 34 years on the faculty of Long Beach Unified School.

   Mr. Nelson is a Certified Public  Accountant in private practice in Portland,
Oregon specializing in tax accounting.  He has also been an active member of the
ITEX Retail Trade Exchange,  and brings the advantages of both of these areas of
experience  to the  Board.  Mr.  Nelson  received  an  MBA  from  Brigham  Young
University and is still active in the BYU Management  Society. He is a member of
the American Institute of CPAs and the Oregon Society of CPAs.

   Dr.  Padbury was elected  Chairman of the Board of  Directors on September 6,
1996. He served in that capacity  during a period of transition in management of
the Company until November 14, 1996, when Mr. Norris was elected Chairman of the
Board of  Directors.  Dr.  Padbury,  who continues  serving as a Director,  is a
leading Beaverton, Oregon dentist and has been a member of the ITEX Retail Trade
Exchange since 1985. Dr. Padbury has brought a wealth of experience to the Board
in terms of the interests,  perceptions,  and vantage point of ITEX clients. Dr.
Padbury has been a director of the Company since 1992.

Committees 
----------

The ITEX Board of Directors has had standing audit,  nominating and compensation
committees  since May 1996.  In the last fiscal year  (August 1, 1995 - July 31,
1996) there were 10 meetings of the Board of Directors.

Compliance with Section 16(a) of the Exchange Act:
--------------------------------------------------

Section 16(a) of the  Securities  Exchange Act requires the Company's  executive
officers  and  directors  and  persons  who own  more  than ten  percent  of the
Company's  common stock to file reports of ownership and changes in ownership of
the Company's  Common Stock and any other equity  securities of the Company with
the Securities and Exchange Commissions (SEC). Executive officers, directors and
greater than ten percent  shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.

                                       11
<PAGE>
Based solely on its review of the copies of such forms  received by the Company,
or written  representations  from certain reporting persons that no Form 5s were
required for those persons, the Company believes that the following persons were
delinquent as listed below:

Forms 4 and 5 were not filed for Mary Scherr, Charles Padbury, or Joseph Morris.
Those forms would have reflected the following transactions:

  (a)   Mary Scherr:  Exercise of stock  options and  sale of shares  on January
        30, 1996 (30,000  shares) and March 12, 1996 (15,000 shares)

  (b)   Charles Padbury:  Exercise  of stock options  on  January 4, 1996 (1,000
        shares)

  (c)   Joseph Morris:   Exercise of stock  options and sale of shares on August
        30, 1995 (6,000 shares),  October 11, 1995  (1,500 shares), November 17,
        1995 (1,250 shares, and November 29 (1,250 shares)


ITEM 2.  PROPERTIES

All of the Company's operations are conducted in leased space as follows:

                                                     Approximate      Current
      Location                Lease Expiration          Sq. Ft.     Annual Rent
------------------------      -----------------      -----------    -----------

Portland, Oregon              December 31, 2001         7,400        $136,000


Westminster, California       December 31, 1996         3,700          45,000


St. Louis, Missouri           October 31, 1998          1,100          17,000


The  Portland,  Oregon  lease is  payable  entirely  in cash.  The  Westminster,
California  lease is payable in cash of $3,000 and 42,000 ITEX trade dollars per
year. The St. Louis,  Missouri lease is payable in cash of $8,500 and 8,500 ITEX
trade dollars per year.


ITEM 3.  LEGAL PROCEEDINGS

On January 24, 1996,  the Company  acquired a 100% common stock interest in SLI,
Inc. ("SLI"), a Nevada corporation, in exchange for the issuance to SLI's former
shareholders  of  60,000  shares of its  common  stock  valued at  approximately
$645,000.  The Company  then made a cash  contribution  to the capital of SLI of
$1,750,000  and made a loan of $300,000 to SLI.  Also on January 24,  1996,  SLI
purchased  a 50%  common  stock  interest  in  Business  Exchange  International
Corporation  ("BXI"), a Nevada corporation,  pursuant to rights to purchase such
interest  that had been assigned to SLI by the former  shareholders  of SLI. SLI
paid  $1,750,000 for the common  interest in BXI by the purchase of newly issued
common stock of BXI and, in addition,  SLI loaned  $300,000 to BXI. BXI owns and
operates one of the leading organized barter exchanges in the United States.

On February  12,  1996,  a complaint  was filed on behalf of the Company and its
wholly owned  subsidiary,  SLI, Inc.,  against Saul Yarmak,  Stephen  Friedland,
Business Exchange  International  Corp., BX International,  Inc., Joel Sens, and
David Lawson.  The complaint,  filed in the Circuit Court of the State of Oregon
for  Multnomah  County  Case No.  9602-01076,  asserted  claims  for  breach  of
contract,   specific  performance,   declaratory  judgment,  fraud,  defamation,
unlawful 

                                       12
<PAGE>
trade practices,  and  interference  with economic  relationships.  It sought to
recover  damages  for  allegedly  disparaging  remarks  made by  certain  of the
defendants  against ITEX and for a court ruling that SLI acquired a 50% interest
in the BXI trade exchange owned by one or more of the defendants.

On April 30, 1996, defendants Yarmak, Friedland, Business Exchange International
Corp.,  and BX  International,  Inc.,  filed  an  answer  denying  the  material
allegations and asserting a counterclaim for attorney fees.

On  October  11,  1996,  ITEX  Corporation  moved for  dismissal  of its  claims
(business  defamation,  unlawful trade practices and interference  with economic
relationships),  without prejudice,  against  defendants.  On that same date the
motion  was  granted  and  leave  granted  to file an  Amended  Complaint.  That
complaint  is styled  SLI,  Inc. v. Saul  Yarmak,  Stephen  Friedland,  Business
Exchange  International  Corp. and BX International,  Inc. The Amended Complaint
restates  the  claims  against  defendants  for  breach  of  contract,  specific
performance,  declaratory  judgment and fraud. By dismissing ITEX  Corporation's
claims without  prejudice,  ITEX may, if it chooses,  reinstitute its claims for
business  defamation,  unlawful trade practices and  interference  with economic
relationships.  Proceeding  under the  Amended  Complaint  permits an  expedited
determination of the core contract issues raised,  that is, whether BXI breached
its contract with SLI by asserting  that the BXI Trade  Exchange is not an asset
of BXI.

The  potential  outcome  of this  lawsuit is  uncertain.  However,  the  Company
believes that SLI has meritorious  arguments in favor of its contract positions.
The Company believes that a solution will be reached either through  negotiation
or through completion of the litigation process. The trial date has been set for
Febuary 24,  1997.  Legal  counsel is unable to evaluate  the  probability  of a
favorable or unfavorable  outcome or to estimate the range of potential recovery
on  the   plaintiff's   claims  or  any  potential   loss  on  the   defendant's
counterclaims.

On  September  17,  1996 the Company  filed an action in the  Circuit  Court for
Multnomah   County,   Oregon,   against  Leslie  L.  French  and  Linda  French,
individually   and  dba  AlphaNet  and  AlphaNet,   Inc.,  an  inactive   Oregon
corporation.  The  Complaint  is Breach of Contract  and Action on Guaranty  and
seeks a total of $89,726 on three claims for breach of  contract.  On October 2,
1996,  defendants filed an Answer denying all claims and a Counterclaim alleging
malicious  prosecution,  abuse of process,  invasion  of privacy and libel.  The
counterclaim seeks compensatory and punitive damages of $5.5 million. A Reply to
defendant's counterclaims has been filed.

The Company  considers each counterclaim to be totally without merit and expects
each counterclaim to be dismissed.  Both the Company's claims and the defense of
the  counterclaims  is being vigorously  prosecuted by the Company.  As with all
litigation,  the potential  outcome of this lawsuit is uncertain.  However,  the
Company believes that its claims against the defendants are meritorious and that
the  defendants'  counterclaims  are wholly  without merit.  In any event,  this
litigation  does not  present  scenarios  which would be expected to result in a
materially  adverse  effect on the  Company's  financial  position or results of
operations.

On June 28, 1996, the Company  announced in a press release that the Company was
the subject of an informal inquiry from the Securities and Exchange  Commission.
Subsequently,  the Company  received a subpoena  for the  production  of certain
documents  on  September  19,  1996,  pursuant  to a  formal  order  of  private
investigation. The Company is cooperating fully with the Securities and Exchange
Commission.

On November  21,  1996,  the  Company  was served with a complaint  filed in the
Circuit Court for  Washington  County,  Oregon,  by William  Bradford  Financial
Services,  Inc.  against  the  Company;

                                       13
<PAGE>
Michael Baer; Graham Norris; Oxford Transfer,  Inc.; David Christensen,  C.P.A.;
Andersen,  Andersen & Strong, L.C., Donavan Snyder, and John Does I-III. William
Bradford  Services is controlled by Leslie  French,  plaintiff in the litigation
described  above.  The complaint  alleges  breach of  compensatory  and punitive
damages.

The company  considers each of the claims in the complaint to be totally without
merit  and will  vigorously  defend  against  each and every  allegation  of the
complaint.  No answer has yet been filed by the Company.  As wih all litigation,
the potential outcome of this lawsuit is uncertain.  In any event, however, this
litigation  does not  present  scenarios  which would be expected to result in a
materially  adverse  effect on the  Company's  financial  position or results of
operations.

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

On May 3, 1996,  the Company held its annual  meeting of  shareholders.  At that
meeting, five items were presented for consideration by the shareholders:

(1)   To elect  nine  directors  to serve for a term of one year or until  their
      successors are elected and qualified. The Board of Directors has nominated
      Michael T. Baer,  Mary Scherr,  Dr. Evan Ames,  Graham Norris,  Dr. Sherry
      Meinberg,  Robert  Nelson,  Dr.  Charles  Padbury,  Thomas Baer and Joseph
      Morris to serve as Directors.

(2)   To  ratify  the  appointment  of  Andersen,  Andersen  & Strong,  L.C.  as
      independent auditors of the Company for the 1995-1996 fiscal year.

(3)   To approve a new  Incentive  Stock  Option Plan for  employees,  officers,
      directors and consultants of the Company.

(4)   To approve a two for one (2 for 1) forward split of the  Company's  issued
      and  outstanding  common  stock.  Approval of this action will  require an
      amendment to the Company's Articles of Incorporation which is described in
      detail in the accompanying Proxy Statement.

(5)   To  transact  any other  business  might  properly  come before the Annual
      Meeting or any adjournment of the Annual Meeting.







                                       14
<PAGE>
The number of common  shares  issued,  outstanding  and entitled to vote at such
Annual  Meeting  was  6,420,555.  There  were  present  at  the  meeting  common
shareholders  holding a total of 5,383,443 of the Company's common stock. Thus a
quorum was present and the business of the Meeting properly proceeded.

(1)   The votes cast in person or by proxy on the resolution to elect a Board of
      Directors was:

                                                    Abstain/    
        Nominee               For       Against     Withhold
-----------------------   ----------  ----------   -----------

Michael T. Baer            4,319,473       0          22,678

Mary Scherr                4,003,507       0         338,553

Graham H. Norris, Sr.      4,004,798       0         337,353

Dr. Sherry L. Meinberg     4,004,798       0         337,353

Dr. Charles Padbury        3,987,415       0         354,645

Robert Nelson              3,987,415       0         354,645

Dr. Evan B. Ames           3,987,415       0         354,645

Thomas G. Baer             4,001,007       0         340,953

Joseph Morris              4,003,007       0         339,053

(2) The  votes  cast in person  and by proxy on the  resolution  to  ratify  and
    approve  the  selection  of  Andersen,  Andersen & Strong  L.C.  to serve as
    auditor of the  accounts of the  Company  for the  1995-96  fiscal year were
    common shares voted 4,324,682 For the resolution;  8,203 common shares voted
    Against the resolution;  and 7,765 common shares abstained or withheld votes
    on the resolution.

(3) The votes  cast in  person  and by proxy on the  resolution  to  approve  an
    Incentive  Stock  Option Plan  adopted by the Board of Directors on December
    15, 1995 were  1,994,304  common  shares voted For the  resolution;  123,536
    common  shares  voted  Against  the  resolution;  and 70,480  common  shares
    abstained or withheld votes on the resolution.

(4) The votes  cast in  person  and by proxy on the  resolution  to  approve  an
    amendment  to the  articles  of  incorporation  of the  Company  to effect a
    two-for-one (2 for 1) forward split of the Company's  issued and outstanding
    common stock were 3,963,603 common shares voted For the resolution;  123,536
    common  shares  voted  Against  the  resolution;  and 15,040  common  shares
    abstained or withheld votes on the resolution.

(5) No further business was transacted at the Annual Meeting.






                                       15
<PAGE>
                                     PART II

ITEM 5.   MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
              COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The  Registrant's  common stock trades in the United States via the NASDAQ Stock
Market,  under the symbol  "ITEX".  Trading  was  initiated  on April 18,  1994.
Previously the Registrant's common stock traded "over-the counter" in the United
States  via the NASD  Bulletin  Board,  under the  symbol  "ITXE".  Trading  was
initiated on June 11, 1992.

         Quarter Ended                              Sale Prices
--------------------------------     -------------------------------------------
                                             High                  Low
                                     --------------------- ---------------------
Fiscal Quarters Ended:
     July 31, 1996.............             $9.75                  4.25
     April 9, 1996.............             12.50                  7.75
     January 15, 1996..........              9.00                  6.13
     October 23, 1995..........              8.13                  6.13
     July 31, 1995.............              6.75                  4.00
     April 9, 1995.............              6.78                  2.38
     January 15, 1995..........              4.63                  1.88
     October 23, 1994..........              2.63                  2.00


A stockholder's  list was prepared by the transfer agent,  OTR Inc., in Portland
Oregon,  as of July 31, 1996. The list indicated 829 registered  shareholders of
the  6,804,000  shares  issued and  outstanding.  It is estimated  another 3,000
individual  shareholders own stock in the Company which is held "in street name"
by brokerage firms.  This results in a total estimated number of shareholders of
3,829.

The Registrant  has not declared any dividends  from its  inception.  Management
anticipates that any future profits will be retained to finance corporate growth
and that no dividends will be declared in the foreseeable future.





                                       16
<PAGE>
ITEM 6.  SELECTED CONSOLIDATED DATA

The following table sets forth a summary of selected consolidated financial data
for the Company as of the dates and for the periods  indicated.  The data should
be  read  in  conjunction  with  such  financial  statements  and  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Except for  historical  information  contained  herein,  the  statements in this
report are forward-looking  statements that are made pursuant to the safe harbor
provisions   of  the  Private   Securities   Litigation   Reform  Act  of  1995.
Forward-looking  statements  involve known and unknown  risks and  uncertainties
that may  cause  the  Company's  actual  results  in  future  periods  to differ
materially from forecasted results.
<TABLE>
<CAPTION>

                                                          Fiscal Years Ended July 31,
                                         ------------------------------------------------------------------
                                             1996            1995          1994        1993         1992
                                         -------------   -----------   ----------   ----------   ----------

                                                       (In thousands, except per share data)
<S>                                      <C>             <C>           <C>          <C>          <C>
Statement of Operations Data:
Revenue:
   Sales arranged....................     $  3,055       $ 1,807
                                          =========      ========

   Corporate trading revenue.........     $ 13,881       $ 12,403       $  8,427       $  4,446       $    538
   Commissions on sales
      arranged.......................          329            291
   Trade exchange revenue............       14,020          9,418          6,339          3,488          4,123
                                          ---------      ---------      ---------      ---------      ---------
     Total revenue...................       28,230         22,112         14,766          7,934          4,661
                                          ---------      ---------      ---------      ---------      ---------
Costs and expenses:     
   Costs of corporate trading........       10,749          9,621          6,409          2,891            ---
   Costs of trade exchange revenue           7,153          4,361          2,806          2,125          1,409
   Selling, general and administrative       8,146          7,185          5,257          2,768          2,833
                                          ---------      ---------      ---------      ---------      ---------
     Total costs and expenses........       26,048         21,167         14,472          7,784          4,242
                                          ---------      ---------      ---------      ---------      ---------
Costs and espenses:     
Income (loss) from operations........        2,182            945            294            150            419
Other income (expense)...............          200            454             19             74              9
                                          ---------      ---------      ---------      ---------      ---------    
Income (loss) before income taxes....        2,382          1,399            313            224            428
Provision for income taxes...........          908            522            101             (8)           ---
                                          ---------      ---------      ---------      ---------      ---------
Income before equity in net income
   of foreign affiliate..............        1,474            877            212            232            428
Equity in net income (loss) of
  foreign affiliate..................                         958            632            ---            ---
                                               (90)
                                          =========      =========      =========      =========      =========
Net income...........................     $  1,384       $  1,835       $    844       $    232       $    428
                                          =========      =========      =========      =========      =========

                                          ---------      ---------      ---------      ---------      ---------
Primary net income per share.........     $   0.19       $   0.41       $   0.26       $   0.08       $   0.21
                                          =========
Primary net income per share.........     $   0.18
                                          =========

Balance Sheet Data:
Working capital (deficit)............     $    261        $  1,507      $     503      $     452      $   1,428
Total assets.........................       23,406          15,578         10,051          6,157          4,346
Long-term debt, net of current
  portion............................          192             156            189             98             38
Stockholders' equity.................     $ 20,383        $ 13,783      $   7,432      $   5,046      $   3,576
</TABLE>


                                       17
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

BUSINESS, LIQUIDITY, AND CAPITAL RESOURCES

Business and Plan of Operation

The Company is engaged in  international  operations  in both the retail  barter
exchange and  corporate  barter areas of the  commercial  barter  industry.  The
Company administers the ITEX Retail Barter Exchange (the Exchange),  which is an
association of business  owners and  professionals  who trade goods and services
with other members of the Exchange.  The Company  promotes the  maximization  of
trade through barter  transactions  that benefit members within the Exchange by:
(a) generating  incremental new business,  (b) conserving members' cash by their
ability to spend ITEX trade dollars,  (c) serving  effectively as an alternative
source of financing,  (d) enhancing the lifestyles of members,  and (e) enabling
the sale of slow  moving or excess  inventories  at  better  values  than can be
realized in cash markets.

The Company acts as a third-party  record-keeper  of members'  transactions  and
balances,  which are denominated in ITEX trade dollars.  An ITEX trade dollar is
an  accounting  unit  used by the  Exchange  to  record  the  value of trades as
determined by the buying and selling parties in barter transactions.  ITEX trade
dollars  denote  the right to receive  goods or  services  available  from other
Exchange  members  or the  obligation  to  provide  goods or  services  to other
Exchange  members.  ITEX trade dollars may not be redeemed for cash.  ITEX trade
dollars may be used only in the manner and for the purpose set forth in the ITEX
Trading Rules that govern the Exchange. ITEX trade dollars are not legal tender,
securities, or commodities.

Members of the Exchange pay cash and ITEX trade dollar fees and  commissions  to
the  Company.  For  these  services,  the  Company  typically  receives  a  cash
commission  of 5% or 6% on the  purchases  and  sales  made  by  members  of the
Exchange.  In addition to administering the activities and record-keeping of the
Exchange, the Company, as a member of the Exchange,  trades as a principal party
in barter  transactions  with  other  members.  The  Company  also  engages as a
principal  party in  trade  transactions  in the  corporate  barter  area of the
industry. In these transactions, the Company acquires goods and services that it
either sells for cash or ITEX trade  dollars or holds in  inventory  for further
trades in the corporate barter area or for trading to members of the Exchange.

The Company owns and operates  retail barter  offices in Portland,  Oregon;  St.
Louis,  Missouri; and Orange County,  California.  All other ITEX broker offices
are  independently  owned  and  operated  by ITEX  Licensed  Brokers.  There are
presently 124 broker offices located in 36 states.  In addition,  there are also
approximately  20 foreign  broker  offices,  including 14 in Canada.  One of the
Company's current objectives is aggressive  international  expansion of the ITEX
retail trade  network.  The Company  bears no financial  responsibility  for the
financing of an independent broker office.

The Company  acts as an  intermediary  for the  exchange  of goods and  services
between major  companies,  through the formation of ITEX USA,  Inc., a corporate
barter management company,  which is the Company's exclusive agent for marketing
the  Company's  corporate  and  industrial  trading  business  of the  Company's
corporate barter  division.  ITEX USA negotiates  corporate  barter  agreements,
services  these  agreements  and  sells  the  inventory  it  acquires  in  these
transactions.  In these  transactions,  ITEX USA  issues  ITEX  Cash  Equivalent
Credits,  which are separate and apart from the ITEX Retail  Trade  Dollar,  now
used in accounting for  transactions  in the ITEX Retail Trade Exchange  System.
The revenues generated from those inventories when sold for cash will be divided
between the Company and ITEX USA. This is the first and primary profit center in
each ITEX corporate barter transaction. The second profit center is a

                                       18
<PAGE>
12%  transaction  fee  paid by the  ITEX  Corporate  Barter  client  on the Cash
Equivalent  Credit portion of each  purchase.  This revenue will also be divided
between the Company and ITEX USA.

The Company operates with the objectives of long-term equity-building while also
ensuring  availability  of sufficient cash for current  operating  requirements.
Accordingly,  the Company may in any period report significant revenue, profits,
and increases in net assets from transactions  denominated in ITEX trade dollars
or other  noncash  consideration.  Sometimes,  the  Company  invests  in  equity
securities with ITEX trade dollars that have been earned by the Company in trade
transactions.  The companies  invested in are able to use the ITEX trade dollars
received in payment for the stock issued to purchase  goods and services used in
the operation of their businesses.

As a result of this utilization of trade dollars, the Company has accumulated an
investment  portfolio of equity securities totaling $3,877,000 at July 31, 1996,
stated at the lower of cost or market.  Also at July 31, 1996, the Company owned
inventories of goods and services  totaling  $7,844,000,  stated at the lower of
cost or market,  which was available for corporate trading or trading to members
within the Exchange, which increases cash commissions earned by the Company, for
exchange for equity  securities of other  companies,  or for  consumption by the
Company in providing for its own operating needs.

In 1993 the Company  purchased a 49% interest in Associated  Reciprocal  Traders
("ART"), a trading company located in Zug, Switzerland.  ART acts as a buyer and
seller of goods and services using barter,  usually dealing with parties outside
the U.S.  Through  its  interest  in ART,  the  Company  has a  presence  in the
international  corporate  barter  marketplace.  The Company's share of ART's net
assets  and  results of  operations  are  included  in the  Company's  financial
statements  using the  equity  method of  accounting.  All of the  undistributed
earnings of the foreign  affiliate  were  reinvested and were not expected to be
remitted to the parent company.  On November 27, 1996, the majority owner of ART
informed the Company of its intent to take immediate steps to distribute all the
assets of ART and to end the  relationship  with the  Company.  The  Company had
previously  intended  to  reinvest  its share of the  earnings  of this  venture
indefinitely  and,  accordingly,  had not provided  income taxes on its share of
ART's  undistributed  earnings.  At July 31,  1995,  the  cumulative  amounts of
reinvested   income  on  which   deferred   taxes  had  not  been  provided  was
approximately  $1,590,000.  As a result of the inability to continue to reinvest
its share of ART's  earnings,  the Company  recognized a deferred  provision for
income taxes of  $1,247,000  during the fourth  quarter of the fiscal year ended
July 31, 1996,  which has been reported as a reduction of the Company's share of
equity in net income (loss) of foreign affiliate in the statement of operations.
This decreased net income by $1,247,000, or $0.17 per share.

The assets of ART as of July 31, 1996 consist  primarily  of  available-for-sale
securities, none of which are securities of ITEX Corporation. The majority owner
of ART has agreed to distribute  the assets on a basis expected to result in the
Company  realizing an amount not less than the carrying  value of the  Company's
investment.

During  the last  several  years,  the  Company  started  and  operated  a media
department,  which  exchanged  media products owned by the Company for due bills
for  prepaid  advertising  credits on radio  stations  across the U.S.  The four
Company-owned  products included the Image Audio Music Production Library, , the
Golden Age of Radio Theatre,  the New Rock Countdown,  and Flashback ... Moments
in Time.  During the fourth  quarter of the fiscal year ended July 31, 1996, the
Company  sold  certain  media  inventory  and  reduced  the  scope of its  media
operations in order to improve the Company's ongoing cash flow.

                                       19
<PAGE>
Although  the  Statement  of  Cash  Flows  indicates  negative  cash  flow  from
operations,  the Company believes that cash fees and commissions,  cash that can
be  obtained  from  the  sale  of  inventories  and  available-for-sale   equity
securities at the  discretion  of the Company,  and cash that would be available
from the sale of equity and debt securities of the Company will be sufficient to
fund cash operating needs of the Company while continuing to follow the strategy
of mixing cash and trade activities so as to maximize  long-term wealth building
and shareholder value. Furthermore,  the Company is presently incurring negative
cash flow with respect to several  areas of business  development  that would be
expected to  contribute  in the future to  long-range  wealth  building.  At the
Company's discretion,  it could conserve cash by suspending or terminating these
activities.  However,  there can be no assurance that operating  conditions will
enable the Company to continue to operate as  described  above or that  adequate
funds from any sources will continue to be available on terms  acceptable to the
Company.

Development Activities

The Company has developed a comprehensive  training program for its brokers. New
brokers come to the training  center at the  Company's  Portland,  Oregon for an
intensive week of initial training before receiving the credential of "Associate
Broker." They are then permitted to set up offices and act as barter brokers for
the Company.  After  demonstrating  adequate  competence and achieving specified
performance levels, they return to the training center for an additional week of
training before receiving the credential of "ITEX Licensed Broker."

The Company has  developed  the largest and most  innovative  electronic  barter
exchange  in the  industry.  The system is modeled  after the NASDAQ  electronic
market quotation system. In a commercial barter exchange, the exchange acts as a
third  party  recordkeeper  for all  parties  who join the  barter  system.  One
advantage of this system is that it enables multi-lateral trade to take place.

Recent  technological  improvements  include a  software  update of the  Account
Information  Maintenance  program utilized by ITEX Brokers, a software update of
the  BarterWire  program  which is utilized by both ITEX Brokers and ITEX Retail
Trade Exchange Members, and developing access on the Internet.

During the fiscal year of Fiscal Year 1995,  the Company  completed an agreement
with  International  Trade Exchange  Corp, a Vancouver  B.C.  based company,  to
operate the Canadian barter company.  The International Trade Exchange Corp does
business  in  Canada  under  the  names  ITEX  and  Bartercard.  In spite of the
similarity of names, ITEX Corporation (U.S.) and  ITEX/Bartercard  (Canada) have
never had a business  relationship in the past. Under the terms of the agreement
ITEX acquired the rights to the name and trademarks of the  International  Trade
Exchange of Vancouver, B.C. Canada together with the right to acquire its client
base and  assets.  The  addition of the  affiliation  with  ITEX/Bartercard  and
TROC/Canada will more fully enable ITEX clients to do business coast-to-coast in
both the U.S. and Canada.

The  Company  has  pioneered  electronic  trading  with its  BarterWire  system,
introduced  by the  Company  nearly a decade  ago.  Using  BarterWire,  Exchange
members can buy and sell products and services  through a personal  computer and
modem from  anywhere  in the world where  telephone  service is  available.  The
Company has continued to enhance its BarterWire software so that users can trade
more efficiently through the Exchange system.  Latest enhanced versions are more
user friendly with features  familiar to those who are accustomed to the Windows
environment.  It  also  includes  color  and  graphic  capabilities  for  better
presentation of products and services offered through the system.

The Company has also made BarterWire  available to clients through the Internet,
complete with its own gateway and web server.  This enables  Exchange members to
enjoy the advantages of 

                                       20
<PAGE>
the latest version of BarterWire  together with savings on long distance charges
and a larger electronic marketplace.

Another  electronic  trading  feature  introduced by the Company is a "fax-back"
system for  Exchange  clients,  which  enables  Exchange  members to request and
receive their account  records,  company data, ITEX business forms,  product and
service lists, and other information by fax.

The  ITEX  Express  card   continues  to  enhance   trade  among  ITEX  clients,
particularly  when taken in concert with other electronic  trading  innovations.
The ITEX Express card is the Company's  debit-credit card for barter,  the first
of its kind in the U.S.  The  card  can be used  for  identification  or to make
purchases using a three part voucher form or point-of-sale (POS) terminal.  ITEX
has  encouraged  the use of POS terminals as a way to speed barter  transactions
and increase the volume of trade.

Management believes that electronic trading systems such as BarterWire, Internet
access, the ITEX Express card, and the fax-back  information and trading service
represent the next major step forward in the development of the barter industry.
By its early involvement in the electronic marketplace, ITEX believes it will be
positioned to take full advantage of future developments in this area.

The  Company  believes  that  new  technologies  and  the  emerging   electronic
marketplace  have  the  potential  to  profoundly  affect  the way  business  is
conducted. As this new marketplace emerges, the Company is positioning itself to
take full advantage of this trend. The Company is already becoming recognized as
an industry leader in this field. As the transition to electronic business takes
place, ITEX intends to play a major role.

At July 31, 1996,  Other assets  includes  costs of  purchasing  and  developing
certain of the Company's  information and communication  systems.  During fiscal
1996, the Company continued work on development projects that had been commenced
in prior  years.  Since these are mature  projects  and  systems,  technological
feasibility  was  present,  resulting  in  the  capitalization  of  most  of the
development  costs  incurred in fiscal 1996,  in  accordance  with the Company's
accounting  policy.  The increase in the level of research and development costs
was  attributable  to the  nature  of  the  activities  in  fiscal  1996,  which
essentially consisted of coding and other activities connected with constructing
the systems.  A large portion of the development  costs were paid to independent
consultants  and  specialists in the particular  systems areas and are not fixed
costs of the Company.

Research  and  development  during the past two fiscal years has focused both on
technological  improvements and international expansion.  During the fiscal year
ended July 31,  1996,  the Company  spent a total of  $577,000  on research  and
development for its communication and information systems, of which $560,000 was
capitalized  and $17,000 was charged to expense.  During the fiscal  years ended
July 31, 1995 and 1994,  the Company  spent a total of  $169,000  and  $131,000,
respectively, all of which was charged to expense.

The terms "Barter is Good ... Responsible Barter is Better" and "BarterWire" are
registered service marks of the Company. The ITEX symbol and name are registered
trademark-service marks of the Company.

                                       21
<PAGE>
Liquidity and Capital Resources

Overall  Financial  Position.  At July 31, 1996, the Company's  working  capital
ratio  was  1.1  to 1,  based  on  current  assets  of  $2,827,000  and  current
liabilities of $2,566,000. The Company's working capital ratio at July 31, 1995,
was 2.0 to 1, based on current assets of $3,016,000  and current  liabilities of
$1,509,000.  The working  capital ratio decreased  because the Company  provided
$1,247,000 in current deferred taxes for earnings to be remitted tas a result of
the  unexpected  termination  of the ART foreign  venture.  The net assets to be
received, consisting primarily of avaliable-for-sale securities, are included in
the  long-term  classification  of  investment  in foreign  equity  affiliate of
$3,197,000.  The Company expects to be able to meet any  requirements to pay the
current  deferred tax  liability by selling a portion of the  available-for-sale
securities to be received.

Total  stockholders'  equity  increased by $6,600,000 to $20,383,000 at July 31,
1996, from $13,783,000 at July 31, 1995. The primary  increases in stockholders'
equity were from continued  profitable  operations and private placements of the
Company's  equity  securities.  In addition,  the Company issued common stock in
exchange for prepaid printing services, of which $640,000 had not been performed
as of July 31, 1996. The Company has  classified  this balance as a reduction of
stockholders'  equity at July 31, 1996,  rather than as a prepaid expense and an
increase to equity. The Company expects to use these printing services in future
periods.

Even  though the  Statement  of Cash  Flows  indicates  negative  cash flow from
operations,  the Company believes that cash fees and commissions,  cash that can
be  obtained  from  the  sale  of  inventories  and  available-for-sale   equity
securities at the  discretion  of the Company,  and cash that would be available
from the sale of equity and debt securities of the Company will be sufficient to
fund cash operating needs of the Company while continuing to follow the strategy
of mixing cash and trade activities so as to maximize  long-term equity building
and shareholder value. Furthermore,  the Company is presently incurring negative
cash flow  with  respect  to  several  development  projects.  At the  Company's
discretion,   it  could  conserve  cash  by  suspending  or  terminating   these
activities.  However,  there  can  be no  assurance  that  adequate  funds  from
operations  or  any  other  sources  will  continue  to be  available  on  terms
acceptable to the Company.

Private  Placements.  During the fiscal  year ended July 31,  1996,  the Company
completed a private  placement with  Newcastle  Services Ltd.  ("Newcastle"),  a
foreign  corporation,  which  owns  a 51%  interest  in  Associated  +Reciprocal
Traders,  Inc.,  the Company's 49% owned  foreign  affiliate,  pursuant to which
Newcastle  purchased  200,000 shares of the Company's common stock for $750,000.
The Company also completed a private  placement  pursuant to which an individual
purchased 56,000 shares of the Company's common stock for $210,000.  The Company
also completed a private  placement  pursuant to which an officer of the Company
purchased  25,000 shares of the Company's  common stock for $94,000.  In each of
these  private  placements,  the Company  issued for each share of common  stock
purchased a warrant to purchase one share of common  stock at an exercise  price
of $4.50 per share and one share of common  stock at an exercise  price of $5.50
per share.  The warrants were  exercisable  from date of issuance and expired on
July 31, 1996.

Effective  January 1, 1996, the Company  entered into a Regulation S transaction
with Wycliff Fund, Inc.  ("Wycliff"),  a foreign corporation.  Wycliff agreed to
purchase  1,022,495  units of the Company's  equity  securities  over a two-year
period for $4.89 per unit, equaling a total of $5,000,000. Each unit consists of
one share of common stock and  warrants to purchase two shares of common  stock.
One  warrant  entitles  the holder to purchase  one share of common  stock at an
exercise price of $4.89 per share, is exercisable  from and after two years from
the

                                       22
<PAGE>
date of issuance,  and expires  five years from the date of issuance.  The other
warrant entitles the holder to purchase one share of common stock at an exercise
price of $6.12 per share, is exercisable from and after four years from the date
of  issuance,  and  expires  ten years from the date of  issuance.  Wycliff  was
required to pay the  purchase  price of the units at a minimum  rate of $625,000
per quarter.

Through July 31, 1996, the Company  received  $1,250,000 from Wycliff and issued
255,624 shares of common stock and the Company also issued  warrants to purchase
255,624  shares  of  common  stock at an  exercise  price of  $4.89  per  share,
exercisable from and after two years from the date of issuance,  with expiration
five years from the date of issuance, and warrants to purchase 255,624 shares of
common stock at an exercise price of $6.12 per share, exercisable from and after
four years from the date of issuance, with expiration ten years from the date of
issuance.

Under the terms of the Wycliff private  placement,  if the entire purchase price
of $5,000,000  was paid no later than December 31, 1996,  the Company would have
been  required to issue to Wycliff  warrants to purchase an  additional  250,000
shares of common  stock at an  exercise  price of $4.89 per share.  The  private
placement  terms also provided that Wycliff would pay to the Company  additional
amounts equal to 8% per annum for any portion of the purchase price that was not
paid on or before December 31, 1996.  Further,  the private  placement  provided
that if Wycliff  failed to pay at least  $625,000 in any calendar  quarter,  the
Company could,  at its sole option,  decline to thereafter  sell any of the then
unpurchased units to Wycliff.  Wycliff did not pay the purchase price that would
have been due for the calendar  quarter ended  September 30, 1996, and therefore
the Company has canceled the remaining portion of the private placement.

In  addition,  during the fiscal year ended July 31,  1996,  the Company  issued
350,000  shares of common stock as  compensation  for services and in connection
with the acquisition of SLI, Inc.

Stock  Option  Plan.  Effective  April  19,  1993,  the  Company  adopted  a Key
Employee's  Incentive  Stock  Option Plan (the 1993 Plan) that  provides for the
grant of options  intended to meet the  requirements  of Internal  Revenue  Code
Section 422, to purchase shares of the Company's  common stock.  Under the Plan,
the Company  may grant to the  Optionee  during the period  ending on a date not
more than ten  years  from the date of the grant of the  option,  the  option to
purchase common stock of the Company at a price per share equal to the bid price
of the Company's traded common stock on the date of the grant of the option. The
Company  filed  a  Form  S-8  registration  with  the  Securities  and  Exchange
Commission with respect to the shares of common stock underlying  options issued
or to be issued pursuant to the 1993 Plan. During the fiscal year ended July 31,
1996, the Company received proceeds totaling $895,000 from the exercise of stock
options to purchase 470,000 shares of common stock pursuant to 1993 Plan.

Effective  December 15, 1995, the Board of Directors  adopted a new stock option
plan  pursuant  to which  options  to  purchase  up to  1,300,000  shares of the
Company's  common stock may be granted to employees,  officers,  directors,  and
consultants of the Company.  Exercise prices for options granted under the plans
are equal to market  value on the date of grant and options  may be  exercisable
for up to ten  years  from the date of grant at the  discretion  of the Board of
Directors. During the fiscal year ended July 31, 1996, pursuant to the new stock
option plan,  options to purchase  1,295,000  shares were granted at an exercise
price of $6.13 per share. The plan was approved by the Company's shareholders at
the annual meeting of the Company's  shareholders held on May 3, 1996. It is the
intention of the Company to file a Form S-8 registration with the Securities and
Exchange  Commission  with  respect  to the  shares of common  stock  underlying
options to be issued pursuant to the plan.

                                       23
<PAGE>
Warrants.  During the fiscal  year ended July 31,  1996,  the  Company  received
proceeds totaling $656,000 from the exercise of previously  outstanding warrants
to purchase 250,000 shares of common stock.

Prepaid  Printing.  the Company  issued  common  stock in  exchange  for prepaid
printing services, of which $640,000 had not been performed as of July 31, 1996.
The Company has classified this balance as a reduction of  stockholders'  equity
at July 31,  1996,  rather than as a prepaid  expense and an increase to equity.
The Company expects to use these printing services in future periods.

Stock Split. At the annual meeting of the Company's shareholders on May 3, 1996,
the  Company's  shareholders  approved a  two-for-one  forward  stock split with
respect  to the  Company's  common  stock.  The  stock  split  has not yet  been
implemented by the Company.  Upon  implementation  of the stock split, all share
and per share data  included  in the  Company's  financial  statements  would be
restated to give effect to the stock split.

Bank Line of Credit.  The  Company  has a line of credit  facility  with a bank.
Pursuant to the line of credit,  the Company is able to borrow up to $250,000 on
a short-term basis for working capital purposes. The interest rate applicable to
borrowings  pursuant  to the  facility  is equal  to the  bank's  prime  rate of
interest  plus  1.5%.  The  maximum  amount  of  cash  borrowings  that  may  be
outstanding  at any time is  determined by a borrowing  base formula  related to
available  collateral.  Borrowings are  collateralized by the Company's accounts
receivable, fixed assets and inventory.  As of July 31, 1996, the Company had no
borrowings  outstanding  under the bank  credit  facility.  The credit  facility
expires December 31, 1997.

Acquisition of Global  Exchange  Network.  During the fiscal year ended July 31,
1996, the Company acquired the assets and business of Global Exchange Network of
Irvine,  California,  including  its  membership  base.  The purchase  price was
$385,000, which was paid $200,000 in cash and by the issuance of a 6% promissory
note for $185,000, payable in monthly installments of $8,331 including principal
and interest,  commencing with the first such payment on September 1, 1996, with
monthly  payments  thereafter  until the final  payment on August 1,  1998.  The
acquisition has been accounted for by the purchase  method.  Pro forma operating
data is not provided  because the effects on  previously  reported data would be
insignificant.

Acquisition of 50% Interest in Business Exchange  International  Corporation and
Related  Litigation.  On January 24,  1996,  the Company  acquired a 100% common
stock interest in SLI, Inc. ("SLI"), a Nevada  corporation,  in exchange for the
issuance to SLI's former  shareholders of 60,000 shares of the Company's  common
stock  valued  at  approximately   $645,000.   The  Company  then  made  a  cash
contribution  to the capital of SLI of $1,750,000 and made a loan of $300,000 to
SLI.  Also on January 24, 1996,  SLI  purchased a 50% common  stock  interest in
Business  Exchange  International  Corporation  ("BXI"),  a Nevada  corporation,
pursuant to rights to purchase  such  interest  that had been assigned to SLI by
the former  shareholders  of SLI. SLI paid $1,750,000 for the common interest in
BXI by the  purchase of newly issued  common stock of BXI and, in addition,  SLI
loaned  $300,000 to BXI.  BXI owns and  operates  one of the  leading  organized
barter exchanges in the United States.

Subsequent  to the  transactions  described  above,  the  owner of the other 50%
interest in BXI issued a series of press releases and widespread  communications
throughout the commercial barter industry stating,  among other things, that BXI
was not the owner of the assets of the BXI barter  exchange,  which assertion is
in direct  contradiction to explicit  contractual  representations  made by that
party.  Despite  having made such  assertion  and  despite  having made what the
Company considers to be unjustified  negative statements about the Company,  the
owner of the other 50% and the Company  engaged in extensive  negotiations  with
regard  to one  party  purchasing  a 1%  interest  from  the  other  and  future
management and operation of the BXI barter

                                       24
<PAGE>
exchange.  On several  occasions,  the  Company  believed  that  resolution  was
imminent.  However,  each time, the subsequent actions of the owner of the other
50% interest in BXI demonstrated unwillingness to abide by the contractual terms
of  the  applicable  agreement,  accompanied  by  the  contradictory  action  of
unwillingness  to refund to the Company the funds that had been paid for the 50%
interest in BXI and the loan that was made to BXI.  Also, the owner of the other
50% interest in BXI continued to publicly make what the Company  considers to be
hostile and unjustified allegations about the Company and its actions.

On February 12, 1996,  the Company  filed suit in the Circuit Court of Multnomah
County,  Oregon  against  BXI, BX  International,  Inc.,  the company  which BXI
alleged in its press  releases was the actual  owner of the BXI Trade  Exchange,
Saul Yarmak,  president of BXI and author of the hostile allegations against the
Company and Stephen  Friedland,  an officer of BXI.  The suit seeks  damages for
breach of contract, fraud, business defamation  (disparagement),  unlawful trade
practices and interference  with economic  relationships and includes claims for
specific  performance  of the  contract to acquire the 50% interest in BXI and a
request for a declaratory  judgment.  The  defendants  answered the Complaint on
April 30, 1996 by denying all allegations and asking for their attorney's fees.

On  October  11,  1996,  ITEX  Corporation  moved for  dismissal  of its  claims
(business  defamation,  unlawful trade practices and interference  with economic
relationships),  without prejudice,  against  defendants.  On that same date the
motion  was  granted  and  leave  granted  to file an  Amended  Complaint.  That
complaint  is styled  SLI,  Inc. v. Saul  Yarmak,  Stephen  Friedland,  Business
Exchange  International  Corp. and BX International,  Inc. The Amended Complaint
restates  the  claims  against  defendants  for  breach  of  contract,  specific
performance,  declaratory  judgment and fraud. By dismissing ITEX  Corporation's
claims without  prejudice,  ITEX may, if it chooses,  reinstitute its claims for
business  defamation,  unlawful trade practices and  interference  with economic
relationships.  Proceeding  under the  Amended  Complaint  permits an  expedited
determination of the core contract issues raised,  that is, whether BXI breached
its contract with SLI by asserting  that the BXI Trade  Exchange is not an asset
of BXI.

The  potential  outcome  of this  lawsuit is  uncertain.  However,  the  Company
believes that SLI has meritorious  arguments in favor of its contract positions.
The Company believes that a solution will be reached either through  negotiation
or through completion of the litigation process. The trial date has been set for
February 24, 1997.  Legal  counsel is unable to evaluate  the  probability  of a
favorable or unfavorable  outcome or to estimate the range of potential recovery
on  the   plaintiff's   claims  or  any  potential   loss  on  the   defendant's
counterclaims.

Acquisition of Barter Exchange, Inc. (BEI) Trade Exchange. On March 1, 1995, the
Company acquired the barter exchange business of Barter Exchange,  Inc. ("BEI").
BEI has twelve  offices  located  primarily in the Southwest and lower  Midwest.
This acquisition added  significantly to the Company's client base and increased
the number of  Exchange  offices  nationwide  by nearly  10%.  This  acquisition
enabled  the  Company  to  absorb a  long-time  competitor  with a well  defined
presence  in the  market.  It also gave the Company  much  improved  presence in
geographic  areas in which the  Company  had not  previously  had a  significant
presence.

Acquisition of Name and Trademarks of International Trade Exchange of Vancouver,
B.C.  In March,  1995 ITEX  acquired  the rights to the name and  trademarks  of
International Trade Exchange (ITEX) Corp., of Vancouver,  B.C. Canada,  together
with the right to acquire its client base and assets.  The  purchase did not add
to the Company's  assets,  but the acquisition had strategic  importance for the
Company's  future plans.  During fiscal 1994,  TROC Canada,  the largest  barter
exchange in Canada,  took steps to join the ITEX barter system as an independent
licensee.  TROC is located in Montreal,  Quebec with most of its  operations  in
eastern Canada. 

                                       25
<PAGE>
Subsequently,  the Company entered into an International  License Agreement with
3264076 Canada,  Inc., governing the use of the ITEX System in Canada. These two
actions thus gave ITEX  coast-to-coast  name recognition in Canada as well as in
the U.S.

Acquisition of Travel Agents Hotel Guide. In February 1995 the Company  acquired
the Travel  Agents Hotel Guide,  a directory of hotels and resorts  across North
America and the Caribbean  that the Company uses to acquire room nights on trade
in  exchange  for  advertising  in the Guide.  The room  nights are then sold to
Exchange  clients  in  exchange  for  trade  dollars,  thus  providing  a highly
desirable business and vacation inventory for trade to Exchange members.








                                       26
<PAGE>
RESULTS OF OPERATIONS


Comparison of Fiscal Years Ended July 31, 1996 and July 31, 1995
----------------------------------------------------------------

Overall Operating Results

Total  revenue  increased 28% to  $28,230,000  in the fiscal year ended July 31,
1996  ("fiscal  1996") from  $22,112,000  in the fiscal year ended July 31, 1995
("fiscal 1995").  Income from operations  increased to $2,182,000 in fiscal 1996
from $945,000 in fiscal 1995.

Equity in net income (loss) from foreign  affiliate was ($90,000) in fiscal 1996
as compared to $958,000 in fiscal 1995. All of the undistributed earnings of the
foreign  affiliate  were  reinvested and were not expected to be remitted to the
parent  company.  On November 27, 1996,  the majority  owner of ART informed the
Company of its intent to take  immediate  steps to distribute  all the assets of
ART and to end the  relationship  with the Company.  The Company had  previously
intended to reinvest its share of the earnings of this venture indefinitely and,
accordingly,  had not provided income taxes on its share of ART's  undistributed
earnings. At July 31, 1995, the cumulative amounts of reinvested income on which
deferred taxes had not been provided was approximately  $1,590,000.  As a result
of the  inability  to  continue  to reinvest  its share of ART's  earnings,  the
Company  recognized a deferred  provision for income taxes of $1,247,000  during
the  fourth  quarter of the fiscal  year  ended  July 31,  1996,  which has been
reported as a reduction of the Company's share of equity in net income (loss) of
foreign  affiliate in the statement of operations.  This decreased net income by
$1,247,000, or $0.17 per share.

The assets of ART as of July 31, 1996 consist  primarily  of  available-for-sale
securities, none of which are securities of ITEX Corporation. The majority owner
of ART has agreed to distribute  the assets on a basis expected to result in the
Company  realizing an amount not less than the carrying  value of the  Company's
investment.  The Company expects to be able to meet any  requirements to pay the
current  deferred tax  liability by selling a portion of the  available-for-sale
securities to be received.

Net  income  decreased  to  $1,384,000,  or $0.19 per share in fiscal  1996 from
$1,835,000,  or $0.41 per share, in fiscal 1995. The decrease  resulted from the
requirement  to provide the deferred tax provision of $1,247,000  related to the
unexpected  termination of the ART foreign venture. This decreased net income by
$1,247,000, or $0.17 per share.

The  fluctuations  in net income and net income per share are not  proportionate
because of a greater number of shares  outstanding in fiscal 1996 and because of
more incremental  shares from options and warrants in computing income per share
caused by increases in the market  price of the  Company's  stock during part of
fiscal 1996.

Revenue

Total  Revenue.  Total revenue  increased 28% to $28,230,000 in fiscal 1996 from
$22,112,000  in  fiscal  1995.   Corporate  trading  revenue  increased  12%  to
$13,881,000  in fiscal 1996 from  $12,403,000  in fiscal  1995.  Trade  exchange
revenue  increased 49% to $14,020,000  in fiscal 1996 from  $9,418,000 in fiscal
1995.



                                       27
<PAGE>
The following  table  summarizes  the cash and trade  (consisting  of ITEX trade
dollars and other noncash consideration)  components of revenue for fiscal years
1996 and 1995:


                                            Fiscal Years Ended July 31,
                                         ----------------------------------
                                              1996                1995
                                         --------------      --------------
                                                   (in thousands)
     Corporate Trading Revenue
         Trade                            $   12,003          $  12,403
         Cash                                  1,878                ---
                                         ---------------     --------------
                                              13,881             12,403
                                         ---------------     --------------
     Commissions on Sales Arranged
          Trade                                  121
         Cash                                    208                291
                                         ---------------     --------------
                                                 329                291
                                         ---------------     --------------
     Trade Exchange Revenue
          Trade                                5,427              4,204
         Cash                                  8,593              5,214
                                         ---------------     --------------
                                              14,020              9,418
                                         ---------------     --------------
     Total Revenue
          Trade                               17,551             16,607
         Cash                                 10,679              5,505
                                         ---------------     --------------
                                          $   28,230          $  22,112
                                         ===============     ==============

The above  reported  revenue  amounts  include only the portions  considered  as
commissions earned with respect to sales by ITEX USA, in accordance with Section
1200.01 of the AICPA  Technical  Practice  Aids.  Total  sales  arranged  by the
Company in connection  with ITEX USA were $3,055,000 and $1,807,000 in the years
ended July 31, 1996 and 1995, respectively.

Corporate  Trading  Revenue.  The continued  increased  level of corporate trade
revenue was attributable to continued operation of the Company's corporate trade
department,  which was established in fiscal 1994. Management expects continuing
significant contributions to revenue from its corporate trading activities.

Trade Exchange Revenue.  The increase in trade exchange revenue was attributable
to an array of factors. During fiscal 1996, the Company recognized a significant
amount of  enrollment  fees for new clients  joining as members of the Exchange.
The Company has continued its commitment to improved broker  training  programs,
which is having the effect of increased  rates of new clients joining as members
of the  Exchange.  The Company has also  continued  its  internal  expansion  by
opening more broker offices.  The Company has continued its ongoing  broad-based
marketing and advertising  program targeted at recruitment of additional brokers
and members of the Exchange.

Costs and Expenses

Costs of Corporate Trading.  Costs of corporate trading increased to $10,749,000
in fiscal  1996 from  $9,621,000  in fiscal 1995  because of the higher  revenue
level.  Costs of  corporate  trading  revenue were 77% in fiscal 1996 and 78% in
fiscal 1995.

Costs of Trade Exchange  Revenue.  Costs of trade exchange revenue  increased to
$7,153,000  in  fiscal  1996 from  $4,361,000  in  fiscal  1995.  Costs of trade
exchange revenue,  which consists of brokers' fees and commissions,  were 51% of
trade  exchange  revenue in fiscal 1996 and 46% in fiscal  1995.  The  resulting
variance of 5% in gross margin  percentage was due to specific  commission rates
applicable to transactions completed in each period.

                                       28
<PAGE>
Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses  increased to $8,146,000 in fiscal 1996 from $7,185,000
in fiscal  1995.  The  increase  resulted  from the  Company's  higher  scope of
operations,   including   expansion   Company-owned  and  operated  local  trade
exchanges.

Total  advertising  and promotion  was  $2,597,000 in fiscal 1996 as compared to
$2,985,000 in fiscal 1995. One of the advantages  available to barter businesses
is the ability to fund a significant  portion of  advertising  costs using trade
dollars or by other trade  consideration.  During fiscal 1996,  the Company paid
$2,312,000  of its  advertising  costs by ITEX  trade  dollars  or  other  trade
consideration, representing 89% of total advertising costs for the period.

Comparison of Fiscal Years Ended July 31, 1995 and July 31, 1994
----------------------------------------------------------------

Overall Operating Results

Total  revenue  increased 50% to  $22,112,000  in the fiscal year ended July 31,
1995  ("fiscal  1995") from  $14,766,000  in the fiscal year ended July 31, 1994
("fiscal  1994").  Income from  operations  increased to $945,000 in fiscal 1995
from  $294,000 in fiscal 1994.  Equity in net income from foreign  affiliate was
$958,000 in fiscal 1995 as compared to $632,000 in fiscal 1994.

Net income more than  doubled to  $1,835,000,  or $0.41 per share in fiscal 1995
from  $844,000,  or $0.26 per share,  in fiscal  1995.  The rate of  increase in
income per share was less than the rate of increase  in net income  because of a
greater number of shares outstanding in fiscal 1995.

Revenue

Total  Revenue.  Total revenue  increased 50% to $22,112,000 in fiscal 1995 from
$14,766,000  in  fiscal  1994.   Corporate  trading  revenue  increased  47%  to
$12,403,000  in fiscal  1995 from  $8,427,000  in fiscal  1994.  Trade  exchange
revenue  increased 49% to  $9,418,000  in fiscal 1995 from  $6,339,000 in fiscal
1994.





                                       29
<PAGE>
The following  table  summarizes  the cash and trade  (consisting  of ITEX trade
dollars and other noncash consideration)  components of revenue for fiscal years
1995 and 1994:

                                             Fiscal Years Ended July 31,
                                           ------------------------------
                                              1995                1994
                                           ----------          ----------
                                                     (in thousands)
     Corporate Trading Revenue
         Trade                             $  12,403           $   8,266
         Cash                                                        161
                                           ----------          ----------
                                              12,403               8,427
                                           ----------          ----------    
     Commissions on Sales Arranged
         Trade
         Cash                                    291
                                           ----------          ----------
                                                 291
                                           ----------          ----------- 
     Trade Exchange Revenue
         Trade                                 4,204                1,942
         Cash                                  5,214                4,397
                                           ----------          -----------
                                               9,418                6,339
                                           ----------          -----------
     Total Revenue
         Trade                                16,607               10,208
         Cash                                  5,505                4,558
                                           ----------
                                                               ===========
                                           $  22,112           $   14,766
                                           ==========          ===========

The above  reported  revenue  amounts  include only the portions  considered  as
commissions earned with respect to sales by ITEX USA, in accordance with Section
1200.01 of the AICPA  Technical  Practice  Aids.  Total  sales  arranged  by the
Company in connection  with ITEX USA were  $1,807,000 in the year ended July 31,
1995.

Corporate  Trading  Revenue.  The  increase  in  corporate  trading  revenue was
attributable to continued operation of the Company's corporate trade department,
which was established in fiscal 1994 and continued corporate barter transactions
by the Company's affiliate,  ITEX USA. Management expects continuing significant
contributions to revenue from its corporate trading activities.

Trade Exchange Revenue.  The increase in trade exchange revenue was attributable
to an array of factors.  The Company has  continued  its  commitment to improved
broker training  programs,  which is having the effect of increased rates of new
clients  joining as members of the Exchange.  The Company has also continued its
external  expansion by acquisitions  and its internal  expansion by opening more
broker offices. The Company has continued its ongoing broad-based  marketing and
advertising program targeted at recruitment of additional brokers and members of
the Exchange.

Costs and Expenses

Costs of Corporate  Trading.  Costs of corporate trading increased to $9,621,000
in fiscal  1995 from  $6,409,000  in fiscal  1994  because  of the  increase  in
corporate trading revenue. Costs of corporate trading revenue were 78% in fiscal
1995 and 76% in fiscal 1994.

Costs of Trade Exchange  Revenue.  Costs of trade exchange revenue  increased to
$4,361,000  in  fiscal  1995 from  $2,806,000  in  fiscal  1994.  Costs of trade
exchange revenue,  which consists of brokers' fees and commissions,  were 46% of
trade exchange revenue in fiscal 1995 and 44% in fiscal 1994.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses  increased by  $1,928,000  to $7,185,000 in fiscal 1995
from $5,257,000 in fiscal 1994. The 

                                       30
<PAGE>
increase  resulted  from the  Company's  higher scope of  operations,  including
expansion Company-owned and operated local trade exchanges.

Total  advertising  and promotion  was  $2,985,000 in fiscal 1995 as compared to
$1,591,000 in fiscal 1994. One of the advantages  available to barter businesses
is the ability to fund a significant  portion of  advertising  costs using trade
dollars or by other trade  consideration.  During fiscal 1995,  the Company paid
$2,746,000  of its  advertising  costs by ITEX  trade  dollars  or  other  trade
consideration, representing 92% of total advertising costs for the period.

INFLATION

The  Company's  results of  operations  have not been  affected by inflation and
management  does  not  expect  inflation  to have a  significant  effect  on its
operations in the future.

FORWARD-LOOKING INFORMATION

From time to time,  the  Company  or its  representatives  have made or may make
forward-looking   statements,   orally  or  in  writing.   Such  forward-looking
statements  may be  included  in,  but not  limited  to,  press  releases,  oral
statements  made with the  approval  of an  authorized  executive  officer or in
various filings made by the Company with the Securities and Exchange Commission.
Words or phrases "will likely result",  "are expected to", "will continue",  "is
anticipated",  "estimate",  "project or projected",  or similar  expressions are
intended  to  identify  "forward-looking  statements"  within the meaning of the
Private Securities  Litigation Reform Act of 1995 (the Reform Act"). The Company
wishes to ensure that such statements are  accompanied by meaningful  cautionary
statements,  so as to maximize to the fullest extent possible the protections of
the safe harbor established in the Reform Act. Accordingly,  such statements are
qualified in their entirety by reference to and are accompanied by the following
discussion  of certain  important  factors  that could cause  actual  results to
differ materially from such forward-looking statements.

Management is currently  unaware of any trends or  conditions  that could have a
material adverse effect on the Company's consolidated financial position, future
results of operations, or liquidity.

However,  investors  should also be aware of factors  that could have a negative
impact on the Company's  prospects and the  consistency of progress in the areas
of revenue  generation,  liquidity,  and generation of capital resources.  These
include:  (i)  variations  in the mix of  corporate  trading and trade  exchange
revenue,  (ii)  possible  inability of the Company to attract  investors for its
equity  securities  or otherwise  raise  adequate  funds from any source,  (iii)
increased governmental regulation of the barter business, (iv) a decrease in the
cash fees and  commissions  realized  by the  Company  based upon a  substantial
decrease in corporate or retail trade exchange transactions, and (v) unfavorable
outcomes to litigation  presently  involving the Company or to which the Company
may become a party in the future.

The risks identified here are not all inclusive. Furthermore,  reference is also
made to other sections of this report that include additional factors that could
adversely impact the Company's business and financial performance. Moreover, the
Company  operates in a very competitive and rapidly  changing  environment.  New
risk factors  emerge from time to time and it is not possible for  Management to
predict all of such risk factors,  nor can it assess the impact of all such risk
factors  on the  Company's  business  or the  extent  to  which  any  factor  or
combination of factors may cause actual results to differ  materially from those
contained  in  any  forward-looking  statements.  Accordingly,   forward-looking
statements should not be relied upon as a prediction of actual results.


                                       31
<PAGE>
                                ITEX CORPORATION
                                   FORM 10K/A
                            For the Fiscal Year Ended
                                  July 31, 1996

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                Page
                                                             ------------

  REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS             33

  CONSOLIDATED BALANCE SHEETS AT JULY 31, 1996 AND 1995          34

  CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE YEARS 
  ENDED JULY 31, 1996, 1995, AND 1994                            35

  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE 
  THREE YEARS ENDED JULY 31, 1996, 1995, AND 1994                36
      
  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE 
  YEARS ENDED JULY 31, 1996, 1995, AND 1994                      37

  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     39


  All  schedules  have  been  omitted  because  they are not  applicable  or not
  required,  because  the  information  is shown in the  consolidated  financial
  statements or the notes thereto, or because the information is immaterial.




                                       32
<PAGE>
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors
of ITEX Corporation
Portland, Oregon

We have audited the  consolidated  financial  statements of ITEX Corporation and
subsidiaries  for the years ended July 31, 1996, 1995, and 1994. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated  financial position of ITEX Corporation
and  subsidiaries  as of July  31,  1996  and  1995,  and the  results  of their
operations  and their cash flows for the years ended July 31,  1996,  1995,  and
1994, in accordance with generally accepted accounting principles.

Andersen, Andersen & Strong
December 3, 1996
Salt Lake City, Utah





                                       33
<PAGE>
<TABLE>
<CAPTION>
                                ITEX CORPORATION
                           CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share amounts )

                                                                                        July 31,
                                                                              ---------------------------
                                                                                  1996            1995
                                                                              -----------     -----------
<S>                                                                          <C>             <C>         
                                   ASSETS
Current Assets
     Cash .................................................................   $    1,301      $    1,524
     Accounts receivable, net of allowance for doubtful
         accounts of $96 and $132..........................................          847           1,117
     Notes receivable......................................................          360             ---
     Deferred tax asset....................................................          ---              51                          
     Prepaids and other current assets.....................................          319             324
                                                                              -----------     -----------
         Total current assets..............................................        2,827           3,016
                                                                                        
Inventory for Principal Party Trading......................................        7,844           5,696
                                                                                         
Available for Sale Equity Securities.......................................        3,877           3,332
                                                                                         
Investment in Foreign Equity Affiliate.....................................        3,197           2,040  
                                                                                                                             
Investment in Business Exchange International Corp.........................        2,418             ---                  
                                                                      
Goodwill and Purchased Member Lists, net...................................        1,299           1,067  
                                                                                   
Deferred Tax Asset.........................................................          ---              26

Notes Receivable, Long-Term Portion........................................          997             ---

Other Assets...............................................................          947             401 
                                                                              -----------     -----------
                                                                              $   23,406      $   15,578
                                                                              ===========     ===========
                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
     Accounts payable......................................................   $      183      $      133
     Portion of receivables due to brokers ................................          508             580
     Trade credits issued in excess of earned..............................           41               4
     Income taxes payable..................................................           94             474
     Deferred tax liability................................................        1,253              43
     Current portion of long-term indebtedness.............................          138              61
     Other current liabilities.............................................          349             214
                                                                              -----------     -----------
         Total current liabilities.........................................        2,566           1,509
                                                                              -----------     -----------
Deferred Income Taxes......................................................          265             130
                                                                              -----------     -----------
Long-term Indebtedness.....................................................          192             156
                                                                              -----------     -----------

Stockholders' Equity
     Common stock, $.01 par value; 20,000,000 shares
        authorized; 6,804,000 and 5,212,000 shares
        issued and outstanding.............................................           68              52
     Paid-in capital.......................................................       16,386          10,625
     Net unrealized gain on marketable securities..........................          132              92 
     Treasury stock, at cost (10,000 and 20,000 shares)....................          (29)            (68)
     Retained earnings.....................................................        4,466           3,082
     Prepaid Printing......................................................         (640)            ---
                                                                              -----------     -----------
         Total stockholders' equity........................................       20,383          13,783
                                                                              -----------     -----------
                                                                                 $23,406      $   15,578
                                                                              ===========     ===========

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                       34
<PAGE>
<TABLE>
<CAPTION>
                                ITEX CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

                                                                        For the Fiscal Years Ended July 31,
                                                       --------------------------------------------------------------------
                                                               1996                    1995                      1994
                                                       -------------------      ------------------       ------------------
<S>                                                    <C>                      <C>                      <C>               
Revenue
    Sales arranged....................................  $         3,055         $         1,807           $           ---
                                                       ===================      ==================       ==================

    Corporate trading revenue.........................  $        13,881         $        12,403           $         8,427
    Commissions on sales arranged.....................              329                     291                       ---
    Trade exchange revenue............................           14,020                   9,418                     6,339
                                                       -------------------      ------------------       ------------------
                                                                 28,230                  22,112                    14,766
                                                       -------------------      ------------------       ------------------
Costs and Expenses
    Costs of corporate trading........................           10,749                   9,621                     6,409
    Costs of trade exchange revenue...................            7,153                   4,361                     2,806
    Selling, general, and administrative..............            8,146                   7,185                     5,257
                                                       -------------------      ------------------       ------------------
                                                                 26,048                  21,167                    14,472
                                                       -------------------      ------------------       ------------------

Income from Operations................................            2,182                     945                       294

Other Income (Expense)
  Interest income (expense), net......................               72                       3                       (16)
  Dividends and subordination fees....................              204                     229                       ---
  Gain (loss) on sale of securities...................              (76)                    222                        12
  Miscellaneous, net................................                ---                     ---                        23
                                                       -------------------      ------------------       ------------------
                                                                    200                     454                        19
                                                       -------------------      ------------------       ------------------
Income Before Taxes and Equity in Net
  Income (Loss) of Foreign Affiliate..................            2,382                   1,399                       313

Provision for Income Taxes............................              908                     522                       101
                                                       -------------------      ------------------       ------------------
Income Before Equity in Net  Income
  (Loss) of Foreign Affiliate.........................            1,474                     877                       212

Equity in Net Income (Loss) of Foreign
  Affiliate (net of tax provision of
  $1,247 in 1996).....................................              (90)                    958                       632
                                                       -------------------      ------------------       ------------------
Net Income ...........................................  $         1,384         $         1,835           $           844
                                                       ===================      ==================       ==================

Average Common and Equivalent Shares:
   Primary............................................            7,346                    4,658                   3,292
                                                       ===================      =================       =================
   Fully diluted......................................            7,617
                                                       ===================

Net Income Per Common Share:
   Primary............................................  $          0.19          $          0.41         $          0.26
                                                       ===================      =================       =================
   Fully diluted......................................  $          0.18
                                                       ===================


The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</TABLE>

                                       35
<PAGE>
<TABLE>
<CAPTION>
                                             ITEX CORPORATION
                             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                         For the Fiscal Years Ended July 31, 1996, 1995, and 1994

                                                                       Unrealized
                          Common Stock       Additional                 Gain(Loss)
                     ----------------------   Paid-in      Retained        on         Treasury      Prepaid
                      Shares      Amount      Capital      Earnings     Securities     Stock        Printing           Total
                     ----------  ---------- ------------- ------------ ------------  -----------  --------------  -------------
<S>                  <C>         <C>        <C>           <C>          <C>           <C>          <C>             <C>
Balance, August 1,
                1993     3,035    $     30     $   5,143   $     403     $    (380)   $    (150)     $               $   5,046

Stock sold for cash       130            1           129                                                                   130
Stock issued in
  exchange
  for member lists          5                         42                                                                    42
Stock exchanged for
  interest in                                                                                                              450
  equity affiliate        150            2           448
Stock exchanged for
  goods, services          96            1           462                                     81                            544
Unrealized Gain
       (Loss)                                                                   376                                        376
Net income, fiscal
                1994                                             844                                                       844
                    -----------  -----------  -----------  -----------  -----------  ------------   ------------    --------------
Balance, July 31,                                                                                                        7,432
                1994     3,416          34         6,224       1,247            (4)          (69)

Stock sold for cash        941           9         2,000                                                                 2,009
Stock issued for
  acquisitions and
  in exchange for
  member lists             556           6         1,326                                                                 1,332
Stock exchanged for
  goods and services       300           3         1,076                                                                 1,079
Unrealized Gain
       (Loss)                                                                   96                                          96
Net income, fiscal
                1995                                           1,835                                                     1,835
                    -----------  -----------  -----------  -----------  -----------  ------------   ------------    --------------
Balance, July 31,                                                                                                       
                1995     5,213          52        10,626       3,082            92           (69)                       13,783 
Stock sold for cash      1,294          13         3,678                                                                 3,691 
Stock issued for                                                                                                        
  acquisitions              60           1           644                                                                   645
Stock exchanged for
  goods and services       237           2         1,438                                      40                         1,480
Prepaid printing                                                                                          (640)           (640)
Unrealized Gain                                                                                                                  
       (Loss)                                                                   40                                          40
Net income, fiscal                                                                                                             
                1996                                           1,384                                                     1,384
                    -----------  -----------  -----------  -----------  -----------  ------------   ------------    --------------

Balance, July 31,
                1996     6,804    $     68     $  16,386   $   4,466     $     132    $     (29)     $    (640)      $  20,383
                    ===========  ===========  ===========  ===========  ===========  ============   ============    ==============

The  accompanying  notes  are an  integral  part of the  consolidated  financial statements.
</TABLE>

                                       36
<PAGE>
<TABLE>
<CAPTION>
                                             ITEX CORPORATION
                                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                                              (In thousands)

                                                                          For the Fiscal Years Ended July 31,
                                                                -------------------------------------------------------
                                                                   1996                   1995                  1994
                                                            ------------------     ------------------    ------------------
<S>                                                         <C>                    <C>                   <C>
Cash Flows from Operating Activities
    Net income............................................    $       1,384          $       1,835         $         844
    Adjustments:
       Equity in net income of foreign affiliate..........           (1,157)                  (958)                 (632)
       Depreciation and amortization......................              290                    215                   142
       Services paid for in stock.........................              740                    660                   451
       Net (gain) on sale of investments..................                                    (452)                  (12)
       Net (loss) on sale of investments..................                                      (2)                  (13)
       Net trade revenue earned over trade costs  ........           (2,974)                (1,683)                 (936)
    Changes in operating assets and liabilities:
       Accounts and notes receivable......................             (596)                   288                  (351)
       Deferred taxes.....................................            1,422                    (48)                   94
       Prepaids and other assets..........................             (224)                   189                    46
       Accounts payable and other current liabilities.....              239                     13                    69
       Portion of receivables due to brokers..............              (73)                   (32)                  226
       Income taxes payable...............................             (469)                   388                    82
       Deferred revenue...................................                                  (1,000)
                                                            ------------------     -------------------    ------------------
         Net cash (used in) operating activities..........           (1,418)                  (587)                   10
                                                            ------------------     -------------------    ------------------
Cash Flows From Investing Activities
    Acquisitions of SLI, Inc. and Global Exchange
        Network, Inc......................................           (2,158)
    Additions to equipment and information systems........              (53)                  (227)                  (68)
    Other.................................................             (397)                                         (25)
                                                            ------------------     -------------------    ------------------
          Net cash (utilized in) investing activities.....           (2,608)                  (227)                  (93)
                                                            ------------------     -------------------    ------------------

Cash Flows From Financing Activities
    Proceeds from sales of common stock...................            3,691                  2,010                   130
    Proceeds from notes payable...........................              237                    814                   224
    Repayments of notes payable...........................             (125)                  (937)                  (99)
                                                            ------------------     -------------------    ------------------
          Net cash provided by financing activities.......            3,803                  1,887                   255

                                                            ------------------     -------------------    ------------------
Net increase (decrease) in cash and equivalents...........            ( 223)                 1,073                   172
Cash and cash equivalents at beginning of period..........            1,524                    451                   279
                                                            ------------------     -------------------    ------------------
Cash and Cash Equivalents at End of Period................    $       1,301          $       1,524          $        451
                                                            ==================     ===================    ==================
Supplemental Cash Flow Information
Cash paid for interest....................................    $           29         $          30          $         20
Cash paid for income taxes................................               610                   180                     5

Non-Cash Investing and Financing Activities
Equipment, inventory, information systems
  development services, prepaids, customer lists,
  marketable securities and goodwill acquired for
  common stock and ITEX trade dollars.....................             3,951                 3,770                 1,831
Stock issued in acquisition of SLI, Inc...................               645
Available-for-sale securities purchased with ITEX trade
  dollars................................................                250                   500                   500
</TABLE>

                                       37
<PAGE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.


                                       38
<PAGE>
                                ITEX CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -  DESCRIPTION OF BUSINESS

The Company is engaged in  international  operations  in both the retail  barter
exchange and  corporate  barter areas of the  commercial  barter  industry.  The
Company administers the ITEX Retail Barter Exchange (the Exchange),  which is an
association of business  owners and  professionals  who trade goods and services
with other members of the Exchange.  The Company  promotes the  maximization  of
trade through barter  transactions  that benefit members within the Exchange by:
(a) generating  incremental new business,  (b) conserving members' cash by their
ability to spend ITEX trade dollars,  (c) serving  effectively as an alternative
source of financing,  (d) enhancing the lifestyles of members,  and (e) enabling
the sale of slow  moving or excess  inventories  at  better  values  than can be
realized in cash markets.

The Company acts as a third-party  record-keeper  of members'  transactions  and
balances,  which are denominated in ITEX trade dollars.  An ITEX trade dollar is
an  accounting  unit  used by the  Exchange  to  record  the  value of trades as
determined by the buying and selling parties in barter transactions.  ITEX trade
dollars  denote  the right to receive  goods or  services  available  from other
Exchange  members  or the  obligation  to  provide  goods or  services  to other
Exchange  members.  ITEX trade dollars may not be redeemed for cash.  ITEX trade
dollars may be used only in the manner and for the purpose set forth in the ITEX
Trading Rules that govern the Exchange. ITEX trade dollars are not legal tender,
securities, or commodities.

Members of the Exchange pay cash and ITEX trade dollar fees and  commissions  to
the  Company.  For  these  services,  the  Company  typically  receives  a  cash
commission  of 5% or 6% on the  purchases  and  sales  made  by  members  of the
Exchange.  In addition to administering the activities and record-keeping of the
Exchange, the Company, as a member of the Exchange,  trades as a principal party
in barter  transactions  with  other  members.  The  Company  also  engages as a
principal  party in  trade  transactions  in the  corporate  barter  area of the
industry. In these transactions, the Company acquires goods and services that it
either sells for cash or ITEX trade  dollars or holds in  inventory  for further
trades in the corporate barter area or for trading to members of the Exchange.

The Company owns and operates  retail barter  offices in Portland,  Oregon;  St.
Louis,  Missouri; and Orange County,  California.  All other ITEX broker offices
are  independently  owned  and  operated  by ITEX  Licensed  Brokers.  There are
presently 124 broker offices located in 36 states.  In addition,  there are also
approximately  20 foreign  broker  offices,  including 14 in Canada.  One of the
Company's current objectives is aggressive  international  expansion of the ITEX
retail trade  network.  The Company  bears no financial  responsibility  for the
financing of an independent broker office.

The Company  acts as an  intermediary  for the  exchange  of goods and  services
between major  companies,  through the formation of ITEX USA,  Inc., a corporate
barter management company,  which is the Company's exclusive agent for marketing
the

                                       39
<PAGE>
Company's  corporate and industrial trading business of the Company's  corporate
barter division. ITEX USA negotiates corporate barter agreements, services these
agreements and sells the inventory it acquires in these  transactions.  In these
transactions,  ITEX USA issues ITEX Cash Equivalent Credits,  which are separate
and  apart  from the ITEX  Retail  Trade  Dollar,  now  used in  accounting  for
transactions in the ITEX Retail Trade Exchange  System.  The revenues  generated
from those  inventories  when sold for cash will be divided  between the Company
and ITEX USA. This is the first and primary profit center in each ITEX corporate
barter  transaction.  The second profit center is a 12%  transaction fee paid by
the ITEX Corporate  Barter client on the Cash Equivalent  Credit portion of each
purchase. This revenue will also be divided between the Company and ITEX USA.

The Company operates with the objectives of long-term equity-building while also
ensuring  availability  of sufficient cash for current  operating  requirements.
Accordingly,  the Company may in any period report significant revenue, profits,
and increases in net assets from transactions  denominated in ITEX trade dollars
or other  noncash  consideration.  Sometimes,  the  Company  invests  in  equity
securities with ITEX trade dollars that have been earned by the Company in trade
transactions.  The companies  invested in are able to use the ITEX trade dollars
received in payment for the stock issued to purchase  goods and services used in
the operation of their businesses.

As a result of this utilization of trade dollars, the Company has accumulated an
investment  portfolio of equity securities totaling $3,877,000 at July 31, 1996,
stated at the lower of cost or market.  Also at July 31, 1996, the Company owned
inventories of goods and services  totaling  $7,844,000,  stated at the lower of
cost or market,  which was available for corporate trading or trading to members
within the Exchange, which increases cash commissions earned by the Company, for
exchange for equity  securities of other  companies,  or for  consumption by the
Company in providing for its own operating needs.

In 1993 the Company  purchased a 49% interest in Associated  Reciprocal  Traders
("ART"), a trading company located in Zug, Switzerland.  ART acts as a buyer and
seller of goods and services using barter,  usually dealing with parties outside
the U.S.  Through  its  interest  in ART,  the  Company  has a  presence  in the
international  corporate  barter  marketplace.  The Company's share of ART's net
assets  and  results of  operations  are  included  in the  Company's  financial
statements  using the equity  method of  accounting.  On November 27, 1996,  the
majority owner of ART informed the Company of its intent to take immediate steps
to  distribute  all  the  assets  of ART and to end the  relationship  with  the
Company.  The Company  had  previously  intended  to  reinvest  its share of the
earnings of this venture indefinitely and, accordingly,  had not provided income
taxes on its share of ART's undistributed earnings. As a result of the inability
to continue to reinvest its share of ART's  earnings,  the Company  recognized a
deferred  provision for income taxes of $1,247,000  during the fourth quarter of
the fiscal year ended July 31, 1996,  which has been  reported as a reduction of
the Company's  share of equity in net income (loss) of foreign  affiliate in the
statement of operations.  This decreased net income by $1,247,000,  or $0.17 per
share.

During  the last  several  years,  the  Company  started  and  operated  a media
department,  which  exchanged  media products owned by the Company for due bills
for  prepaid

                                       40
<PAGE>
advertising  credits on radio  stations  across the U.S. The four  Company-owned
products included the Image Audio Music Production  Library, , the Golden Age of
Radio Theatre, the New Rock Countdown, and Flashback ... Moments in Time. During
the fourth  quarter of the fiscal year ended July 31,  1996,  the  Company  sold
certain media  inventory and reduced the scope of its media  operations in order
to improve the Company's ongoing cash flow.







                                       41
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
---------------------------
The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned subsidiaries. Intercompany transactions have been eliminated.


Trade Dollar Transactions  
-------------------------
Normal  Valuation  of Trade  Dollars.  The  Company  uses the ratio of one trade
dollar to one United States dollar in measuring and accounting for purchases and
sales. This one-for-one  ratio is the pervasive  standard within the ITEX Retail
Barter  Exchange  and  throughout  the barter  industry.  The  Company  does not
recognize any accounting  implications if differences are observed between trade
dollar and U.S. dollar prices that are within reasonable ranges that might exist
between prices of similar U.S. dollar transactions.

Abnormal  Valuation of Trade  Dollars.  For those few  significant  trade dollar
transactions  in which  fair  market  values  are  determined  to be  materially
different  from the ratio of $1 to one trade dollar,  the fair market values are
used in determining the accounting result of the transaction  instead of amounts
equal to the number of trade dollars exchanged.  Abnormal  valuations most often
occur in certain acquisitions of bulk inventories, such as those entered into by
the Company for principal party trading or for trading to and for the benefit of
members of the ITEX Retail Barter Exchange.  In such  situations,  an accounting
adjustment  is recorded to decrease the carrying  value of the inventory to fair
market value along with a decrease to income for the period.

Trade Dollar Valuation in the Statement of Operations. The ratio of $1 per trade
dollar is  applicable  to revenue  and costs and  expenses in the  statement  of
operations  with the exception of the effects of  additional  costs and expenses
recorded as a result of the circumstances  described under the preceding section
"Abnormal  Valuation of Trade Dollars." It should be noted that to a significant
extent, any adjustments to trade dollar revenue would be offset by corresponding
adjustments  to expenses  paid when  corresponding  trade  dollars are spent for
goods and services that are charged to costs and expenses.

Trade  Dollar  Valuation  in the Balance  Sheet.  The Company has  expertise  in
trading.  The Company has a blended  cash-trade  purchasing  program in which it
spends  trade  dollars  that have been  earned or issued by the Company and U.S.
dollars--in  tandem--to  pay for goods and  services  used by the Company in its
operations. Because of the effectiveness of its purchasing programs, the Company
has not accumulated significant trade dollar balances on its balance sheets.

Any negative  trade dollar balance of the Company is shown as a liability in the
balance sheet. The contractual  relationship  between the Company and members of
the ITEX Retail Barter Exchange permit the Company to essentially "borrow" trade
dollars  through  the  issuance  of  trade  dollars  in  excess  of  the  amount
specifically earned by the Company, within certain specified limitations.

At each balance sheet date, in accordance  with  generally  accepted  accounting
principles,  any positive trade dollar balance of the Company would be evaluated
for net

                                       42
<PAGE>
realizable  value.  The Company  would  adjust the  carrying  value of the trade
dollars if the fair value of the trade  dollars is less than the carrying  value
or it is probable that not all trade dollars will be used.

Information  that  would  be  used to  support  the net  realizable  value  of a
significant  positive trade dollar balance at a balance sheet date would include
the Company's past track record of utilizing trade dollars,  evident ability and
intent to utilize  the trade  dollars in a  reasonable  time,  indicated  by the
quantity  of trade  dollars  relative to the size of the  Company's  procurement
budget for items the trade dollars may be used for, and  preparation  of a trade
plan for  timely  utilization  on a $1 per  trade  dollar  basis  for  goods and
services that will be available.

Inventory for Principal Party Trading

General. Inventories are stated at the lower of cost (first-in, first-out basis)
or market.

Inventory  Purchased  and Sold for Trade  Dollars.  Purchases of  inventory  for
principal  party  trading paid for in trade  dollars are valued at the amount of
trade dollars paid unless the  circumstances  described in the preceding section
"Abnormal Valuation of trade dollars" are present. For significant  purchases of
inventory  for  principal  party trading paid for in trade dollars in which fair
market values are determined to be materially different from the ratio of $1 per
trade dollar,  the fair market  values are used in  determining  the  accounting
result of the  transaction  and the  carrying  value of the  inventory.  In such
situations,  an accounting adjustment is recorded to decrease the carrying value
of the  inventory  to fair market  value along with a decrease to income for the
period.

Determination and Substantiation of Fair Market Value. The Company's  procedures
for inventory for principal party trading include  obtaining  appraisals of fair
market,  comparison to equivalent  cash market prices that would be required for
similar purchases, or both.

Revenue Recognition.  Revenue is recognized for sales of inventory for principal
party trading when the buyer has made an unconditional  commitment to convey the
applicable  consideration  to the Company and the  Company  has  culminated  the
earnings  process by having shipped the inventory to the buyer or performed such
other acts necessary to have completed its required  performance pursuant to the
applicable transaction. For any transaction resulting in revenue to the Company,
if any material contingencies are present,  revenue recognition is delayed until
all material  contingencies  are eliminated.  Further,  no revenue is recognized
unless collection of the applicable consideration is probable.

Trading With Cash Equivalent Credits

Nature of Transactions. In addition to and separate from principal party trading
transactions  in which the Company  purchases  and sells  inventories  for trade
dollars,  the  Company  enters into  transactions  in which it  exchanges  "Cash
Equivalent Credits" for bulk inventory of corporations. These transactions occur
completely  outside the ITEX Retail  Barter  Exchange  and do not involve  trade
dollars,  which are  completely  different

                                       43
<PAGE>
from Cash Equivalent Credits. The Company arranges the sale of the inventory for
cash, which is retained by the Company subject to no future contingencies.

Holders of Cash  Equivalent  Credits may only use them in purchases of goods and
services  from specific  vendors  identified by the Company in a blend of mostly
cash and a  smaller  proportion  of Cash  Equivalent  Credits.  Because  of bulk
purchasing  arrangements the Company has with these vendors,  the vendors accept
the cash portion of the price and  essentially  grant a special  discount to the
client equal to the number of Cash Equivalent Credits utilized in the cash-trade
blended  purchases.  ITEX will assist the client in  executing  transactions  in
which the client utilizes its Cash Equivalent Credits,  but the Company does not
guarantee the utilization of the Cash Equivalent  Credits and it is the client's
responsibility  to  utilize  its Cash  Equivalent  Credits.  The  Company  earns
transaction  fees equal to a percentage of the Cash Equivalent  Credits utilized
by the client.

Revenue  Recognition.  The Company  recognizes  revenue  equal to the cash to be
received from the sale of the inventory when the buyer has made an unconditional
commitment to pay and the earnings process has been completed by the shipment of
the  inventory  or  such  other  acts  necessary  to  have  completed   required
performance pursuant to the applicable transaction.

Transaction fee revenue associated with clients'  utilization of Cash Equivalent
Credits is recognized when Cash  Equivalent  Credits are utilized and the client
is obligated to pay the transaction fee to the Company.

For any  transaction  resulting  in  revenue  to the  Company,  if any  material
contingencies  are present,  revenue  recognition  is delayed until all material
contingencies  are  eliminated.   Further,   no  revenue  is  recognized  unless
collection of the applicable consideration is probable.

Available for Sale Securities
-----------------------------
Nature of  Transactions.  The Company  operates with the objectives of long-term
wealth-building  while also ensuring availability of sufficient cash for current
operating  requirements.  In this respect,  the Company sometimes exchanges ITEX
Corporation  common  stock for  stock of other  publicly-traded  companies.  The
Company  also  invests  trade  dollars  that have  been  earned or issued by the
Company or inventories for principal party trading in equity securities of other
publicly-traded  companies.  The  investee  companies  are able to use the trade
dollars  received in payment for the stock  issued to purchase  needed goods and
services or to use the inventory  items received as payment for the stock in the
operation of their businesses.

Accounting Principles.  Effective August 1, 1994, the Company changed its method
of accounting for equity  securities to conform to the requirements of financial
Accounting   Standards  Board   Statement  No.  115,   "Accounting  for  Certain
Investments in Debt and Equity Securities." The change had no effect on retained
earnings. The noncurrent portfolio of available-for-sale securities is stated at
fair  market  value at  balance  sheet  dates.  Realized  gains and  losses  are
determined on the specific  identification  method and recognized in net income.
Net unrealized gains or losses on noncurrent  available-for-sale  securities are
recorded  in a separate  stockholders'  equity  account,  except for

                                       44
<PAGE>
unrealized  losses that are  considered  to be other than  temporary,  which are
recognized as losses in determining net income.

Determination  of  Fair  Market  Value.   Investments  in  restricted  stock  of
publicly-traded  companies  are stated at the  current  quoted  market  price of
freely-trading stock of the investee. Convertible preferred stocks are stated at
the current  quoted market price of common  shares that the  preferred  stock is
convertible into.

Income Taxes
------------
Income taxes are provided  for the tax effects of  transactions  reported in the
financial  statements  and consist of taxes  currently due plus  deferred  taxes
related  primarily  to  differences  between  the bases of  certain  assets  and
liabilities  for financial and tax reporting.  The deferred taxes  represent the
future tax  return  consequences  of those  differences,  which  will  either be
taxable or deductible  when the assets and liabilities are recovered or settled.
The Company accounts for investment tax credits using the  flow-through  method,
and thus,  they reduce  income tax in the year the related  assets are placed in
service or qualified progress payments are made.

For years prior to July 31,  1995,  the Company  filed its income tax returns on
the cash basis whereby, trade accounts receivable and various operating payables
had  no tax  basis.  Revenue  associated  with  trade  accounts  receivable  was
recognized when payments were received and the various  operating  payables were
deductible  when payments were made. For fiscal years 1996 and 1995, the Company
is required to file its income tax returns on the accrual basis.

The provision for income taxes includes federal, foreign, state and local income
taxes  currently  payable and those  deferred  because of temporary  differences
between the financial statements and tax bases of assets and liabilities. All of
the undistributed earnings of the foreign affiliate were reinvested and were not
expected to be remitted to the parent  company.  Accordingly,  no federal income
taxes were provided on such  earnings.  On November 27, 1996, the majority owner
of ART informed the Company of its intent to take immediate  steps to distribute
all the assets of ART and to end the relationship with the Company.  The Company
had  previously  intended to reinvest  its share of the earnings of this venture
indefinitely  and,  accordingly,  had not provided  income taxes on its share of
ART's  undistributed  earnings.  At July 31,  1995,  the  cumulative  amounts of
reinvested   income  on  which   deferred   taxes  had  not  been  provided  was
approximately  $1,590,000.  As a result of the inability to continue to reinvest
its share of ART's  earnings,  the Company  recognized a deferred  provision for
income taxes of  $1,247,000  during the fourth  quarter of the fiscal year ended
July 31, 1996,  which has been reported as a reduction of the Company's share of
equity in net income (loss) of foreign affiliate in the statement of operations.

Income Per Share
----------------
Income  per  share of common  stock is  computed  on the  basis of the  weighted
average  shares of common  stock  outstanding,  plus  common  equivalent  shares
arising from the effect of dilutive  stock options  using the modified  treasury
stock  method,  and net income  increased for debt  reduction and  investment in
short-term paper from the hypothetical exercise of options.

                                       45
<PAGE>
Costs of Communication and Information  Systems
-----------------------------------------------
The Company capitalizes costs of purchasing and internal costs of developing and
enhancing its communication  and information  systems.  The Company  capitalizes
only  direct  costs of  development  after  technological  feasibility  has been
determined.  Other  costs  related to  development  are  expensed as incurred as
research and development  expenditures.  Capitalized  costs of communication and
information systems are amortized over a 4 year period.

Depreciation and Amortization
-----------------------------
Property  and  equipment  are stated at cost.  Depreciation  is  computed on the
straight-line  method for financial statement  purposes.  Estimated useful lives
range from 3 to 10 years. Intangible assets,  consisting of "excess of cost over
net assets of company acquired," "noncompete covenants," and "member lists", are
stated at cost and are being amortized over 20 and 5-year periods, respectively.

Capitalized Equipment Leases
----------------------------
Vehicle and equipment  leases have been recorded at the present value of the net
minimum  lease  payments.   These  assets  are  being   depreciated   using  the
straight-line method over lease terms of 3 to 5 years.

Allowance for Uncollectible Accounts
------------------------------------
The Company provides an allowance for accounts  receivable which are doubtful of
collection.  The  allowance  is based upon  management's  periodic  analysis  of
receivables,  evaluation of current  economic  conditions,  and other  pertinent
factors.  Ultimate losses may vary from the current  estimates and, as additions
to the allowance  become  necessary,  they are charged  against  earnings in the
period in which  they  become  known.  Losses are  charged  and  recoveries  are
credited to the allowance.

Estimates and Assumptions
-------------------------
Management uses estimates and assumptions in preparing  financial  statements in
accordance with generally accepted  accounting  principles.  those estimates and
assumptions  affect  the  reported  amounts  of  assets,  liabilities,  revenue,
expenses,  gains and losses,  and also disclosures  about contingent  assets and
liabilities.  Actual results may vary from estimates and  assumptions  that were
used in preparing the financial statements.

Reclassifications
-----------------
Certain  reclassifications  to financial  statements  of prior fiscal years have
been made to be consistent with  classifications in the financial statements for
the fiscal year ended July 31, 1996.


NOTE 3 - REVENUE

The following  table  summarizes  the cash and trade  (consisting  of ITEX trade
dollars and other noncash  consideration)  components of revenue for each of the
fiscal years ended July 31, 1996, 1995, and 1994:

                                       46
<PAGE>


                                         Fiscal Years Ended July 31,
                                    --------------------------------------
                                       1996          1995          1994
                                    ----------    ----------    ----------
                                               (in thousands)
  Corporate Trading Revenue
      Trade                         $  12,003     $  12,403     $   8,266
      Cash                              1,878                         161
                                    ----------    ----------    ----------
                                       13,881        12,403         8,427
  Commissions on Sales Arranged
      Trade                               121
      Cash                                208           291
                                    ----------    ----------    ----------
                                          329           291
                                    ----------    ----------    ----------
  Trade Exchange Revenue
      Trade                             5,427         4,204         1,942
      Cash                              8,593         5,214         4,397
                                    ----------    ----------    ----------
                                       14,020         9,418         6,339
                                    ----------    ----------    ----------
  Total Revenue
      Trade                            17,551        16,607        10,208
      Cash                             10,679         5,505         4,558
                                    ----------    ----------    ----------
                                   $   28,230     $  22,112     $  14,766
                                    ==========    ==========    ==========

The above  reported  revenue  amounts  include only the portions  considered  as
commissions earned with respect to sales by ITEX USA, in accordance with Section
1200.01 of the AICPA  Technical  Practice  Aids.  Total  sales  arranged  by the
Company in connection  with ITEX USA were $3,055,000 and $1,807,000 in the years
ended July 31, 1996 and 1995, respectively.



NOTE 4 - NOTES RECEIVABLE

At July 31, 1996 and 1995, notes receivable consisted of the following:

                                                         July 31,
                                                  ----------------------
                                                     1996        1995
                                                  ----------  ----------
                                                 (in thousands, except monthly
                                                       payment amounts)

  Note receivable in five equal annual
     installments, including interest at 6% per
     annum                                        $     600    $    ---
  Note receivable from Business Exchange
     International, Inc., payable over a fifteen-
     year period in monthly installments of
     $3,513, including interest at 8% per annum         300         ---
  Note receivable from former officer of SLI,
     Inc., due January 24, 1997, with interest at
     8% per annum                                       125         ---
  Note receivable from ITEX USA, Inc., due
     October 15, 1996, with interest at 9% per
     annum                                              106         ---
  Other                                                 226          29
                                                  ----------  ----------
                                                      1,357          29

                                       47
<PAGE>
  Less, current portion                                (360)        (29)
                                                  ==========  ==========
                                                  $     997   $     ---
                                                  ==========  ==========




NOTE 5 -  INVENTORY FOR PRINCIPAL PARTY TRADING

Following are the components of inventory for principal party trading:

                                                          July 31,
                                                  -----------------------
                                                      1996        1995
                                                  ----------  ----------
                                                       (in thousands)
 
        Prepaid media advertising duebills        $   3,530   $   3,402
        Image production inventory                      ---         292
        Art work                                      2,642         245
        Foreign hotel roomnights                        ---         226
        Domestic hotel roomnights                     1,482       1,531
        Miscellaneous inventory                         190         ---
                                                  ----------  ----------
                                                  $   7,844   $   5,696
                                                  ==========  ==========





                                       48
<PAGE>
NOTE 6 - AVAILABLE-FOR-SALE SECURITIES

Following is  information  about the value of  available-for-sale  securities at
July 31, 1996 and 1995:

                                           Gross          Gross        Market 
                               Carrying  Unrealized     Unrealized     Value
                                Value      Gains          Losses    (Discounted)
July 31, 1996:  
Convertible  preferred stock  $ 3,163      $            $            $ 3,301
Stock  dividends  receivable      327                                    327  
Common  stock (restricted)        255                        (6)         249
                              --------     --------     --------     --------
                              $ 3,745      $   138      $    (6)     $ 3,877
                              --------     --------     --------     --------
July 31, 1995:
Convertible preferred stock   $ 3,011      $    92      $            $ 3,103
Stock dividends receivable        123
Subordination fee receivable      106
                              --------     --------     --------     --------
                              $ 3,240      $    92      $            $  3,332
                              ========     ========     ========     ========

Effective  August 1, 1994,  the  Company  changed its method of  accounting  for
equity  securities  to  conform  to the  requirements  of  Financial  Accounting
Standards  Board Statement No. 115,  Accounting for Certain  Investments in Debt
and Equity Securities. The change had no effect on retained earnings.

The  Company  recognizes  realized  gains and  losses  from the  disposition  of
available-for-sale  securities in results of operations.  The Company recognized
gains of $470,000  and losses of $248,000 in the year ended July 31,  1995.  The
Company  recognized  gains of $231,000  and losses of $219,000 in the year ended
July 31, 1994.

In May 1994, the Company  acquired  $2,500,000 face value of Class A Convertible
Preferred  Stock of Sky  Scientific  Financial  Services,  Inc. The terms of the
preferred  stock  include  a 4 3/4%  cumulative  annual  dividend  rate  payable
quarterly.  The stock is convertible one-third of face value every twelve months
to common stock of Sky  Scientific,  Inc. (the parent  company).  The conversion
rate is 80% of the  average  bid  price  of the  common  stock.  Sky  Scientific
Financial  Services,  Inc.  has the right to call any stock not  converted.  The
preferred stock is valued at the face value,  discounted by the present value of
shares  convertible  into common in the future.  Included in unrealized gains is
the value of the lapse of one year of a  conversion  restriction  of  $91,670 in
fiscal 1995 and the value of the lapse of the final  conversion  restriction  of
$138,000 in fiscal 1996.

In July 1995, the Company acquired  $1,650,000 face value of Class A Convertible
Preferred  Stock (of which  $1,500,000  was sold during the same month) of North
American Resorts,  Inc.  ("NAR").  Such shares accrue interest at the rate of 9%
per annum  payable  in common  shares.  The  preferred  shares  are  convertible
one-fourth  of  the  original  face  value  any  time  after  each   consecutive
twelve-month period, at 80% of the average traded price of NAR's common stock.

In August 1994,  the Company  acquired  $500,000 face value of Class B Preferred
Stock of  Softpoint,  Inc.  Such  shares  accrue  interest at the rate of 9% per
annum, payable in 

                                       49
<PAGE>
cash or common  shares at  Softpoint's  discretion.  The  preferred  shares  are
convertible  any time,  after one year until ten years for shares of  restricted
common stock of Softpoint, Inc. at the average bid price. The preferred stock is
valued at the face value,  discounted by the present value of shares convertible
into common in the future.

In April 1996, the Company  acquired  15,121 shares of preferred  stock of North
American Resorts,  Inc. The preferred shares are convertible to common shares in
18 months based on the 30-day average stock price at the time of conversion.

In April 1995, the Company agreed to subordinate its preferred stock position in
Softpoint,  Inc. to that of another investor. In exchange for the subordination,
Softpoint  agreed to issue 25,000 common shares to the Company.  The shares were
received by the Company during fiscal 1996.

Also included in the noncurrent  marketable  equity  securities for fiscal 1994,
are  investments in restricted or legend stock.  Quoted prices for  unrestricted
shares of the same class of stock  that is  restricted  are used in  determining
fair  market  values.  Market  values  of  other  noncurrent  marketable  equity
securities are determined based on quoted prices.

NOTE 7 - INVESTMENT IN FOREIGN EQUITY AFFILIATE

The Company owns a 49% interest in Associated  Reciprocal Traders, Inc. ("ART"),
a foreign corporation based in Switzerland with international  commercial barter
operations.  ART engages in commercial barter transactions as a buyer and seller
of goods and services with companies and businesses  that are based in countries
outside the United States, as well as U.S.  companies.  The Company accounts for
its  investment in and share of net income or loss of ART by the equity  method.
The Company's equity share of ART's net income (loss), after amortization of the
difference  between  investment  cost and the Company's  proportionate  share of
underlying  assets,  was  ($90,000)  for the fiscal  year  ended July 31,  1996,
$958,000  for the fiscal year ended July 31,  1995,  and $632,000 for the fiscal
year ended July 31, 1994.

All of the  undistributed  earnings of the foreign affiliate were reinvested and
were not  expected to be remitted to the parent  company.  On November 27, 1996,
the majority  owner of ART informed the Company of its intent to take  immediate
steps to distribute all the assets of ART and to end the  relationship  with the
Company.  The Company  had  previously  intended  to  reinvest  its share of the
earnings of this venture indefinitely and, accordingly,  had not provided income
taxes on its  share of  ART's  undistributed  earnings.  At July 31,  1995,  the
cumulative  amounts of reinvested  income on which  deferred  taxes had not been
provided was approximately  $1,590,000. As a result of the inability to continue
to  reinvest  its share of ART's  earnings,  the Company  recognized  a deferred
provision for income taxes of $1,247,000 during the fourth quarter of the fiscal
year  ended  July 31,  1996,  which  has been  reported  as a  reduction  of the
Company's  share of equity in net  income  (loss) of  foreign  affiliate  in the
statement of operations.  This decreased net income by $1,247,000,  or $0.17 per
share.

                                       50
<PAGE>
Following is summary  balance sheet data of ART as of July 31, 1996 and July 31,
1995:

                                              July 31,
                                    ---------------------------
                                        1996            1995
                                    -----------     -----------
                                          (in thousands)

  Total assets                      $    5,679      $    4,543
                                    ===========     =========== 

  Current liabilities               $       84      $      469
  Stockholders' equity                   5,595           4,074
                                    -----------     ----------- 
  Total liabilities and equity      $    5,679      $    4,543
                                    ===========     =========== 

The assets of ART as of July 31, 1996 consist  primarily  of  available-for-sale
securities, none of which are securities of ITEX Corporation. The majority owner
of ART has agreed to distribute  the assets on a basis expected to result in the
Company  realizing an amount not less than the carrying  value of the  Company's
investment.  The Company expects to be able to meet any  requirements to pay the
current  deferred tax  liability by selling a portion of the  available-for-sale
securities to be received.


NOTE 8 - INVESTMENT IN BUSINESS EXCHANGE INTERNATIONAL
         CORPORATION AND RELATED LITIGATION

On January 24, 1996,  the Company  acquired a 100% common stock interest in SLI,
Inc. ("SLI"), a Nevada corporation, in exchange for the issuance to SLI's former
shareholders  of  60,000  shares  of  the  Company's   common  stock  valued  at
approximately $645,000. The Company then made a cash contribution to the capital
of SLI of  $1,750,000  and made a loan of $300,000  to SLI.  Also on January 24,
1996,  SLI  purchased  a  50%  common  stock   interest  in  Business   Exchange
International  Corporation ("BXI"), a Nevada corporation,  pursuant to rights to
purchase such interest that had been assigned to SLI by the former  shareholders
of SLI. SLI paid  $1,750,000  for the common  interest in BXI by the purchase of
newly issued common stock of BXI and, in addition,  SLI loaned  $300,000 to BXI.
BXI owns and  operates  one of the leading  organized  barter  exchanges  in the
United States.

On February  12,  1996,  a complaint  was filed on behalf of the Company and its
wholly owned  subsidiary,  SLI, Inc.,  against Saul Yarmak,  Stephen  Friedland,
Business Exchange  International  Corp., BX International,  Inc., Joel Sens, and
David Lawson.  The complaint,  filed in the Circuit Court of the State of Oregon
for  Multnomah  County  Case No.  9602-01076,  asserted  claims  for  breach  of
contract,   specific  performance,   declaratory  judgment,  fraud,  defamation,
unlawful trade  practices,  and  interference  with economic  relationships.  It
sought to recover damages for allegedly  disparaging  remarks made by certain of
the  defendants  against  ITEX and for a court  ruling  that SLI  acquired a 50%
interest in the BXI trade exchange owned by one or more of the defendants.

On April 30, 1996, defendants Yarmak, Friedland, Business Exchange International
Corp.,  and BX  International,  Inc.,  filed  an  answer  denying  the  material
allegations and asserting a counterclaim for attorney fees.

                                       51
<PAGE>
On  October  11,  1996,  ITEX  Corporation  moved for  dismissal  of its  claims
(business  defamation,  unlawful trade practices and interference  with economic
relationships),  without prejudice,  against  defendants.  On that same date the
motion  was  granted  and  leave  granted  to file an  Amended  Complaint.  That
complaint  is styled  SLI,  Inc. v. Saul  Yarmak,  Stephen  Friedland,  Business
Exchange  International  Corp. and BX International,  Inc. The Amended Complaint
restates  the  claims  against  defendants  for  breach  of  contract,  specific
performance,  declaratory  judgment and fraud. By dismissing ITEX  Corporation's
claims without  prejudice,  ITEX may, if it chooses,  reinstitute its claims for
business  defamation,  unlawful trade practices and  interference  with economic
relationships.  Proceeding  under the  Amended  Complaint  permits an  expedited
determination of the core contract issues raised,  that is, whether BXI breached
its contract with SLI by asserting  that the BXI Trade  Exchange is not an asset
of BXI.

The  potential  outcome  of this  lawsuit is  uncertain.  However,  the  Company
believes that SLI has meritorious  arguments in favor of its contract positions.
The Company believes that a solution will be reached either through  negotiation
or through completion of the litigation process. The trial date has been set for
February 24, 1997.  Legal  counsel is unable to evaluate  the  probability  of a
favorable or unfavorable  outcome or to estimate the range of potential recovery
on  the   plaintiff's   claims  or  any  potential   loss  on  the   defendant's
counterclaims.

NOTE 9 - GOODWILL AND PURCHASED MEMBER LISTS

On September  20, 1993,  ITEX  acquired  the clients  (member  lists) of a trade
exchange for $67,000 and subsequently, on January 10, 1995, the Company acquired
additional clients for $76,000.  The cost of the member lists is being amortized
over a five-year period.

At July 31, 1996 and 1995, the unamortized  balance of member lists consisted of
the following:


                                              July 31,
                                    ---------------------------
                                        1996            1995
                                    -----------     -----------
                                          (in thousands)
   Cost                             $      142      $      142
   Accumulated amortization                (60)            (32)
                                    -----------     ----------- 
                                    $       82      $      110
                                    ===========     =========== 

Amortization  expense for member lists was $28,000,  $21,000 and $11,000 for the
fiscal years ended July 31, 1996, 1995, and 1994, respectively.

On February 10, 1995, the Company  acquired the assets and clients of the Travel
Agent's Hotel Guide (TAHG) for $329,000, of which $293,000 represented the value
of the clients  (member lists).  Previously,  the Company had acquired a lodging
commitment  from TAHG for $96,000.  The  unamortized  cost of the  commitment of
$55,000  was  added  to the  acquisition  basis  and is being  amortized  over a
five-year period.

At July 31, 1996 and 1995, the unamortized balance consisted of the following:

                                       52
<PAGE>
                                               July 31,
                                    ---------------------------
                                        1996            1995
                                    -----------     ----------- 
                                           (in thousands)
   Cost                             $      348      $      348
   Accumulated amortization               (104)            (35)
                                    -----------     -----------
                                    $      244      $      313
                                    ===========     ===========               

Amortization expense was $70,000, $35,000 and $10,000 for the fiscal years ended
July 31, 1996, 1995, and 1994, respectively.

On March 1,  1995,  the  Company  acquired  100% of the  common  stock of Barter
Exchange,  Inc. (BEI) for $900,000,  of which $657,825 represented the excess of
cost over the fair  value of net  assets  acquired.  The excess of cost over net
assets of the Company  acquired is  amortized on a  straight-line  basis over 20
years.


At July 31, 1996 and 1995, the unamortized cost consisted of the following:

                                               July 31,         
                                    --------------------------- 
                                        1996            1995          
                                    -----------     -----------       
                                          (in thousands)              
   Cost                             $      658      $      658        
   Accumulated amortization                (47)            (14)       
                                    -----------     -----------       
                                    $      611      $      644        
                                    ===========     ===========       
                                          

Amortization expense was $33,000 and $14,000 for the fiscal years ended July 31,
1996 and 1995, respectively.

On April 27,  1996,  the  Company  acquired  the  assets  and  clients of Global
Exchange Network,  Inc. for $385,000, of which $257,000 represented the value of
a noncompete agreement and $128,000 represented the value of the member list. At
July 31, 1996, the unamortized balance consisted of the following:


                                   (in thousands)

   Cost                             $      385
   Accumulated amortization                (23)
                                    -----------
                                    $      362
                                    ===========

Amortization expense was $22,000 for the fiscal year ended July 31, 1996.

NOTE 10 - OTHER ASSETS

At July 31, 1996 and 1995,  property and equipment,  which are included in Other
assets,  consisted of the following:



                                       53
<PAGE>

                                              July 31,
                                    ---------------------------
                                        1996            1995
                                    -----------     -----------            
                                          (in thousands)

   Office furniture and fixtures    $      111      $      110
   Computer equipment                      486             446
   Vehicles                                 29             ---
   Leasehold improvements                  118             151
                                    -----------     -----------            
                                           744             707
   Less, accumulated depreciation         (491)           (487)
                                    -----------     -----------            
                                    $      253      $      220
                                    ===========     ===========            

Depreciation expense for property and equipment was $91,000, $68,000 and $91,000
for the fiscal years ended July 31, 1996, 1995, and 1994, respectively.

At July 31, 1996 and 1995,  capitalized  equipment leases, which are included in
Other assets, consisted of the following:

                                              July 31,
                                    ---------------------------
                                        1996            1995
                                    -----------     -----------       
                                          (in thousands)

   Vehicles                         $      ---      $       69
   Computer equipment                      175             193
                                    -----------     -----------                 
                                           175             262
   Less, accumulated depreciation          (72)            (92)
                                    -----------     -----------                 
                                    $      103      $      170
                                    ===========     ===========                 

Depreciation expense for capitalized  equipment leases was $41,000,  $31,000 and
$11,000 for the fiscal years ended July 31, 1996, 1995, and 1994, respectively.

At July 31, 1996,  Other assets  includes  costs of  purchasing  and  developing
certain of the Company's  information and communication  systems.  During fiscal
1996, the Company continued work on development projects that had been commenced
in prior  years.  Since these are mature  projects  and  systems,  technological
feasibility  was  present,  resulting  in  the  capitalization  of  most  of the
development  costs  incurred in fiscal 1996,  in  accordance  with the Company's
accounting  policy.  The increase in the level of research and development costs
was  attributable  to the  nature  of  the  activities  in  fiscal  1996,  which
essentially consisted of coding and other activities connected with constructing
the systems.  A large portion of the development  costs were paid to independent
consultants  and  specialists in the particular  systems areas and are not fixed
costs of the Company.

Research  and  development  during the past two fiscal years has focused both on
technological  improvements and international expansion.  During the fiscal year
ended July 31,  1996,  the Company  spent a total of  $577,000  on research  and
development for its communication and information systems, of which $560,000 was
capitalized  and $17,000 was charged to expense.  During the fiscal  years ended
July 31, 1995 and

                                       54
<PAGE>
1994, the Company spent a total of $169,000 and $131,000,  respectively,  all of
which was charged to expense.

The projects were still in progress at July 31, 1996. Several of the systems and
enhancement projects were nearing completion at the end of fiscal 1996. When the
projects  are  completed  and ready for general use, the costs will be amortized
over a four-year period.

NOTE 11 - BROKER PORTION OF ACCOUNTS RECEIVABLE

The  Company  maintains  brokers in offices  around the  country to service  its
customers.  The broker is  entitled  to a split of any  collections  the Company
makes on that  broker's  customers,  which is then payable  within 35 days.  The
liability  for amounts  estimated to be collected in the future was $508,000 and
$580,000 at July 31, 1996 and 1995, respectively.

NOTE 12 - EXCESS OF TRADE DOLLARS ISSUED OVER TRADE CREDITS
                   EARNED

At July 31, 1996,  the Company had expended  41,000 ITEX trade dollars in excess
of the amount of trade dollars earned by the Company. This situation is commonly
referred to in the commercial barter industry as a "negative trade balance."

Trade dollars issued in excess of earned by the Company is specifically provided
for in the ITEX Trading Rules that govern the Exchange.  Such  provisions  allow
the Company to issue trade dollars in excess of earned within certain  guideline
amounts. This provides the Company with additional liquidity and the opportunity
to complete  advantageous  purchase  transactions  that  benefit the Company and
Exchange members. The Company would be ultimately obligated to provide goods and
services to Exchange  members to offset any amounts of trade  dollars  issued in
excess of earned.  This could be  accomplished  by the sale for trade dollars of
the inventories  for which the acquisition  resulted in the trade dollars issued
in excess of earned or other inventories, by otherwise earning trade dollars, or
a combination of both.

NOTE 13 - BANK LINE OF CREDIT

Bank Line of Credit.  The  Company  has a line of credit  facility  with a bank.
Pursuant to the line of credit,  the Company is able to borrow up to $250,000 on
a short-term basis for working capital purposes. The interest rate applicable to
borrowings  pursuant  to the  facility  is equal  to the  bank's  prime  rate of
interest  plus  1.5%.  The  maximum  amount  of  cash  borrowings  that  may  be
outstanding  at any time is  determined by a borrowing  base formula  related to
available  collateral.  Borrowings are  collateralized by the Company's accounts
receivable, fixed assets and inventory.  As of July 31, 1996, the Company had no
borrowings  outstanding  under the bank  credit  facility.  The credit  facility
expires on December 31, 1997.

                                       55
<PAGE>
NOTE 14 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Notes Payable

At July 31, 1996 and 1995, long-term debt consisted of the following:
<TABLE>
<CAPTION>
                                                                     July 31,
                                                            ---------------------------
                                                                1996            1995
                                                            -----------     -----------
                                                                   (in thousands)

<S>                                                         <C>             <C>
   Note payable at $1,000 per month,  including interest
   at 7% per  annum,  collateralized  by  property  of a
   related party                                            $       11       $      21

   Note payable at $8,300 per month,  including interest
   at 6% per annum                                                 185

   Note  payable at $600 per month,  including  interest
   at 8% per annum, collateralized by a vehicle                     26
                                                            -----------     -----------
                                                                   222              21
   Less, current maturities                                        (96)            (11)
                                                            -----------     -----------
                                                            $      126      $       10
                                                            ===========     ===========
</TABLE>


The annual maturities of long-term debt for the next five years are as follows:

                                                    (in thousands)

                      Fiscal Year Ending July 31,
                           1997                        $   96
                           1998                           102
                           1999                            14
                           2000                             7
                           2001                             3


Capital Leases

The Company leases  vehicles and equipment  under seven  noncancellable  capital
leases. The leases,  which expire during the years 1996 through 1999, have terms
from three to five years and provide for aggregate  monthly  payments of $4,600.
The Company is obligated under the vehicle leases to pay executory costs such as
insurance, maintenance and other related expenses.

Minimum  future lease  payments under capital leases for the next five years are
as follows:

                                       56
<PAGE>

                                                 (in thousands)

           Fiscal Year Ending July 31,
                1997                                 $   54
                1998                                     45
                1999                                     24
                2000                                      4
                                                     -------
                                                        127
           Less, imputed interest                       (19)
                                                     -------
           Present value of minimum lease payments      108
           Less, current portion                        (42)
                                                     -------
                                                     $   66
                                                     =======

NOTE 15 - CAPITAL STOCK

Private  Placements.  During the fiscal  year ended July 31,  1996,  the Company
completed a private  placement with  Newcastle  Services Ltd.  ("Newcastle"),  a
foreign corporation, which owns a 51% interest in Associated Reciprocal Traders,
Inc.,  the Company's 49% owned foreign  affiliate,  pursuant to which  Newcastle
purchased 200,000 shares of the Company's common stock for $750,000. The Company
also  completed a private  placement  pursuant to which an individual  purchased
56,000  shares of the  Company's  common  stock for  $210,000.  The Company also
completed  a private  placement  pursuant  to which an  officer  of the  Company
purchased  25,000 shares of the Company's  common stock for $94,000.  In each of
these  private  placements,  the Company  issued for each share of common  stock
purchased a warrant to purchase one share of common  stock at an exercise  price
of $4.50 per share and one share of common  stock at an exercise  price of $5.50
per share.  The warrants were  exercisable  from date of issuance and expired on
July 31, 1996.

Effective  January 1, 1996, the Company  entered into a Regulation S transaction
with Wycliff Fund, Inc.  ("Wycliff"),  a foreign corporation.  Wycliff agreed to
purchase  1,022,495  units of the Company's  equity  securities  over a two-year
period for $4.89 per unit, equaling a total of $5,000,000. Each unit consists of
one share of common stock and  warrants to purchase two shares of common  stock.
One  warrant  entitles  the holder to purchase  one share of common  stock at an
exercise price of $4.89 per share, is exercisable  from and after two years from
the date of  issuance,  and expires  five years from the date of  issuance.  The
other  warrant  entitles  the holder to purchase one share of common stock at an
exercise price of $6.12 per share, is exercisable from and after four years from
the date of issuance,  and expires ten years from the date of issuance.  Wycliff
was  required  to pay the  purchase  price  of the  units at a  minimum  rate of
$625,000 per quarter.

Through July 31, 1996, the Company  received  $1,250,000 from Wycliff and issued
255,624 shares of common stock and the Company also issued  warrants to purchase
255,624  shares  of  common  stock at an  exercise  price of  $4.89  per  share,
exercisable from and after two years from the date of issuance,  with expiration
five years from the date of issuance, and warrants to purchase 255,624 shares of
common stock at an exercise price of $6.12 per share, exercisable from and after
four years from the date of issuance, with expiration ten years from the date of
issuance.

                                       57
<PAGE>
Under the terms of the Wycliff private  placement,  if the entire purchase price
of $5,000,000  was paid no later than December 31, 1996,  the Company would have
been  required to issue to Wycliff  warrants to purchase an  additional  250,000
shares of common  stock at an  exercise  price of $4.89 per share.  The  private
placement  terms also provided that Wycliff would pay to the Company  additional
amounts equal to 8% per annum for any portion of the purchase price that was not
paid on or before December 31, 1996.  Further,  the private  placement  provided
that if Wycliff  failed to pay at least  $625,000 in any calendar  quarter,  the
Company could,  at its sole option,  decline to thereafter  sell any of the then
unpurchased units to Wycliff.  Wycliff did not pay the purchase price that would
have been due for the calendar  quarter ended  September 30, 1996, and therefore
the Company has canceled the remaining portion of the private placement.

In  addition,  during the fiscal year ended July 31,  1996,  the Company  issued
350,000  shares of common stock as  compensation  for services and in connection
with the acquisition of SLI, Inc.

Stock  Option  Plan.  Effective  April  19,  1993,  the  Company  adopted  a Key
Employee's  Incentive  Stock  Option Plan (the 1993 Plan) that  provides for the
grant of options  intended to meet the  requirements  of Internal  Revenue  Code
Section 422, to purchase shares of the Company's  common stock.  Under the Plan,
the Company  may grant to the  Optionee  during the period  ending on a date not
more than ten  years  from the date of the grant of the  option,  the  option to
purchase common stock of the Company at a price per share equal to the bid price
of the Company's traded common stock on the date of the grant of the option. The
Company  filed  a  Form  S-8  registration  with  the  Securities  and  Exchange
Commission with respect to the shares of common stock underlying  options issued
or to be issued pursuant to the 1993 Plan. During the fiscal year ended July 31,
1996, the Company received proceeds totaling $895,000 from the exercise of stock
options to purchase 470,000 shares of common stock pursuant to 1993 Plan.

Effective  December 15, 1995, the Board of Directors  adopted a new stock option
plan  pursuant  to which  options  to  purchase  up to  1,300,000  shares of the
Company's  common stock may be granted to employees,  officers,  directors,  and
consultants of the Company.  Exercise prices for options granted under the plans
are equal to market  value on the date of grant and options  may be  exercisable
for up to ten  years  from the date of grant at the  discretion  of the Board of
Directors. During the fiscal year ended July 31, 1996, pursuant to the new stock
option plan,  options to purchase  1,295,000  shares were granted at an exercise
price of $6.13 per share. The plan was approved by the Company's shareholders at
the annual meeting of the Company's  shareholders held on May 3, 1996. It is the
intention of the Company to file a Form S-8 registration with the Securities and
Exchange  Commission  with  respect  to the  shares of common  stock  underlying
options to be issued pursuant to the plan.

Following  is a summary of activity  under both stock option plans for the three
year period ended July 31, 1996:

                                       58
<PAGE>
                                                  Option Price (equal to 
                                                  Market Value)at Date of
                                                           Grant
                                     Number of   ------------------------
                                      Shares      Per Share      Total
                                    -----------  -----------  -----------
  Balance at August 1, 1993........    305,000      $1.00     $  305,000
      Grants.......................    203,000       3.38        686,000
      Exercises....................   (130,000)      1.00       (130,000)
                                    -----------               -----------
  Balance at July 31, 1994.........    378,000    1.00-3.38      861,000
      Grants.......................    730,000    1.94-2.50    1,517,000
      Exercises....................    (10,000)      1.00        (10,000)
                                    -----------               -----------
  Balance at July 31, 1995.........  1,098,000    1.00-3.38    2,368,000
      Grants.......................  1,295,000       6.13      7,938,000
      Exercises....................   (470,000)   1.94-2.50    ( 895,000)
                                    -----------               -----------
  Balance at July 31, 1996.........  1,923,000    1.00-6.13   $9,411,000
                                    ===========               ===========

  Number of shares exercisable:
      July 31, 1996................  1,923,000
                                    ===========
      July 31, 1995................  1,098,000
                                    ===========

Warrants.  During the fiscal  year ended July 31,  1996,  the  Company  received
proceeds totaling $656,000 from the exercise of previously  outstanding warrants
to purchase 250,000 shares of common stock.

Prepaid  Printing.  The Company  issued  common  stock in  exchange  for prepaid
printing services, of which $640,000 had not been performed as of July 31, 1996.
The Company has classified this balance as a reduction of  stockholders'  equity
at July 31,  1996,  rather than as a prepaid  expense and an increase to equity.
The Company expects to use these printing services in future periods.

Stock Split. At the annual meeting of the Company's shareholders on May 3, 1996,
the  Company's  shareholders  approved a  two-for-one  forward  stock split with
respect  to the  Company's  common  stock.  The  stock  split  has not yet  been
implemented by the Company.  Upon  implementation  of the stock split, all share
and per share data  included  in the  Company's  financial  statements  would be
restated to give effect to the stock split.





                                       59
<PAGE>
NOTE 16 - INCOME TAXES

Comparative analysis of the provisions for income taxes follows:

                               Fiscal Years Ended July 31,
                 ------------------------------------------------------
                      1996                1995                1994
                 --------------      --------------      --------------
                                       (in thousands)
  Current:
    Federal      $       607        $        475        $        76
    State                125                  94                 16
                 --------------      --------------      --------------         
                         732                 569                 92
                 --------------      --------------      --------------         
  Deferred
    Federal              147                 (40)                 8
    State                 29                  (7)                 1
                 --------------      --------------      --------------         
                         176                 (47)                 9
                 --------------      --------------      --------------         
                  $      908         $       522        $       101
                 ==============      ==============      ==============         

A reconciliation  of the consolidated  income tax expense on income per the U.S.
Federal Statutory rate to the reported income tax follows:

                                        Fiscal Years Ended July 31,
                           -----------------------------------------------------
                                 1996               1995               1994
                           --------------      --------------     --------------
                                       (in thousands)

  Taxes at U.S. Federal
    statutory rate          $    1,160          $      746         $     307  
  Share of net income of
    foreign equity affiliate      (451)              ( 316)             (209)
  State income taxes               170                 137                28
  Other                             29                 (45)              (25)
                            --------------      --------------     -------------
                            $      908          $      522         $     101
                            ==============      ==============     =============

At July 31, 1996 and 1995,  deferred tax (assets)  liabilities  consisted of the
following:

                                                July 31,
                                       -------------------------                
                                          1996           1995
                                       ----------     ----------                
                                             (in thousands)

  Current deferred tax liabilities     $   1,253      $      43
  Noncurrent deferred tax liabilities        265            130
  Current deferred tax assets                ---            (51)
  Noncurrent deferred tax assets             ---            (26)
  Valuation allowance                        ---           ----
                                       ----------     ----------
                                       $   1,518      $      96
                                       ----------     ----------                

All of the undistributed  earnings of Associated  Reciprocal Traders,  Inc., the
Company's 49% owned foreign affiliate,  were reinvested and were not expected to
be remitted to the  Company.  On November 27,  1996,  the majority  owner of ART
informed the Company of its intent to take immediate steps to distribute all the
assets of ART and to end the  relationship  with the  Company.  The  Company had
previously  intended  to  reinvest  its share of the  earnings  of this  venture
indefinitely  and,  accordingly,  had not


                                       60
<PAGE>
provided income taxes on its share of ART's undistributed  earnings. At July 31,
1995, the cumulative amounts of reinvested income was approximately  $1,590,000.
As a  result  of the  inability  to  continue  to  reinvest  its  share of ART's
earnings,  the  Company  recognized  a deferred  provision  for income  taxes of
$1,247,000  during the fourth  quarter of the fiscal  year ended July 31,  1996,
which has been reported as a reduction of the  Company's  share of equity in net
income  (loss)  of  foreign  affiliate  in the  statement  of  operations.  This
decreased net income by $1,247,000, or $0.17 per share.

NOTE 17 - ACQUISITIONS

Acquisition of Global  Exchange  Network.  During the fiscal year ended July 31,
1996, the Company acquired the assets and business of Global Exchange Network of
Irvine,  California,  including  its  membership  base.  The purchase  price was
$385,000, which was paid $200,000 in cash and by the issuance of a 6% promissory
note for $185,000, payable in monthly installments of $8,331 including principal
and interest,  commencing with the first such payment on September 1, 1996, with
monthly  payments  thereafter  until the final  payment on August 1,  1998.  The
acquisition  has been accounted for by the purchase  method.  The purchase price
was allocated to the following:

                                            (in thousands)


           Member lists                      $       128
           Noncompete covenant                       257
                                             ------------
                                             $       385
                                             ============

The accompanying  consolidated financial statements include operations of Global
from April 27, 1996, the date of acquisition.

Acquisition of Barter  Exchange,  Inc. (BEI) Trade Exchange.  Effective March 1,
1995,  ITEX  entered  into  an  Agreement  to  acquire  all  of the  issued  and
outstanding  capital  stock of  Barter  Exchange,  Inc.  (BEI)  (a newly  formed
corporation), from Inventory Merchandising Services, Inc. (IMS). Pursuant to the
Agreement,  ITEX  agreed  to  transfer  and  deliver  to IMS  300,000  shares of
authorized but previously  unissued common stock of ITEX. BEI is involved in the
retail barter industry in the Texas region.

The  exchange  of  stock  was  accounting  for  using  the  purchase  method  of
accounting,  and the results of  operations  of BEI have been included in ITEX's
consolidated  financial statements  subsequent to March 1, 1995. As of March 31,
1995,  the  fair  market  value  of the  300,000  shares  of ITEX  common  stock
approximated $900,000 and,  accordingly,  ITEX has used the fair market value of
the  ITEX  shares  exchanged  for  purposes  of  purchase  accounting.  Goodwill
resulting  from  the   acquisition  is  being  amortized  over  20  years  on  a
straight-line basis. The price was allocated as follows:

                                            (in thousands)

           Accounts receivable               $       242
           Goodwill                                  658
                                             ------------
                                             $       900
                                             ============              

                                       61
<PAGE>
The accompanying  consolidated  financial  statements  include operations of the
subsidiary from March 1, 1995, the date of acquisition.

Acquisition  of Travel  Agents Hotel Guide.  Effective  February 10, 1995,  ITEX
acquired  all of the  business  assets of Travel  Agent's  Hotel Guide (TAHG) in
exchange  for  125,000  shares of ITEX  common  stock  valued at  $328,125.  The
purchase price was allocated as follows:


                                            (in thousands)

           Fixed assets                      $        35
           Goodwill                                  293
                                             ------------
                                             $       328
                                             ============

The accompanying  consolidated  financial  statements include operations of TAHG
for the period from February 10, 1995, the date of acquisition.

NOTE 18 - 401(k) SAVINGS PLAN

Employees of the Company may  participate in a 401(k) savings plan,  whereby the
employees  may  elect  to make  contributions  pursuant  to a  salary  reduction
agreement upon meeting age and length of service requirements. The Company makes
matching contributions of 50% of electing employees' deferrals,  up to a ceiling
amount of 3% of gross  annual  wages.  Matching  contributions  to the plan were
$10,000, $7,000 and $5,000 for the plan years ended December 31, 1995, 1994, and
1993, respectively.

NOTE 19 - BUSINESS CONCENTRATIONS

One customer accounted for approximately  $3,200,000 or 20% of corporate trading
revenue and 20% of total revenue. for the year ended July 31, 1996.

Three customers accounted for approximately $6,200,000 or 48% of corporate trade
revenue and 26% of total operating revenues for the year ended July 31, 1995.

One customer  accounted for  approximately  $2,361,000 or 28% of corporate trade
revenue and 16% of total operating  revenues (not including revenues included in
the net income of the foreign affiliate) for the year ended July 31, 1994.

N0TE 20 - COMMITMENTS AND CONTINGENCIES

The Company  leases  office  facilities  in  Portland,  Oregon;  Orange  County,
California;  and St. Louis, Missouri. Future minimum rental commitments pursuant
to these leases are as follows:

                                            (in thousands)
           Fiscal Year Ending July 31,
                     1997                    $       170
                     1998                            151


                                       62
<PAGE>
                     1999                            140
                     2000                            140
                     2001                            140

Of the minimum rental commitment due in fiscal 1997, $144,000 is payable in cash
and $26,000 is payable in ITEX trade dollars.

On April 9, 1994,  the Company  issued 150,000 shares of common stock as partial
payment  for a 49%  interest in a foreign  affiliate.  (See Notes 9 and 20.) The
Company shall pay the seller a maximum of $1,650,000.  In addition to the common
stock,  the remaining  amount due shall be paid by the issuance of up to 400,000
shares of a new class of stock to be issued upon the approval of a  shareholders
meeting and referred to as Class "A" Convertible  Preferred  Stock.  Delivery of
the shares is subject to the foreign affiliate fulfilling specified  performance
criteria.

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES,  AND REPORTS ON FORM 8-K

a)   1. Financial Statements.
        ---------------------
     The following financial statements are filed as a part of this Form 10K/A:

     The Index to Consolidated Financial Statements is set out in Item 8 herein.

     3. Exhibits.
        ---------
        Articles of Incorporation and Bylaws (incorporated by reference for Form
        10 filed February 7, 1990)

     10.1 Barter Exchange,  Inc.  contract dated March 1, 1995  (incorporated by
        reference from Form 8-K filed June 16, 1995)

     10.2 Key Employees'  Incentive Stock Option Plan (incorporated by reference
        from Form S-8 S-8 effective August 24, 1995, File No. 33-95900)

     10.3 ITEX Corportion 1995-96 Key Employees' Stock Option Plan (incorporated
        by reference from proxy materials filed April 12, 1996)

     10.4 Contract  with SLI,  Inc.  dated  January 24, 1996 (  incorporated  by
        reference from Form 8-K filed February 7, 1996)

     10.5 Agreement for Purchase of ITEX Units by Wycliff Fund,  Inc.,  dated as
        of January 1, 1996.

     21.  Subsidiaries of the Company:  Barter Exchange,  Inc.,  incorporated in
        Nevada SLI, Inc., incorporated in Nevada

     23.1 Consent of Independent Certified Public Accountants




                                       63

<PAGE>
                                                                     EHIBIT 10.5

THE UNITS  REPRESENTED  HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 IN RELIANCE UPON REGULATION S PROMULGATED  UNDER THAT ACT AND MAY NOT BE
TRANSFERRED  EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S. THE UNITS
MAY NOT BE OFFERED FOR SALE,  SOLD OR OTHERWISE  TRANSFERRED TO A U.S. PERSON OR
FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON (OTHER THAN A DISTRIBUTOR) EXCEPT IN
ACCORDANCE  WITH THE  PROVISIONS  OF  REGULATION  S,  PURSUANT  TO AN  EFFECTIVE
REGISTRATION  STATEMENT  UNDER  THE  ACT,  OR  PURSUANT  TO  AN  EXEMPTION  FROM
REGISTRATION  UNDER THE ACT, THE  AVAILABILITY  OF WHICH IS TO BE ESTABLISHED TO
THE SATISFACTION OF THE CORPORATION.


                            AGREEMENT FOR PURCHASE OF
                                   ITEX UNITS



         THIS AGREEMENT FOR PURCHASE OF ITEX UNITS (the  "Agreement")  effective
as of January 1, 1996 by and between ITEX Corporation, a Nevada Corporation with
principal offices at One Lincoln Center, P.O. Box 2309, Portland,  OR 97208-2309
U.S.A. ("Seller") and Wycliff Fund, Inc., a corporation formed under the laws of
the Bahamas, with offices located at c/o McKinney,  Bancroft & Hughes, #4 George
Street, N-3937, Nassau, BAHAMAS ("Purchaser").

1.     PURPOSE.

     A.   The  Units.  On  the  basis  of  the  representations  and  warranties
          contained  herein,  and subject to the terms and  conditions set forth
          herein,   Purchaser   agrees  to  purchase  from  Seller  one  million
          twenty-two  thousand four hundred  ninety-five  (1,022,495) units (the
          "Units"),  each Unit consisting of one (1) share of its authorized but
          previously  unissued common stock,  par value $0.01 per share, and two
          (2)  warrants,  each to  purchase an  additional  share of ITEX common
          stock on terms set forth hereafter and more  particularly set forth in
          such warrants. The purchase price for the Units is Five Million United
          States  Dollars  (US$5,000,000.00)  or US$4.89 per Unit (the "Purchase
          Price").

     B.   Concerning the Warrants.  One warrant attached to each share of common
          stock shall be exercisable  from and after two (2) years from the date
          of  issuance  at a price of US$4.89 per share and will expire five (5)
          years  from  the  date  of  issuance.   The  other  warrant  shall  be
          exercisable from and after four (4) years from the date of issuance at
          a price of US$6.12  per share and will  expire ten (10) years from the
          date of issuance. Specimen forms of such warrants are attached

                                       64

<PAGE>
          hereto marked Exhibit "A" and Exhibit "B" and  incorporated  herein by
          this reference.

2.       DELIVERY OF THE UNITS AND THE PURCHASE PRICE.

         It is intended that  Purchaser  shall pay for and receive not less that
$625,000  worth of the Units  (approximately  127,812  Units)  in each  calendar
quarter  commencing  January 1, 1996. Seller hereby agrees that it shall deliver
to Purchaser the Units as soon as practicable  after receipt by Seller of all or
any portion of the  Purchase  Price by  delivering  good funds in United  States
Dollars to the Seller for closing by delivery of  securities  versus  acceptable
payment  to Seller or such other  terms are  acceptable  to Seller.  In no event
shall  Seller be  required  to issue any  fractional  Units but rather may defer
further  issuances  until  such  time as  sufficient  of the  Purchase  Price is
received to permit delivery of convenient blocks of Units.

         If,  however,  Purchaser  pays the entire  Purchase  Price on or before
December  31,  1996,  Purchaser  will  receive an  additional  250,000  warrants
exerciseable  at $4.89 per share  (Exhibit B  warrants).  On the other hand,  if
Purchaser has not paid the entire Purchase Price on or before December 31, 1996,
the  remaining  unpaid  balance shall bear interest at the rate of eight percent
(8%) per  annum  until  the  entire  purchase  price is  paid.  Furthermore,  if
Purchaser  fails  to pay at  least  $625,000  in any  calendar  quarter  for the
purchase of Units, Seller may, at its sole option,  declare this Agreement at an
end and shall not be obliged to sell any further Units to Purchaser.

3.       REGISTRATION OF SHARES.

         Seller  agrees to register  the shares  making up the Units any time so
requested in writing by Purchaser from and after June 30, 1996, and will use its
best efforts to register any shares which may be issued to Purchaser  based upon
exercise by Purchaser of the Warrants granted to Purchaser as follows:

     A.   If at any time after issuance of the Units Seller proposes to register
          any of its equity  securities  under the  Securities  Act of 1933,  as
          amended  (the  "Act")  on  Form  S-1,  S-2,  S-3,  S-8  or  any  other
          registration  form at the time in effect on which  shares of its stock
          could be registered for sale by the holders  therof,  the Seller shall
          give written  notice to Purchaser of its intention to so register and,
          upon the written request of Purchaser  within 30 days after receipt of
          any such notice and  exercise of the  Warrants for all or a portion of
          the total number of shares of stock of the Seller for which  Purchaser
          has warrants  ("Registration  Shares"),  the Seller will  register the
          Registration  Shares under the Act and and under the same registration
          statement  proposed to be filed by Seller, all to the extent requisite
          to  permit  the  sale or other  disposition  by the  Purchaser  of the
          Registration Shares;  provided,  however that if the offering to which
          the proposed registration statement relates is to be distributed by or
          through  underwriter(s)  selected by Seller,  Purchaser shall agree to
          sell the Registration  Shares through such  underwriter(s) on the same
          terms and conditions as the  underwriter(s)  agrees to sell securities
          on behalf of Seller; and provided, futher, that if a greater number of
          shares of stock of the Seller (including the Registration

                                       65
<PAGE>
          Shares) is offered  for  participation  in the  proposed  underwriting
          than,  in  the  opinion  of  the  managing  underwriter  proposing  to
          underwrite  the  securities  to be  sold  can be  accomodated  without
          adversely affecting the proposed underwriting, the Seller may elect to
          reduce  ratably  (based upon the  relative  proportions  of the shares
          owned which carry  registration  rights) the amount of all  securities
          proposed  to be offered in the  underwriting  for the  accounts of all
          persons other than the Seller to a number deemed  satisfactory  by the
          managing underwriter.  For purposes of the foregoing,  Purchaser shall
          not bear  reduction on account of shares to be registered on behalf of
          officers and directors of Seller.

     B.   All  expenses  incurred by Seller in complying  with the  registration
          requirements  hereof (except fees and disbursements of counsel for any
          shareholder  and  underwriting  discounts,   commissions,  or  similar
          expenses  to be incurred in  connection  with the sale of  Purchaser's
          shares)  shall  be  borne  by  Purchaser  in  such  proportion  as the
          Purchaser  shares bear to the total number of shares to be registered.
          All  registration  rights  granted  herein may apply only to shares of
          common  stock  issued  by  Seller.  Seller is under no  obligation  to
          maintain the effectiveness of any Registration Statement for more than
          an aggregate of 90 days.

     C.   In  connection  with  the  filing  of any  Registration  Statement  or
          offering  statement  under this section,  Seller  covenants and agrees
          that it will  take all  necessary  action  which  may be  required  in
          qualifying  or  registering  the  Purchaser's  shares  included  in  a
          Registration  Statement or offering  statement  for the offer and sale
          under  the  securities  or blue  sky  laws of  such  states  as may be
          reasonably  requested  by  the  holders  of  the  Purchaser's  shares;
          provided,  that Seller  shall not be  obligated to execute or file any
          general  consent  to  service  of  process  or to qualify as a foreign
          corporation to do business under the laws of any such jurisdiction.

     D.   In the event of any  registration of any Seller common stock under the
          Securities  Act pursuant to this section,  Seller shall  indemnify and
          hold  harmless   Purchaser  or  any   subsequent   transferee  of  the
          Purchaser's shares against any losses, claims, damages or liabilities,
          joint or several,  to which such holder may become  subject  under the
          Securities Act or any other statute or at common law,  insofar as such
          losses, claims, damages or liabilities (or actions in respect thereof)
          arise out of or are based upon any  alleged  untrue  statement  of any
          material  fact  contained,  on  the  effective  date  thereof,  in any
          Registration  Statement  under which such  securities  were registered
          under  the  Securities  Act,  any  preliminary   prospectus  or  final
          prospectus  contained therein,  or any amendment required to be stated
          therein or necessary to make the  statements  therein not  misleading,
          and shall  reimbursesuch  holder  for any legal or any other  expenses
          reasonably incurred by such holder in connection with investigating or
          defending any such loss, claim, damage, liability or action; provided,
          however,  that  Seller  shall  not be  labile  in any such case to the
          extent that any such loss, claim, damage or liability arises out of or
          is based upon any alleged untrue statement or 


                                       66
<PAGE>
          alleged  omission  made in such  Registration  Statement,  preliminary
          prospectus, prospectus or amendment or supplement in reliance upon and
          in  conformity  with  written  information   furnished  to  Seller  by
          Purchaser or such holder specifically for use therein.  Such indemnity
          shall remain in full force and effect  regardless of any investigation
          made by or on behalf of such holder and shall  survive the transfer of
          such securities by such holder and  consummation  of the  transactions
          contemplated by this Agreement.

     E.   The  reimbursements  required by Section 3 E shall be made by periodic
          payments  during the course of the  investigation  or defense,  as and
          when bills are received or expense incurred;  provided,  however, that
          to the extent that an indemnified party receives periodic payments for
          legal or other  expenses  during  the  course of an  investigation  or
          defense,  and  such  party  subsequently  receives  payment  for  such
          expenses from the other parties to the proceeding, such payments shall
          be used by the indemnified  party to reimburse the indemnifying  party
          for such periodic payments.

     F.   Seller  further  agrees that in the event that counsel to Purchaser is
          of  the  reasonable   opinion  that  the  Purchaser's  shares  may  be
          transferred  and/or sold in full compliance with the provisions of the
          Act, without the need for filing a Registration Statement, Seller will
          fully cooperate in connection with such transfer and/or sale.

     G.   Seller further agrees and represents that while any of the Purchaser's
          shares  are   outstanding   and  held  by  Purchaser  or   Purchaser's
          affiliates, Seller will timely file all reports and documents required
          under the Exchange Act and the Securities Act.

     H.   Purchaser  agrees that the ITEX common shares making up the Units will
          be subject to a voting  trust in favor of ITEX which  shall  remain in
          force  with  respect  to each such  share  until each shall be sold by
          Purchaser or the holder thereof. Nothing in said voting trust shall in
          any way  restrict or limit the  ability of the holder  thereof to sell
          such shares.

4.       REPRESENTATIONS AND WARRANTIES OF SELLER.

         Seller hereby represents and warrants to Purchaser that:

     A.   Organization.  Seller is a  corporation  duly  organized  and  validly
          existing and in good  standing  under the laws of the state of Nevada,
          and it has all corporate  power necessary to engage in the business in
          which it presently engages;

     B.   Authority.  This  Agreement  has been duly  executed by Seller and the
          execution and performance of this Agreement will not violate or result
          in a breach of, or constitute a default in any agreement,  instrument,
          judgment,  order  or  decree  to which  Seller  is a party or to which
          Purchaser is subject;

                                       67
<PAGE>
     C.   Legal Status.  The Units are genuine,  validly issued and outstanding,
          fully paid and  nonassessable  and are not issued in  violation of any
          agreement  by which the Seller is bound.  All  issued and  outstanding
          shares  of  Seller  and  the  shares  represented  in  the  Units  and
          underlying the warrants are, and will be, legally issued,  fully paid,
          and  nonassessable  and not issued in violation of the  preemptive  or
          other right of any person. There are no dividends or other amounts due
          or payable  with  respect  to any of the  shares of  capital  stock of
          Seller.

     D.   Offshore  Transaction.  Seller has not offered these securities to any
          person in the United  States or to any U.S.  person or for the account
          or benefit of any U.S. person.

     E.   No Directed Selling Efforts. In regard to this transaction, Seller has
          not conducted any "directed  selling  efforts" as that term is defined
          in Rule 902 of Regulation S promulgated  under the  Securities  Act of
          1933, nor has Seller  conducted any general  solicitation  relating to
          the offer and sale of the  Warrants  to  persons  resident  within the
          United States or elsewhere.

     F.   Reporting Company Status. The Seller 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 and has been  subject to such  filing
          requirements for the past 90 days.

5.       REPRESENTATIONS AND WARRANTIES OF PURCHASER.

         Purchaser hereby represents and warrants to Seller that:

     A.   Organization. Purchaser is a bona fide business entity organized under
          the laws of the Bahamas and is in good  standing  with the  regulatory
          authorities therein;

     B.   Authority.  This Agreement has been duly executed by Purchaser and the
          execution  and  performance  of this  Agreement  will not violate,  or
          result in a breach  of, or  constitute  a  default  in any  agreement,
          instrument, judgment, order or decree to which Purchaser is a party or
          to which  Purchaser is subject nor will such execution and performance
          constitute  a violation  of or conflict  with any  fiduciary  to which
          Purchaser is subject;

     C.   Further Documents.  Purchaser warrants to Seller that it will complete
          and  answer  all  applicable   questions  contained  in  the  attached
          Suitability   Letter,   Information   and   Confirmation   Letter  and
          Subscription   Agreement   and   return  a  signed   copy  to   Seller
          contemporaneously with this Agreement.

                                       68
<PAGE>
     D.   Sale/Title. Purchaser warrants that it will not sell or transfer title
          to the Units unless sold or transferred in compliance  with Regulation
          S of the Securities Act of 1933 and all other U.S. securities laws.

     E.   Offshore  Transaction.  Purchaser represents and warrants to Seller as
          follows:

          (i)  Purchaser  is not a U.S.  person  (whenever  such  term  is  used
               herein, it shall have the meaning given in Regulation S);

          (ii) As of  the  effective  date  this  Agreement  was  entered  into,
               Purchaser was outside the United States and is outside the United
               States  as of the  date of the  execution  and  delivery  of this
               Agreement;

          (iii)Purchaser  is not  purchasing  the  Units on  behalf  of any U.S.
               person and the sale has not been pre-arranged with a purchaser in
               the United States;

          (iv) Each distributor participating in the offering of the securities,
               if any,  has agreed in  writing  that all offers and sales of the
               securities prior to the expiration of a period  commencing on the
               date of the final  closing of the  offering  of Shares and ending
               one (1) year thereafter (the  "Restricted  Period") shall only be
               made in compliance  with the safe harbor  contained in Regulation
               S, pursuant to registration of Shares under the Securities Act of
               1933 or pursuant to an exemption from registration.

          (v)  Purchaser  represents  and  warrants  and hereby  agrees that all
               offers  and sales of the  Units  prior to the  expiration  of the
               Restricted  Period shall only be made in compliance with the safe
               harbor  contained in Regulation S,  pursuant to  registration  of
               securities  under the  Securities  Act of 1933 or  pursuant to an
               exemption from  registration,  and all offers and sales after the
               Restricted   Period  shall  be  made  only  pursuant  to  such  a
               registration,  and all  offers  and sales  after  the  Restricted
               Period shall be made only pursuant to such a  registration  or to
               such exemption from registration.

          (vi) All offering  documents  received by Purchaser include statements
               to the effect that the Units have not been  registered  under the
               Securities  Act of 1933  and may  not be  offered  or sold in the
               United  States or to U.S.  Person  (other  than  distributors  as
               defined in Regulation S) during the Restricted  Period unless the
               Units  are  registered  under  the  Securities  Act of 1933 or an
               exemption from the registration requirements is available.

          (vii)Purchaser  acknowledges that the purchase of the Units involves a
               high degree of risk and further acknowledges that it can bear the
               economic  risk of the purchase of the Units,  including the total
               loss of its investment.

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<PAGE>
          (viii) Purchaser understands that the Units are being offered and sold
               to it in reliance on specific  exemptions  from the  registration
               requirements  of Federal and State  Securities  laws and that the
               Seller  is   relying   upon  the  truth  and   accuracy   of  the
               representations,  warranties,  agreements,  acknowledgements  and
               understandings   of  Purchaser  set  forth  herein  in  order  to
               determine  the   applicability   of  such   exemptions   and  the
               suitability of Purchaser to acquire the Units.

          (ix) Purchaser is  sufficiently  experienced in financial and business
               matters to be capable of  evaluating  the merits and risks of its
               investment, and to make an informed decision relating thereto.

          (x)  In  evaluating  its  investment,  Purchaser has consulted its own
               investment and/or legal and/or tax advisors.

          (xi) Purchaser  understands  that in the view of the SEC the statutory
               basis for the exemption  claimed for the transaction would not be
               present if the  offering  of the  Units,  although  in  technical
               compliance  with  Regulation  S, is part of a plan or  scheme  to
               evade  the  registration  S, is part of a plan or scheme to evade
               the  registration  provisions  of  the  1933  Act  and  Purchaser
               confirms  that  its  purchase  is not  part of any  such  plan or
               scheme.  Purchaser is acquiring the Units of investment  purposes
               and has no  present  intention  to sell the  Units in the  United
               States or to a U.S.  Person or for the  account  or  benefit of a
               U.S.  Person either now or promptly  after the  expiration of the
               Restricted Period.

          (xii)Purchaser is not an underwriter of, or dealer in, the Units;  and
               Purchaser  is  not  participating,   pursuant  to  a  contractual
               agreement,  in the  distribution  of the Units.  If  Purchaser is
               purchasing the Units subscribed for hereby in  representative  or
               fiduciary  capacity,  the  representations and warranties in this
               Stock  Purchase  Agreement  shall be  deemed to have been made on
               behalf  of  the  person  or  persons  for  whom  Purchaser  is so
               purchasing.

     F.   Independent   Investigation;   Access.   Purchaser  acknowledges  that
          Purchaser,  in making the  decision to purchase  the Units  subscribed
          for, has relied upon  independent  investigations  made by it and it's
          purchaser   representatives,   if  any,   and   Purchaser   and   such
          representatives, if any, have, prior to any sale to it, been given the
          opportunity  to receive  answers  from Seller or any officer of Seller
          acting on its  behalf  concerning  the terms  and  conditions  of this
          offering. Purchaser and its advisors, if any, have been furnished with
          access to all publicly  available  materials relating to the business,
          finances and  operations of the Seller and  materials  relating to the
          offer and sale of the 


                                       70
<PAGE>
          Units which have been requested.  Purchaser and it's advisors, if any,
          have received complete and satisfactory answers to any such inquiries.

     G.   No Government  Recommendation or Approval.  Purchaser understands that
          no  federal  or state  agency  has  passed on or made any  finding  or
          determination  relating to the fairness for public  investment  in the
          Units,  or  has  passed  or  made,  or  will  pass  on  or  make,  any
          recommendation or endorsement of the Units.

     H.   Entity Purchases. If Purchaser is a partnership, corporation or trust,
          then the person executing this Agreement on its behalf  represents and
          warrants that:

          (i)  He or she has made due inquiry to determine the  truthfulness  of
               the   representations   and  warranties  made  pursuant  to  this
               Agreement.

          (ii) He or she is duly  authorized (if the  undersigned is a trust, by
               the trust  agreement) to make this  investment  and to enter into
               and execute this Agreement on behalf of such entity.

         The foregoing  representations  and warranties are true and accurate as
of the date hereof, shall be true and accurate as of the date of the delivery of
the  assignment  of the Units,  and shall survive  thereafter.  If Purchaser has
knowledge,  prior to the  acceptance of this  Agreement by the Seller,  that any
such  representations  and  warranties  shall  not be true and  accurate  in any
respect,  the Purchaser  prior to such  acceptance,  will give written notice of
such fact to the Seller specifying which  representations and warranties are not
true and accurate and the reasons therefor.

         Purchaser agrees to fully  indemnify,  defend and hold harmless Seller,
its officers,  directors,  employees,  agents and attorneys form and against any
and all losses, claims, damages,  liabilities and expenses, including reasonable
attorney's  fees and  expenses,  which may result  from a breach of  Purchaser's
representations, warranties and agreements contained herein.

6. RESTRICTED PERIOD;  LEGEND.  The transaction  restrictions of Regulation S in
connection with the offshore offer and sale restrict Purchaser from offering and
selling  to U.S.  persons or for the  account or benefit of a U.S.  person for a
period of forty (40) days  commencing  upon  completion of this  offering.  Rule
903(c)(2)  governs  the forty day  transaction  restriction.  In the event  that
multiple  Agreements  for Sale of Stock Units are  accepted  by the Seller,  the
forty day restriction  period shall begin only after the closing with respect to
the final such Agreement accepted by Seller.  Purchaser  understands that Seller
will instruct its transfer  agent to place a stop transfer order with respect to
the certificates representing the Units and that such certificates will bear the
following  legend:  "The Units  represented  by this  certificate  have not been
registered  under the  Securities  Act of 1933  (the  "Act")  in  reliance  upon
Regulation S  promulgated  under that Act and may not be  transferred  except in
accordance  with the  provisions  of Regulation S. The shares may not be offered
for sale,  sold or otherwise  transferred to a U.S. person or for the account or
benefit of a U.S.  person (other than a distributor)  except in accordance  with
the 


                                       71
<PAGE>
provisions of Regulation S, pursuant to an effective  registration statement
under the Act, or pursuant to an exemption from registration  under the Act, the
availability  of  which  is to be  established  by  the  holder  hereof  to  the
satisfaction of the Corporation."

7. EXEMPTION; RELIANCE ON REPRESENTATIONS.  Purchaser understands that the offer
and sale of the Units is not being registered under the 1933 Act and that Seller
is relying on the rules  governing  offers  and sales  made  outside  the United
States  pursuant  to  Regulation  S  and  the  representations,  warranties  and
agreements of Purchaser made herein.

8.       MISCELLANEOUS.

     A.   Notices.  Any notice under this Agreement shall be deemed to have been
          sufficiently  given if sent by registered or certified  mail,  postage
          prepaid, addressed as follows:

         If to Seller:             If to Purchaser:

         ITEX Corporation          Wycliff Fund, c/o McKinney, Bancroft & Hughes
         P.O. Box 2309             #4 George Street, N-3937
         Portland, OR 97208-2309   Nassau
         U.S.A.                    BAHAMAS

                  or to any other  address  which may hereafter be designated by
                  either party by notice given in such manner. All notices shall
                  be deemed to have been given as of the date of receipt.

     B.   Entire Agreement.  This Agreement sets forth the entire  understanding
          between  the  parties  hereto  and no  other  prior  written  or  oral
          statement or agreement shall be recognized or enforced.

     C.   Severability. If a court of competent jurisdiction determines that any
          clause  or  provision  of  this  Agreement  is  invalid,   illegal  or
          unenforceable, the other clauses and provisions of the Agreement shall
          remain in full force and effect and the  clauses and  provision  which
          are determined to be void,  illegal or unenforceable  shall be limited
          so that they shall remain in effect to the extent permissible by law.

     D.   Assignment.  Neither  party may  assign  this  Agreement  without  the
          express  written  consent  of  the  other  party,  however,  any  such
          Assignment  shall  be  binding  on and  inure to the  benefit  of such
          successor,  or, in the event of death or  incapacity,  on their heirs,
          executors, administrators and successors of any party.

     E.   Applicable  Law.  This  Agreement  shall be construed  and enforced in
          accordance  with the laws of the  State of  Oregon,  United  States of
          America, and in the English language.

                                       72
<PAGE>
     F.   Venue.  A claim or other  dispute  among the  parties  whether  or not
          arising from any transaction contemplated (whether or not specifically
          referred  to) by this  Agreement,  shall  not be made the  subject  of
          litigation  until  submitted  for binding  arbitration  in the nearest
          available  location as indicated  above, or otherwise  pursuant to the
          applicable  arbitration  law.  The  parties  agree  to  the  exclusive
          personal and subject matter jurisdiction, and venue of the federal and
          local courts in Multnomah  County,  Oregon U.S.A.  with respect to all
          such disputes to the extent legally  permissible.  These  arrangements
          are  being  made  because  of the  parties  mutual  desires  to remove
          uncertainty  as to such  matters,  and the location  therein of one or
          more of the parties and their property.

     G.   Attorney's   Fees.   If  any   legal   action   or  other   proceeding
          (nonexclusively  including arbitration) is brought for the enforcement
          of or to declare any right or obligation  under this Agreement or as a
          result of a breach,  default or  misrepresentation  in connection with
          any of the  provisions of this  Agreement,  or otherwise  because of a
          dispute among the parties hereto,  any successful or prevailing  party
          will be entitled to recover reasonable  attorney's fees (including for
          appeals and collection) and other expenses  incurred in such action or
          proceeding, in addition to any other relief to which such party may be
          entitled.

     H.   No Third Party  Beneficiary.  Nothing in this Agreement,  expressed or
          implied, is intended to confer upon any person, other than the parties
          hereto and their successors, any rights or remedies under or by reason
          of this  Agreement,  unless this  Agreement  specifically  states such
          intent.

     I.   Counterparts.  It is understood  and agreed that this Agreement may be
          executed in any number of identical counterparts, each of which may be
          deemed an original for all purposes.

     J.   Further  Assurances.  At any  time and from  time to time,  after  the
          effective date,  each party will execute such  additional  instruments
          and take such action as may reasonably be requested by the other party
          to confirm or perfect title to the subject Units transferred hereunder
          or otherwise to carry out the intent and purposes of this Agreement.

     K.   Broker's or Finder's Fee: Expenses.  Purchaser and Seller warrant that
          neither has incurred  any  liability,  contingent  or  otherwise,  for
          brokers' or finders' fees or  commissions  relating to this  Agreement
          for which the other  shall have  responsibility.  Except as  otherwise
          provided herein, all fees, costs and expenses incurred by either party
          relating to this  Agreement  shall be paid by the party  incurring the
          same.

     L.   Amendment or Waiver.  Every right and remedy  provided herein shall be
          cumulative  with  every  other  right and  remedy,  whether  conferred
          herein,  at  law,  or in  equity,  and

                                       73

<PAGE>
          may be enforced concurrently  herewith,  and no waiver by any party of
          the performance of any obligation by the other shall be construed as a
          waiver  of the  same  or  any  other  default  then,  theretofore,  or
          thereafter   occurring  or   existing.   At  any  time  prior  to  the
          consummation  if  the  transactions   contemplated   hereunder,   this
          Agreement  may be amended by a writing  signed by all parties  hereto,
          with  respect to any of the terms  contained  herein,  and any term or
          condition of this Agreement may be waived or the time for  performance
          hereof may be extended by a writing signed by the party or parties for
          whose benefit the provision is intended.

     M.   Headings.  The section and  subsection  headings in this Agreement are
          inserted  for  convenience  only and shall  not  affect in any way the
          meaning or interpretation of this Agreement.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.

ITEX CORPORATION ("Seller")



By /s/ Michael T. Baer
  -----------------------------------------------
Name & Title:  Michael T. Baer, President and CEO



WYLIFF FUND, INC. ("Purchaser")



By /s/H.J. Keilman
  ----------------------------------
Name & Title:  H.J Keilman, Director


                                       74

<PAGE>
                                                                   EXHIBIT 23.1

               CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
ITEX Corporation
Portland, Oregon

We consent to the incorporation by reference in the Registration Statement (Form
S-8 File No. 33-95900)  pertaining to the Key Employees'  Incentive Stock Option
Plan of  ITEX  Corporation,  of our  report  with  respect  to the  consolidated
financial  statements of ITEX Corporation  included in the amended Annual Report
(Form 10K/A) for the fiscal year ended July 31, 1996.

Andersen, Andersen, & Strong, L.C.
Salt Lake City, Utah
December 5, 1996









                                       75
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

Date:    December 6, 1996

                                ITEX CORPORATION


    December 6, 1996                      /s/  Graham H. Norris, Sr.
------------------------     ---------------------------------------------------
                             Graham H. Norris, Chairman of the Board
                             of Directors, President and Chief Executive Officer
                             (principal executive officer and director)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  persons on behalf of the Company and in
the capacities and on the dates indicated.



/s/  Graham H. Norris, Sr.                             December 6, 1996

Graham H. Norris, Chairman of the Board of Directors, President and
Chief Executive Officer (principal executive officer and director)

/s/  Joseph M. Morris                                  December 6, 1996
Joseph M. Morris, Vice President and Chief Financial Officer
(principal accounting officer and director)

/s/ Mary Sherr                                         December 6, 1996
----------------------------------------------
Vice President of Broker Development, Director

/s/ Dr. Evan B. Ames                                   December 6, 1996
----------------------------------------------
Director

/s/ Thomas G. Baer                                     December 6, 1996
----------------------------------------------
Director

/s/ Dr. Sherry L. Meinberg                             December 6, 1996
----------------------------------------------
Director

/s/ Robert Nelson                                      December 6, 1996
----------------------------------------------
/s/ Director

/s/ Dr. Charles Padbury                                December 6, 1996
----------------------------------------------
Director

                                       76
<PAGE>