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

                                    FORM 10-K



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

                            For the Fiscal Year Ended

                                  July 31, 1997

                         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
incorporation or organization)                               Identification No.)

           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 10-K or any amendment of this
Form 10-K. [ ]

The  approximate  market value of stock held by  non-affiliates  is  $41,525,000
based upon 6,644,000 shares held by such persons and the close price of $6.25 on
October 23, 1997. The number of shares outstanding of the Registrant's $0.01 par
value common stock at October 23, 1997 was 7,307,000.

                       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 10-K includes 62 pages)


<PAGE>
                                ITEX CORPORATION
                                    FORM 10-K
                            For the Fiscal Year Ended
                                  July 31, 1997

                                      INDEX


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

ITEM 1.       DESCRIPTION OF BUSINESS                                   3

ITEM 2.       DESCRIPTION OF PROPERTIES                                 14

ITEM 3.       LEGAL PROCEEDINGS                                         14

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY               17
              HOLDERS


                                            PART II

ITEM 5.       MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S         18
              COMMON EQUITY AND RELATED  STOCKHOLDER MATTERS

ITEM 6.1      SELECTED CONSOLIDATED DATA                                19

ITEM 7.1      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL         20
              CONDITION AND RESULTS OF OPERATIONS

ITEM 8.       FINANCIAL STATEMENTS                                      29


                                          PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND             59
               REPORTS ON FORM 8-K

               SIGNATURES                                               61

                                       2

<PAGE>
                                ITEX CORPORATION
                                    FORM 10-K
                            For the Fiscal Year Ended
                                  July 31, 1997

PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

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  portion of the commercial  barter
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  accounting  for
transactions  between  members of the group,  including the  allocation of trade
dollars.  Also, the Company  attempts to maximize trade through the 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
is a $9 billion a year industry  which is growing at an annual rate of 8%. There
are over 500 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.

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<PAGE>

Management  believes  that the  Company is the  largest  barter  exchange 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,  however,  because none of the other major  exchanges are operated by
publicly  reporting  companies.   BarterNews,   the  barter  industry's  primary
magazine, has referred to the Company as the "world's largest exchange".

THE COMPANY

General

ITEX  Corporation  (hereinafter  referred to as "ITEX" or 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 its 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  Company is engaged in domestic  and  international  operations  in both the
retail  trade  exchange and  corporate  barter  areas of the  commercial  barter
industry.   The  Company   administers  the  ITEX  Retail  Trade  Exchange  (the
"Exchange"),  which is an association of business owners and  professionals  who
trade goods and services with other  members of the Exchange  through the medium
of the ITEX Trade Dollar. 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 for needed goods and services,  (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. The Company does not redeem Trade Dollars for cash. ITEX Trade
Dollars  may be used only in the  manner  and for the  purpose  set forth in the
Trading  Rules  of the  ITEX  Retail  Trade  Exchange  which  govern  the  trade
operations of 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. The Company typically receives a cash commission ranging from 5% to
7.5% on the  purchases  and sales  made to and 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 sells for cash or
ITEX Trade  Dollars,  holds in  inventory  for further  trades in the  corporate
barter area, or for selling to members of the Exchange.

The Company owns and  operates  retail trade  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. The Company bears
no financial  responsibility  for the financing of an independent broker office.
There are presently  over 150 brokers  worldwide.  One of the Company's  current
objectives is aggressive  international expansion of the ITEX trade network. The
Company has license  arrangements  with  companies  operating  in Canada,  South
Africa, and Australia that were established in prior fiscal years. During fiscal
1997,  the Company has signed new 

                                       4

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agreements  with  licensees in Turkey,  Norway,  New Zealand and Romania and has
extended the license arrangements in South Africa and Australia.

Additionally,  the Company acts as an intermediary for the exchange of goods and
services  between major  companies  through 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 as described below. 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 used in accounting for transactions in the ITEX Retail Trade
Exchange  System.  The revenues  generated from those  inventories when sold for
cash  are  divided  between  the  Company  and  ITEX  USA.  Additionally,  a 12%
transaction  fee is  paid  by the  ITEX  Corporate  Barter  client  on the  Cash
Equivalent Credit portion of each purchase. This revenue is also 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 firms in which the Company has  invested  are able to use the
ITEX Trade Dollars to purchase goods and services used in the operation of their
businesses.  Further,  the Company  invests in other  business  ventures,  which
involve  acquiring  and operating  businesses,  operating  projects,  or holding
properties for investment or operation. The Company focuses on ventures in which
the Company has or will obtain adequate expertise for successful  management and
operation.  Ventures that can benefit from the financial resources and liquidity
that the  Company  provides  through  trading for goods and  services  are given
priority.

Natural Resource Interests

On July 31, 1997, the Company commenced a partial redeployment of its assets and
investment  strategy by investing in natural  resources  located on four mineral
properties in the State of  Washington.  In exchange for these  properties,  the
Company  issued  130,000  shares  of  common  stock,  paid  $20,000  in cash and
transferred  media inventory,  hotel room inventory,  and fine art paintings and
sculpture.  The total  carrying  value of the  acquired  mineral  properties  of
$6,576,000 has been confirmed in an appraisal by a firm of independent qualified
mining consultants. The four properties contain deposits including limestone and
high-grade calcium carbonate,  high-grade and very-high-grade calcium carbonate,
limestone and medium-grade calcium carbonate,  quartzite flagstone,  and olivine
and dunite. Subsequent to July 31, 1997, the Company obtained several additional
mineral property claims at nominal cost by original claim staking.

Foreign Subsidiary

The  Company  has  a  wholly-owned  foreign  subsidiary,  Associated  Reciprocal
Traders,  Ltd.  ("ART"),  which engages in international  commercial  barter and
other  activities.  In 1993 the  Company  purchased  a 49%  interest  in ART and
through July 31, 1996, the Company  accounted for its investment in and share of
net  income  or  loss  of ART by the

                                       5

<PAGE>
equity method.  All of the undistributed  earnings of the 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  provided  for  income  taxes  on  its  share  of  ART's
undistributed  earnings.  As a result of the perceived  inability to continue to
reinvest its share of ART's  earnings,  in the fourth quarter of fiscal 1996 the
Company  recognized a deferred  provision for income taxes of $1,247,000,  which
reduced  net income for the year  ended  July 31,  1996 by $0.17 per share.  The
deferred  tax accrual was  reported as a  reduction  of the  Company's  share of
equity in net income (loss) of foreign  affiliate in the statement of operations
for the fiscal year ended July 31, 1996.  Commencing  August 1, 1996 and through
July 30,  1997,  the Company  accounted  for its  investment  in ART by the cost
method.

During fiscal 1997, the Company  explored  alternative  ways of terminating  the
relationship  with the other stockholder of ART and during the quarter ended May
7, 1997,  it was  determined  that this  could be  accomplished  by the  Company
purchasing the other stockholder's interest, in which case the Company would not
repatriate  the foreign  assets of ART. In the  quarter  ended May 7, 1997,  the
Company reversed the deferred  liability for income taxes of $1,247,000 that had
been recorded at July 31, 1996 as described above. On July 30, 1997, the Company
completed the purchase of the remaining 51% interest.  The  acquisition has been
accounted for using the purchase  method.  The historical basis of the Company's
49% share of assets when the equity method of accounting  was used and the other
51% share was  allocated  based on  respective  fair  value.  The  assets of ART
consisted primarily of available-for-sale securities.

The purchase  price was  $2,840,000,  which was paid by conveyance of certain of
the Company's  available-for-sale  securities  and  investments in fine art. The
assets acquired were primarily other available-for-sale  securities. The Company
has fully  consolidated  the assets and  liabilities of ART in the  consolidated
balance sheet at July 31, 1997.

During  October  1997,  ART  acquired a 60% interest in 16 acres of improved but
undeveloped resort property known as the Villas Punta Ballena Samana Resort (the
"Samana Resort"), along with associated plans, engineering drawings, permits and
approvals  for  the  resort,  and  a  commitment  for  a  construction  loan  of
approximately $40,000,000.  The Samana Resort is located in the northeast corner
of the Dominican  Republic on the Bay of Samana.  The transaction was structured
as the  purchase  of a 60% equity  interest  in Villas  Punta  Ballena C. por A.
("VPB"),  a  Dominican  Republic  corporation,  the holder of the Samana  Resort
property.  VPB has never had any business operations other than ownership of the
Samana Project.

The total  purchase  price  consisted of cash of  $1,250,000,  ITEX  Corporation
common  stock to have a market  value at time of  issuance  of  $1,000,000,  and
available-for-sale securities totaling $5,142,000 from the portfolio of ART. The
purchase price is to be paid in  installments  ranging from payments at the time
of contract signing to the final payment of ITEX Corporation  common stock which
is due within five days of the  commencement of substantial  construction on the
property.  The value of the acquired  assets has been  determined by independent
appraisal of the property.

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<PAGE>
The Company intends to proceed with construction of the resort facility pursuant
to the plans for  development  of the property,  which have been approved by the
appropriate  authorities.  When  completed,  the Samana  Resort is  expected  to
include more than 250 condominium and hotel units, as well as a casino, swimming
pools, tennis courts,  restaurants,  and most other amenities  associated with a
five-star Caribbean resort.

International Licensees

On December 19, 1996,  the Company  announced  the signing of an agreement  with
Ihlas Holdings, a major Turkish  corporation,  to license an ITEX Trade Exchange
in Turkey,  to be called  Ihlas ITEX Barter SA. Under the  agreement,  which was
effective  January 1, 1997,  Ihlas Holdings  receives  exclusive use of the ITEX
name, trademarks,  and proprietary barter accounting and management software for
use in Turkey.  The Company will receive  royalties based on trade  transactions
generated through the new system,  which will enable Ihlas ITEX clients to trade
with ITEX members in other countries.  Ihlas Holdings is one of Turkey's largest
corporations  and has 57  subsidiaries,  which  include  interests in chemicals,
textiles,  food,  electronics,   health  care,  construction,   media,  banking,
insurance,  and international trade. Ihlas has already taken steps to expand the
Ihlas ITEX barter network into nearby Kazakhistan, Turkistan, and Azerbaijan.

The Company  has  arrangements  with  licensees  in Canada,  South  Africa,  and
Australia that were  established in prior fiscal years.  During fiscal 1997, the
Company has signed new agreements with licensees in Turkey,  Norway, New Zealand
and  Romania  and has  extended  the license  arrangements  in South  Africa and
Australia.

IBNet

In October  1997,  the Company  announced  that it has formed an  alliance  with
Internatonal  Business Ntework for World Commerce and Industry,  Ltd. ("IBNET").
IBNET is the Managing  Partner of the IBCC-Net  Consortium  for Global  Commerce
("the  Consortium").  The  Consortium  consists of the  International  Bureau of
Chambers of  Commerce  ("IBCC"),  representing  over 1,000  chambers,  the Paris
Chamber of  Commerce  and  Industry  ("CCIP"),  which  represents  over  270,000
companies,  and the Global Management  Center of the Trade  Information  Network
("GMC")  of  the  United  Nations  Group  of 77  Chambers  of  Commerce  ("G77")
representing   132   countries,   plus  China,   and  IBNET.   IBNET's   primary
responsibility  to the  Consortium  is to operate a global  business  network to
enable businesses worldwide to exchange and validate information for the purpose
of achieving  sales,  marketing,  establish  joint  ventures and other  business
transactions.  Working through overf 10,000 Chambers of Commerce worldwide,  the
Network will serve as a third party to validate participating  businesses via an
electronic  information and transaction  system.  This system,  operating on the
Internet,  is very  similar to the ITEX Online  system  operated by the Company.
ITEX's unique expertise and capability to facilitate  barter  transactions  will
enhance  the World  Chamber  Netwrok's  ("WCN")  mission of meeting the needs of
their constituents.  The Company views the Strategic Partnership with IBNET as a
significant   activity  to  advance  it's  effectiveness  in  the  International
Marketplace.

Media

Media is an important commodity in the commercial barter industry. Several years
ago, the Company started and operated a media department,  which exchanged media


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products owned by the Company for due bills for prepaid  advertising  credits on
radio  stations  across the U.S.  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. The Company now obtains media under favorable terms from outside sources.

Broker Training

The Company has developed a comprehensive  training program for its brokers. New
brokers  come  to  the  training  center  at  the  Company's  Portland,  Oregon,
headquarters  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's clients.  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."

Technology

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 through the Internet.

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
with  "ITEX  Online",  complete  with its own  in-house  gateway  and web server
(www.itex.com).  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.  The Company has the same Internet  connection
capability as that of many typical internet service providers.

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

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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,  ITEX
Online, 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.

During  the  fiscal  year  ended July 31,  1997,  the  Company  spent a total of
$166,000 on research  and  development  for its  communication  and  information
systems, $31,000 of which was capitalized. 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. During
the fiscal year ended July 31,  1995,  the Company  spent a total of $169,000 on
research and development for its communication and information  systems,  all of
which was charged to expense.

Domestic 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 have
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 by $200,000 in cash and 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  now known as IME,
Inc., 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.

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Because  the holder of the other 50% of the common  stock of BXI denied that BXI
was the owner of the BXI Trade  Exchange,  SLI was forced to file  litigation in
February  1996  requesting  a court to decide  the  issue.  That  litigation  is
described in detail in Item 3 of this Form 10-K.

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.

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.
Subsequently,  the  Company  transferred  the rights to use of the name  "Travel
Agents  Hotel  Guide".  The  Company  continues  to obtain  hotel room nights in
exchange for advertising on the Company's web site.

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

As of October 23, 1997,  the Company  employed 66 persons,  of which 60 are full
time employees.  Additionally each of the Exchange's 120 domestic broker offices
is managed by an ITEX  Licensed  Broker who is an  independent  contractor  that
employs  support  staff.  This results in a total network of  approximately  265
persons working as either consultants,  independent contractors, or employees of
the Company.






                                       10
<PAGE>
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           55    Chairman of the Board Of Directors
                                 President and Chief Executive Officer

Mary Scherr                60    Vice President of Broker Development, Director

Gerald Pitts               41    Vice President of International Operations

Joseph M. Morris, CPA      48    Senior Vice President and Chief Financial
                                 Officer, Director

Sondra R. Ames             41    Vice President

Edward S. Wittman          50    Vice President of Business Development

Cynthia Pfaltzgraff, CMA   43    Controller

Donovan Snyder, Esq.       47    General Counsel, Corporate Secretary

Dr. Charles Padbury        59    Director

Dr. Evan B. Ames           58    Director

Robert Nelson              49    Director

Ronald P. Erickson         53    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. A previous Registered Principal, Mr. Norris has
a  strong  sales  and  marketing  background  in  fields  including  securities,
insurance,  electronics and aviation. 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 prestigious credential of
Certified Trade Broker.

     Ms. Scherr,  with over 15 years of experience  within the barter  industry,
became an  independent  broker  with ITEX in 1984.  She has been  recognized  as
Broker of the Year three times and in 1991,  received the Distinguished  Service
Award  from the  International  Reciprocal  Trade  Association  for  outstanding
contributions  to the barter  industry.  She

                                       11

<PAGE>
became a Director  of the Company in 1988 and in 1993 joined the Company as Vice
President  of  Broker  Development.  She  received  a  Masters  Degree  from the
University of Iowa and is a Certified Trade Broker.

     Mr.  Pitts has been active in the  commercial  barter  industry for over 15
years. He participated in activities of the Company as early as 1982,  including
helping with the development of the original  BarterWire and further improvement
in the new  BarterWire  and  ITEX  Online.  He was  elected  Vice  President  of
International  and  Central  Trade  Development  in  early  1997.  He  has  been
instrumental  in  the  Company's   success  in  entering  into  foreign  license
agreements.

     Mr. Morris  joined the Company in January 1996 as Vice  President and Chief
Financial  Officer and a Director and on September 1, 1997 was named Senior Vice
President and Chief Financial  Officer and a Director.  He had been a consultant
to the Company and a Director  since  February  1995.  He has been active in the
barter  industry for over 16 years,  including  serving as a  consultant  to the
International   Reciprocal   Trading   Association   ("IRTA").   He   was   Vice
President-Controller of Scientific  Software-Intercomp,  Inc., a NASDAQ company,
from 1984 through 1995,  except for 1988 to 1990,  when he was a project manager
with the FASB. He has authored several books for financial professionals, two of
which received  awards.  Earlier in his career,  Mr. Morris was an audit manager
with Coopers & Lybrand.

     Ms. Ames joined the Company in May 1996,  following the  acquisition of her
company,  Global  Exchange  Network and was named Vice  President  On October 1,
1997. Ms. Ames has over 20 years  experience in the commercial  barter industry.
She was  instrumental  in  founding  both  the  International  Reciprocal  Trade
Association  ("IRTA") and the California  Reciprocal  Trade  Association and has
twice received IRTA's Distinguished Service Award for Outstanding  Contributions
to Commercial Barter.  She is a member of the Dwight D. Eisenhower  Economic and
Financial Delegation,  contributing to international industrialization worldwide
and has served as a director of Orange National Bank over the last 10 years. Ms.
Ames is a Certified Trade Broker.

     Mr.  Wittman joined the Company in August 1997 and became Vice President of
Business  Development in October 1997.  Previously,  he was President of Wittman
Associates,  Inc., a consulting firm specializing in strategic planning, mergers
and  acquisitions and financial  management.  He also served as president of the
U.S.   subsidiary  of  AGE  Construction  &  Trading  Company,   Ltd.,  a  large
international  construction  company.  Over the preceding 11 years,  he was vice
president  of a NASDAQ  company,  serving  as  chief  financial  officer,  as an
operating  division head, and negotiating,  planning and managing  international
projects.  Previously,  he held  various  operations  and  financial  management
postions in the computer and medical products fields.

     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 16 years  experience in accounting  and financial  management.
Ms. Pfaltzgraff has a Bachelor 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 19 years
experience as an attorney,  including 10 years as corporate  in-house counsel to
several  companies

                                       12

<PAGE>
in Salt Lake 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. Padbury was elected  Chairman of the Board of Directors on September 6,
1996 and 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.

     Dr. Ames has been a Director  of the Company  since  August  1995.  He is a
Registered  Investment  Advisor and operates his  investment  strategy  research
firm,  EBA  Associates,  Inc. Dr. Ames received a Ph.D.  in 1971 from  Princeton
University in near eastern and soviet  studies.  He then served with the Central
Intelligence  Agency,   before  entering  the  investment  field,  first  as  an
investment researcher, analyst, and investment strategist.

     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.

     Mr. Erickson,  who became a Director in October 1997, is Chairman and Chief
Executive   Officer   of   Global   Tel   Resources,   Inc.,   a   provider   of
telecommunications services, messaging and intranet solutions. He was one of the
initial investors and Chairman, President and Chief Executive Officer of Egghead
Software,  Inc.  and also was a  founder,  director,  and/or  officer of various
companies,  generally in the high technology and communications  industries.  He
has a law degree and was a  practicing  attorney  from 1975 to the late  1980's.
Earlier in his  career,  he worked in  Washington,  D.C.  as a White House staff
member.  Mr.  Erickson was appointed to the Board seat vacated by the retirement
from the Board of Dr.  Sherry L.  Meinberg,  who had  meritoriously  served as a
Director of the Company since 1982.

Committees and Meetings of the Board of Directors

The ITEX Board of Directors has had standing audit,  nominating and compensation
committees  since May 1996.  In the last fiscal year  (August 1, 1996 - July 31,
1997) there were five 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.

                                       13

<PAGE>
Based solely on its review of the copies of such forms  received by the Company,
or  written  representations  from  certain  reporting  persons,  the  following
reporting persons were delinquent in filing such reports:

Dr. Sherry  Meinberg was late in filing a report  showing sales of shares of the
Company of 1,445 shares on March 25, 1997 at $3.43 per share, of 5,500 shares on
April 3, 1997 at $3.77 per share,  and of 1,445 shares on April 8, 1997 at $3.75
per share.

Dr. Charles  Padbury was late in filing a report showing  purchases of shares of
the Company of 2,000  shares on January 16, 1997 for $4.3125 per share and 2,000
shares on January 14, 1997 for $4.375 per share.


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      10,900         $178,000

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

  St. Louis, Missouri         October 31, 1998        1,100           15,000


The  Portland,  Oregon,  lease is payable  entirely  in cash.  The Company has a
subtenant  that  occupies  2,200 square feet of the  Portland  office space at a
monthly sublease rate of $3,400.

The Westminster,  California, lease is payable in cash of $3,000 and 42,000 ITEX
trade dollars per year.  There is presently no commitment for this space,  which
is on a month-to-month arrangement.

The St.  Louis,  Missouri,  lease is  payable  50% in cash and 50% in ITEX trade
dollars.


ITEM 3.  LEGAL PROCEEDINGS

On January 24, 1996,  the Company  acquired a 100% common stock interest in SLI,
Inc. ("SLI"),  a Nevada  corporation now known as IME, Inc., 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,

                                       14

<PAGE>
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 December 20, 1996 SLI filed a motion for partial summary judgment  requesting
that the court rule as a matter of law that the contract is unambiguous and that
the defendants had breached the contract for sale of the 50% interest in the BXI
trade exchange.  If the court found in favor of SLI on these issues,  the motion
asked that the court declare that SLI is 50% owner of the company which owns the
BXI trade  exchange or,  alternatively,  order the  defendants  to take whatever
steps are necessary to transfer the assets of the BXI trade  exchange to BXI. On
March 12,  1997 the court  ruled  from the bench and  granted  SLI's  motion for
partial summary judgment.  On April 8, 1997, the court rejected objections filed
by the  defendants  to the  proposed  judgment  and on April 21,  1997, a formal
judgment  was  entered in favor of SLI.  The  critical  portion of the  judgment
declares  that BEI is the owner of the BXI Trade  Exchange.  The  judgment  also
awards certain  supplemental  relief to effectuate this  declaration,  including
requiring the  defendants:  (a) transfer all assets of the BXI Trade Exchange to
BEI, (b) to provide the court and SLI with  certificates of title to reflect the
fact that BEI owns all assets of the BXI Trade Exchange, and (c) to preserve the
status quo by operating the BXI Trade Exchange in the usual and ordinary  course
of business in conformity with all applicable laws and regulations.

On May 2, 1997, the defendants filed notices of appeal from the judgment entered
against  them.   Defendants   concurrently  filed  a  "Deposit  of  Instruments"
consisting of a "Bill of Sale" and a  "Certificate  of  Ownership".  The Bill of
Sale  purports  to convey all the assets of the BXI Trade  Exchange  to BEI upon
payment of $1,783,000 and if the judgment is affirmed on appeal. The Certificate
states that BEI will own the assets of the BXI Trade Exchange if the judgment is
affirmed on appeal.

The Company believes that these documents do not comply with the requirements of
the  judgment.  SLI  immediately  filed an objection to the  sufficiency  of the
documents  and  asked  that  the  defendants  be  required  to  file a bond in a
sufficient  sum to assure SLI that the judgment will be complied with when it is
upheld on appeal.  A hearing to require a bond of between  $2.5 million and $3.5
million or,  alternatively,  to appoint a receiver was heard on June 3, 1997. By
letter ruling dated June 30, 1997, the Circuit court judge:  (a) ordered that in
order to obtain a stay pending appeal of the judgment,  the defendants must post
a bond  totaling  $1.2  million  and  deposit an  unconditional  certificate  of
ownership and bill of sale, and (b) awarded to SLI $193,000 in attorney fees and
$16,000 in costs.  Pursuant to legal action subsequent to entry of the judgment,
the Court  increased  the attorney fees award to $218,000 and the costs award to
$21,000.

On September 15, 1997, the parties  participated in a mediation program mandated
by the Oregon Court of Appeals.  The parties and their attorneys met for several
hours with a 

                                       15

<PAGE>
neutral mediator. Mediation does not result in a binding resolution
of the disputes  between the parties.  However,  the Company  believes  that the
mediation  process was  fruitful in that it resulted in a framework  under which
the  parties  may yet be able to settle  the  disputes  without  exhausting  the
litigation  process.  As part of the  efforts  at  settling,  SLI has  agreed to
temporarily  pause  its  actions  in  Nevada  and  California   directed  toward
preserving its interest in the BXI Trade Exchange.

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 for Breach of Contract and Action on Guaranty and
seeks a total of $89,726 on three claims.  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
vigorously  prosecuted both its own claims and the defense of the counterclaims.
Trial of the matter was set for  September  16, 1997.  Just prior to trial,  the
parties  agreed  to  settle  both  this  case and the  "William  Bradford"  case
described   below.  The  parties  continue  to  negotiate  the  details  of  the
settlement.  It is expected  that the  settlement  will  dispose of all disputes
between the Company and Leslie L. French and Linda French and their companies.

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;  Michael  Baer;  Graham  Norris;  Oxford
Transfer, Inc.; David Christensen,  C.P.A.;  Andersen,  Andersen & Strong, L.C.,
Donovan 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  fiduciary  duty,  breach  of  contract,  interference  with
contract,  and fraud and seeks  compensatory and punitive  damages.  The Company
filed an answer denying all of the allegations of the complaint.

As discussed  above in connection  with the ITEX  Corporation v. French,  et al.
case, this matter has been settled in principle and it is expected that the case
will be dismissed as to all defendants.

On February  14, 1997 the Company was served with a summons and  complaint  in a
matter filed in the Circuit Court of Multnomah County, Oregon entitled BXI Trade
Exchange,  Inc. and Business Exchange  International  Corp. v. ITEX Corporation,
Terry L.  Neal,  Michael  T. Baer.  Donovan  C.  Snyder,  Joel P. Sens and David
Lawson.  This action arises out of the basic fact situation  involved in the SLI
matter described above. The complaint contains seven claims for relief, only two
of which relate to the Company,  Mr.  Neal,  Mr. Baer and Mr.  Snyder (the "ITEX
defendants"). All other claims relate solely to Mr. Sens and Mr. Lawson.

                                       16

<PAGE>
The claims  against  the ITEX  defendants  are for  conspiracy  to  defraud  and
unlawful trade practices under the Oregon unfair trade  practices  statute.  The
ITEX  defendants  consider each and every claim against them to be without merit
and will vigorously defend against those claims. In connection with a Motion for
Summary  Judgment filed by the ITEX  defendants but which has not yet been heard
by the Court, the plaintiffs  conceded that the claim alleging  violation of the
Oregon unfair trade  practices  statute must be dismissed.  The ITEX  defendants
have temporarily  delayed the hearing on the remainder of their summary judgment
motion  based  upon the  mediation  in the SLI,  Inc.  v.  Yarmak,  et al.  case
described above.  Since a global settlement is sought with the defendants in the
SLI case, it may be possible to dispose of this  litigation in that context.  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 of results of operations.

On May 6, 1997,  SLI, Inc. filed a legal action in Nevada against BEI seeking to
preserve its rights as a 50% shareholder of BEI both under Nevada state law (SLI
and BEI are Nevada corporations) and pursuant to the Stock Purchase Agreement by
which SLI  acquired  its  interest  in BEI.  Those  rights  include the right to
conduct  an  audit  of the BEI  financial  records  (including  an  audit of the
operations of the BXI Trade Exchange) and the right to representation on the BEI
board of directors.

A hearing on SLI's motion for a mandatory  injunction requiring BEI to permit an
audit of its books and records,  including  the books of the BXI Trade  Exchange
and for  appointment  of a receiver was heard on June 11, 1997. The Nevada court
has initially  declined to rule on the requests on the basis that similar relief
was requested in the Oregon action. SLI's attorneys are prepared to file further
motions in this case in order to vindicate its rights as a  shareholder  of BEI.
However,  based upon the  mediation  in the SLI,  Inc.  v.  Yarmak,  et al. case
discussed  above,  SLI has  temporarily  delayed any further action on this case
pending possibly reaching a global settlement.


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

No matters were  submitted  during the fourth quarter of the fiscal year covered
by this report to a vote of security holders.











                                       17

<PAGE>
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, 1997.............             $4.13                 $2.75
     May 7, 1997...............              5.50                  3.44
     February 12, 1997.........              4.75                  3.25
     November 20, 1996.........              6.00                  3.50
     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

A stockholder's  list was prepared by the transfer agent,  OTR Inc., in Portland
Oregon,  as of July 31, 1997.  The list, as adjusted,  indicated 796  registered
shareholders  of the 7,207,000  shares issued and  outstanding.  It is estimated
another 4,000 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 4,796.

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.













                                       18

<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,
                                        --------------------------------------------------------------
                                           1997         1996         1995         1994         1993
                                        ----------   ----------   ----------   ----------   ----------
                                                     (In thousands, except per share data)
<S>                                     <C>          <C>          <C>          <C>          <C>
Statement of Operations Data:
Revenue:
   Corporate trading revenue.........   $  11,602    $  16,936    $  14,210    $   8,427    $   4,446
   Trade exchange revenue............      17,582       14,020        9,418        6,339        3,488
                                        ----------   ----------   ----------   ----------   ----------
     Total revenue...................      29,184       30,956       23,628       14,766        7,934
                                        ----------   ----------   ----------   ----------   ----------
Costs and expenses:
   Costs of corporate trading........       9,245       13,745       11,137        6,409        2,891
   Costs of trade exchange revenue          6,715        7,153        4,361        2,806        2,125
   Selling, general and administrative      8,445        8,146        7,185        5,257        2,768
                                        ----------   ----------   ----------   ----------   ----------
     Total costs and expenses........      24,405       28,774       22,683       14,472        7,784
                                        ----------   ----------   ----------   ----------   ----------
Income (loss) from operations........       4,779        2,182          945          294          150
Other income (expense)...............         201          200          454           19           74
                                        ----------   ----------   ----------   ----------   ----------
Income (loss) before income taxes....       4,980        2,382        1,399          313          224
Provision for income taxes...........       1,755          908          522          101           (8)
                                        ----------   ----------   ----------   ----------   ----------
Income before equity in net income
   of foreign affiliate..............        3,225       1,474          877          212          232
Equity in net income (loss) of
  foreign affiliate..................        1,247         (90)         958          632         ---
                                        ----------   ----------   ----------   ----------   ----------
Net income...........................   $   4,472    $   1,384    $   1,835    $     844    $     232
                                        ==========   ==========   ==========   ==========   ==========

Net income per share.................   $    0.52    $    0.19    $    0.41    $    0.26    $    0.08
                                        ==========   ==========   ==========   ==========   ==========

Balance Sheet Data:
Working capital .....................   $     981    $     261    $   1,507    $    503     $     452
Total assets.........................      29,968       23,406       15,578      10,051         6,157
Long-term debt, net of current
  portion............................          26          192          156         189            98
Stockholders' equity.................   $  27,774    $  20,383    $  13,783    $  7,432     $   5,046

</TABLE>







                                       19

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


LIQUIDITY AND CAPITAL RESOURCES

Strategy  and  Diversification.  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 firms in which the
Company has  invested are able to use the ITEX Trade  Dollars to purchase  goods
and services used in the  operation of their  businesses.  Further,  the Company
invests in other  business  ventures,  which  involve  acquiring  and  operating
businesses,   operating  projects,  or  holding  properties  for  investment  or
operation.  The Company  will focus on ventures in which the Company has or will
obtain adequate expertise for successful management and operation. Ventures that
can benefit from the financial resources and liquidity that the Company provides
through trading for goods and services are given priority.

On July 31, 1997, the Company commenced a partial redeployment of its assets and
investment  strategy by investing in natural  resources  located on four mineral
properties in the State of  Washington.  In exchange for these  properties,  the
Company  issued  130,000  shares  of  common  stock,  paid  $20,000  in cash and
transferred  media inventory,  hotel room inventory,  and fine art paintings and
sculpture.  The total  carrying  value of the  acquired  mineral  properties  of
$6,576,000 has been confirmed in an appraisal by a firm of independent qualified
mining consultants. The four properties contain deposits including limestone and
high-grade calcium carbonate,  high-grade and very-high-grade calcium carbonate,
limestone and medium-grade calcium carbonate,  quartzite flagstone,  and olivine
and dunite. Subsequent to July 31, 1997, the Company obtained several additional
mineral property claims at nominal cost by original claim staking.

On July 30,  1997,  the Company  completed  the  purchase of the  remaining  51%
interest  in  Associated  Reciprocal  Traders,   Ltd.  ("ART"),   making  ART  a
wholly-owned  foreign  subsidiary.  The  assets of ART  consisted  primarily  of
available-for-sale securities.

During  October  1997,  ART  acquired a 60% interest in 16 acres of improved but
undeveloped resort property known as the Villas Punta Ballena Samana Resort (the
"Samana Resort"), along with associated plans, engineering drawings, permits and
approvals  for  the  resort,  and  a  commitment  for  a  construction  loan  of
approximately $40,000,000.  The Samana Resort is located in the northeast corner
of the Dominican  Republic on the Bay of Samana.  The transaction was structured
as the  purchase  of a 60% equity  interest  in Villas  Punta  Ballena C. por A.
("VPB"),  a  Dominican  Republic  corporation,  the holder of the Samana  Resort
property.  VPB has never had any business operations other than ownership of the
Samana Project.

The total  purchase  price  consisted of cash of  $1,250,000,  ITEX  Corporation
common  stock to have a market  value at time of  issuance  of  $1,000,000,  and
available-for-sale securities totaling $5,142,000 from the portfolio of ART. The
purchase price is to be paid in  installments  ranging from payments at the time
of contract signing to the final

                                       20

<PAGE>
payment of ITEX  Corporation  common  stock which is due within five days of the
commencement  of  substantial  construction  on the  property.  The value of the
acquired assets has been determined by independent appraisal of the property.

The Company intends to proceed with construction of the resort facility pursuant
to the plans for  development  of the property,  which have been approved by the
appropriate  authorities.  When  completed,  the Samana  Resort is  expected  to
include more than 250 condominium and hotel units, as well as a casino, swimming
pools, tennis courts,  restaurants,  and most other amenities  associated with a
five-star Caribbean resort.

Overall Financial Position.  Subsequent to July 31, 1977 and through October 28,
1997, the Company sold a portion of its available-for-sale securities, realizing
cash  proceeds of  $3,218,000,  substantially  increasing  the  liquidity of the
Company.  The  Company  believes  that  this  demonstrates  the  success  of the
Company's  strategy of realizing cash from the sale of stocks of other companies
that are purchased for trade dollars or other nonmonetary consideration.

At July 31, 1997,  the  Company's  working  capital ratio was 1.5 to 1, based on
current  assets  of  $3,048,000  and  current  liabilities  of  $2,067,000.  The
Company's working capital ratio at July 31, 1996, was 1.1 to 1, based on current
assets of $2,827,000 and current  liabilities of $2,566,000.  The primary reason
for the  improvement  in the working  capital  ratio was due to the inclusion of
$1,247,000 in current  deferred taxes at July 31, 1996 for earnings  expected to
be  repatriated  as a result of the  termination  of the  Associated  Reciprocal
Traders,  Inc. ("ART") foreign venture.  In fiscal 1997,  instead of receiving a
distribution  of its share of ART's  assets,  the  Company  purchased  the other
venturer's 51% interest in ART,  making ART a wholly-owned  foreign  subsidiary.
The deferred tax  liability was reversed in fiscal 1997 because of the change in
circumstances  that now permit the Company to reinvest the foreign  earnings for
an indefinite period.

Total  stockholders'  equity  increased by $7,391,000 to $27,774,000 at July 31,
1997, from  $20,383,000 at July 31, 1996. The primary reason for the increase in
stockholders' equity were: (a) continued profitable  operations and (b) a credit
to additional  paid-in  capital of $1,092,000 for tax benefits  derived from tax
deductions  allowed to corporations as a result of exercises of stock options at
exercise  prices  lower than market  price of the stock at the date of exercise.
The tax refunds  due were  applied as a reduction  of the  Company's  income tax
liabilities for the fiscal year ended July 31, 1997.

Statement  of Cash  Flows.  Net cash used in  operating  activities  improved to
$349,000 in fiscal 1997 as compared to  $1,418,000  in fiscal 1996.  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.  Further, the success of the
Company's  strategy of realizing cash from the sale of stocks of other companies
that  are  purchased  for  trade  dollars  or  other  nonmonetary  consideration
indicates that trade dollars or other  nonmonetary  consideration  earned by the
Company can be converted  into cash.  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.

                                       21

<PAGE>
Net cash used in investing activities was $398,000 in fiscal 1997 and $2,608,000
in fiscal 1996. The primary  reason for the difference was the  acquisition of a
50% equity interest in Business Exchange International, Inc.
during fiscal 1996.

Net cash  provided  by  financing  activities  was  $259,000  in fiscal 1997 and
$3,803,000 in fiscal 1996. In fiscal 1996, the Company received  $2,081,000 from
the exercise of stock  options and  $1,250,000  from the sale of common stock in
the Newcastle private placement.

Private  Placements.  During the year ended July 31, 1997, the Company  received
proceeds of $179,000 from a private placement of 55,000 units at $3.25 per unit,
each unit consisting of one share of common stock and one warrant.  Each warrant
entitles the holder to purchase one share of common stock for $3.25 through June
18, 1999, and for $4.00 thereafter through June 18, 2000.

The terms of a private placement with Wycliff Fund, Inc.  previously reported by
the  Company  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 was due for the calendar  quarter ended  September 30, 1996
and following quarters.  Therefore, the Company may cancel the remaining portion
of the private placement.

Stock Options. The Board of Directors adopted a new stock option plan applicable
to directors,  officers,  employees,  and  consultants of the Company  effective
December  27,  1996,  pursuant to which  1,000,000  shares of common  stock were
reserved for issuance at an exercise price of $3.75 per share.  Exercise  prices
for the options granted under the new plan are equal to market value on the date
of grant and may be exercisable for up to five years.

Effective  September 3, 1997, the Board of Directors  adopted a new stock option
plan pursuant to which options to purchase up to 965,000 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.  Pursuant to the new stock option plan, options to
purchase  765,000  shares were granted on September 3, 1997 at an exercise price
of $3.19 per share.

The Company intends to request shareholder action on the stock option plans that
were  adopted  on  December  27,  1996 and  September  3, 1997 by the  Company's
shareholders at the annual meeting of the Company's  shareholders  scheduled for
January  8,  1998.  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 stock
option  plans that were  adopted on December  15,  1995,  December  27, 1996 and
September 3, 1997.

During  the fiscal  year ended July 31,  1996,  the  Company  received  proceeds
totaling  $1,437,000  from the  exercise of stock  options to  purchase  687,000
shares of common stock.  During the fiscal year ended July 31, 1997, the Company
received  proceeds  totaling  $245,000  from the  exercise  of stock  options to
purchase 120,000 shares of common stock.

                                       22

<PAGE>
Bank Line of Credit. On December 4, 1996, the Company's primary bank agreed to a
new line of credit  arrangement with a term through December 31, 1997.  Pursuant
to the line of credit,  the Company  may 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, 1997,  the Company had no borrowings  outstanding
under the bank  credit  facility.  Based on  available  collateral,  the  entire
facility  amount of credit of $250,000  was  available to the Company as of July
31, 1997.

RESULTS OF OPERATIONS

Comparison of Fiscal Years Ended July 31, 1997 ("Fiscal 1997") and July 31, 1996
("Fiscal 1996")

Overall Operating Results

Total revenue  decreased 6% to  $29,184,000  in fiscal 1997 from  $30,956,000 in
fiscal 1996.  Income from  operations  more than doubled to $4,779,000 in fiscal
1997 from  $2,182,000 in fiscal 1996.  Net income  increased to  $4,472,000,  or
$0.52 per share in fiscal 1997 from  $1,384,000,  or $0.19 per share,  in fiscal
1996.

The increases resulted primarily from:

         (a)   More profitable operations in fiscal 1997, and

         (b)   The reversal in fiscal 1997 of a liability  for  deferred  income
               taxes of  $1,247,000  that had been  provided with respect to the
               Company's foreign venture,  Associated  Reciprocal Traders,  Inc.
               ("ART"), which is now a wholly-owned subsidiary.

The Company  believes that an important  comparison of fiscal 1997 operations to
fiscal 1996  operations  is that "Income  before  Equity in Net Income (Loss) of
Foreign Affiliate"  amounted to $3,225,000,  or $.39 per share in fiscal 1997 as
compared to $1,474,000,  or $.20 per share in fiscal 1996. These amounts exclude
the unusual  effects of the deferred tax provision  related to ART of $1,247,000
that was recorded in fiscal 1996 and reversed in fiscal 1997.

The  fluctuations  in net income and net income per share are not  proportionate
because of a greater number of shares  outstanding in fiscal 1997 for the income
per share  computation  because of more  incremental  shares  from  options  and
warrants.









                                       23

<PAGE>
Revenue

Total Revenue.  The following table summarizes the cash and trade (consisting of
ITEX trade  dollars and other noncash  consideration)  components of revenue for
fiscal years 1997 and 1996:

                                   Fiscal Years Ended July 31,
                                 ------------------------------
                                     1997              1996
                                 ------------      ------------
                                         (in thousands)
  Corporate Trading Revenue
      Trade                      $     9,893       $    12,003
      Cash                             1,709             4,933
                                 ------------      ------------
                                      11,602            16,936
                                 ------------      ------------
  Trade Exchange Revenue
      Trade                            7,566             5,427
      Cash                            10,016             8,593
                                 ------------      ------------
                                      17,582            14,020
                                 ------------      ------------
  Total Revenue
      Trade                           17,459            17,430
      Cash                            11,725            13,526
                                 ------------      ------------
                                 $    29,184       $    30,956
                                 ============      ============

Corporate   Trading  Revenue.   Corporate   trading  revenue  decreased  31%  to
$11,602,000 in fiscal 1997 from $16,936,000 in fiscal 1995. During the first two
quarters of fiscal 1997, the Company had a decreased level of corporate  trading
revenue, which was attributable to the Company devoting less of its resources to
corporate trading  activities during those periods.  Significant  management and
staff time was spent on  litigation  and other  regulatory  matters,  on further
development of the retail trade exchange, and on international expansion. During
the second half of fiscal 1997, management refocused more resources on corporate
trading  activities.  Management  is  continuing  to focus on corporate  trading
activities  through  its Central  Trade  Department  and  through its  corporate
trading agent, ITEX USA, Inc. Continued significant contributions to revenue are
expected for corporate trading activities.

Trade Exchange  Revenue.  Trade exchange revenue increased 25% to $17,582,000 in
fiscal 1997 from  $14,020,000  in fiscal 1996.  The  increase in trade  exchange
revenue was  attributable to an array of factors.  The Company has continued its
expansion  internally,  by  acquisition,   and  entering  into  foreign  license
agreements.  In fiscal 1997, the Company reported revenue from foreign licensees
totaling  $386,000.  The Company  has also  started to realize  transaction  fee
revenue based on activity of the foreign licensees. This foreign transaction fee
revenue amounted to $15,000 in fiscal 1997.

The Company has continued its commitment to improved broker  training  programs,
which is having the effect of increased  enrollments  of new clients  joining as
members of the Exchange and higher performance levels by brokers.  Further,  the
Company continues to invest in its ongoing broad-based marketing and advertising
program  targeted  at  recruitment  of  additional  brokers  and  members of the
Exchange.


                                       24

<PAGE>
Costs and Expenses

Costs of Corporate  Trading.  Costs of corporate trading decreased to $9,245,000
in fiscal  1997 from  $13,475,000  in fiscal 1996  because of the lower  revenue
level.  Costs of corporate  trading  revenue were 80% in each of fiscal 1997 and
fiscal 1996.

Costs of Trade Exchange  Revenue.  Costs of trade exchange revenue  decreased to
$6,715,000  in  fiscal  1997 from  $7,153,000  in  fiscal  1996.  Costs of trade
exchange revenue,  which consists of brokers' fees and commissions,  were 38% of
trade  exchange  revenue in fiscal 1997 and 51% in fiscal 1996.  The decrease in
the cost percentage is partially  attributable to revenue from foreign licenses,
on which the Company does not pay brokers' fees and commissions.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses were at  approximately  the same level at $8,445,000 in
fiscal 1997 and $8,146,000 in fiscal 1996.

Total  advertising  and promotion  was  $1,943,000 in fiscal 1997 as compared to
$2,597,000 in fiscal 1996. The reduction was a result of the Companies  decision
to  reduce  costs  in this  area.  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 1997,  the
Company paid $1,851,000 of its advertising  costs by ITEX trade dollars or other
trade consideration, representing 95% of total advertising costs for the period.

Comparison of Fiscal Years Ended July 31, 1996 ("Fiscal 1996") and July 31, 1995
("Fiscal 1995")

Overall Operating Results

Total revenue  increased 31% to $30,956,000  in fiscal 1996 from  $23,628,000 in
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 perceived  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.

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

                                       25

<PAGE>
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.  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                               4,933           1,807
                                   ------------    ------------
                                        16,936          14,210
                                   ------------    ------------
  Trade Exchange Revenue
      Trade                              5,427           4,204
      Cash                               8,593           5,214
                                   ------------    ------------
                                        14,020           9,418
                                   ------------    ------------
  Total Revenue
      Trade                             17,430          16,607
      Cash                              13,526           7,021
                                   ------------    ------------
                                   $    30,956     $    23,628
                                   ============    ============

Corporate   Trading  Revenue.   Corporate   trading  revenue  increased  19%  to
$16,936,000  in fiscal  1996 from  $14,210,000  in fiscal  1995.  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.  Trade exchange revenue increased 49% to $14,020,000 in
fiscal 1996 from  $9,418,000  in fiscal  1995.  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 $13,475,000
in fiscal 1996 from  $11,137,000  in fiscal 1995  because of the higher  revenue
level.  Costs of  corporate  trading  revenue were 80% in fiscal 1996 and 78% in
fiscal 1995.

                                       26

<PAGE>
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.

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. The reduction was a result of the Companies  decision
to  reduce  costs  in this  area.  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.

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 may 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

                                       27

<PAGE>
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 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.














                                       28

<PAGE>
                                ITEX CORPORATION
                                    FORM 10-K
                            For the Fiscal Year Ended
                                  July 31, 1997

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                         Page
                                                                       --------

     REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                   30

     CONSOLIDATED BALANCE SHEETS AT JULY 31, 1997 AND 1996                31

     CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
     YEARS ENDED JULY 31, 1997, 1996, AND 1995                            32

     CONSOLIDATED  STATEMENT OF STOCKHOLDERS' EQUITY FOR THE 
     THREE YEARS ENDED JULY 31, 1997,  1996, AND 1995                     33

     CONSOLIDATED  STATEMENTS OF CASH FLOWS FOR THE THREE 
     YEARS ENDED JULY 31, 1997, 1996, AND 1995                            34

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                           35


     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.















                                       29
<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, 1997, 1996, and 1995. 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,  1997  and  1996,  and the  results  of their
operations  and their cash flows for the years ended July 31,  1997,  1996,  and
1995, in accordance with generally accepted accounting principles.

Andersen, Andersen & Strong
October 28, 1997
Salt Lake City, Utah










                                       30
<PAGE>
<TABLE>
<CAPTION>
                                ITEX CORPORATION
                           CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share amounts )

                                                                         July 31,
                                                              ---------------------------
                                                                  1997           1996
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                   ASSETS
Current Assets
     Cash ..................................................  $       813    $     1,301
     Trade Dollars..........................................          786          ---
     Accounts receivable, net of allowance for doubtful
      accounts of $140 and $96..............................        1,084            847
     Notes receivable.......................................          285            360
     Prepaids and other current assets......................           80            319
                                                              ------------   ------------
         Total current assets...............................        3,048          2,827

Inventory for Principal Party Trading.......................        6,939          5,202

Available for Sale Equity Securities........................        7,088          3,877

Natural Resource Interests..................................        6,576          ---

Investment in Foreign Equity Affiliate......................        ---            3,197

Investment in Business Exchange International Corp..........        2,792          2,418

Investment in Fine Art .....................................           36          2,642

Goodwill and Purchased Member Lists, net....................        1,075          1,299

Notes Receivable, Long-Term Portion.........................          810            997

Other Assets................................................        1,604            947
                                                              ------------   ------------

                                                              $    29,968    $    23,406
                                                              ============   ============
                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
     Accounts payable.......................................  $       246    $       183
     Portion of receivables due to brokers .................          552            508
     Income taxes payable...................................          840             94
     Deferred tax liability.................................         ---           1,253
     Current portion of long-term indebtedness..............          166            138
     Other current liabilities..............................          263            390
                                                              ------------   ------------
         Total current liabilities..........................        2,067          2,566
                                                              ------------   ------------

Deferred Income Taxes.......................................          101            265
                                                              ------------   ------------

Long-term Indebtedness......................................           26            192
                                                              ------------   ------------

Stockholders' Equity
     Common stock, $.01 par value; 20,000,000 shares
        authorized; 7,207,000 and 6,804,000 shares
        issued and outstanding..............................           72             68
     Paid-in capital........................................       19,114         16,386
     Net unrealized gain on marketable securities...........           60            132
     Treasury stock, at cost (3,900 shares in 1996).........        ---              (29)
     Retained earnings......................................        8,938          4,466
     Prepaid Printing.......................................         (410)          (640)
                                                              ------------   ------------
         Total stockholders' equity.........................       27,774         20,383
                                                              ------------   ------------
                                                              $    29,968    $    23,406
                                                              ============   ============
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       31

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

                                                              For the Fiscal Years Ended July 31,
                                                       ------------------------------------------------
                                                           1997              1996              1995
                                                       ------------     -------------     -------------
<S>                                                    <C>              <C>               <C>
Revenue
    Corporate trading revenue......................... $    11,602      $     16,936      $     14,210
    Trade exchange revenue............................      17,582            14,020             9,418
                                                       ------------     -------------     -------------
                                                            29,184            30,956            23,628
                                                       ------------     -------------     -------------
Costs and Expenses
    Costs of corporate trading........................       9,245            13,475            11,137
    Costs of trade exchange revenue...................       6,715             7,153             4,361
    Selling, general, and administrative..............       8,445             8,146             7,185
                                                       ------------     -------------     -------------
                                                            24,405            28,774            22,683
                                                       ------------     -------------     -------------

Income from Operations................................       4,779             2,182               945

Other Income (Expense)
  Interest income (expense), net......................          63                72                 3
  Dividends and subordination fees....................         ---               204               229
  Gain (loss) on sale of securities...................         138               (76)              222
  Miscellaneous, net................................           ---               ---               ---
                                                       ------------     -------------     -------------
                                                               201               200               454
                                                       ------------     -------------     -------------
Income Before Taxes and Equity in Net
  Income (Loss) of Foreign Affiliate..................       4,980             2,382             1,399

Provision for Income Taxes............................       1,755               908               522
                                                       ------------     -------------     -------------

Income Before Equity in Net  Income
  (Loss) of Foreign Affiliate.........................       3,225             1,474               877

Equity in Net Income (Loss) of Foreign
  Affiliate (net of tax provision of
  $1,247 in 1996).....................................       1,247               (90)              958
                                                       ------------     -------------     -------------
Net Income ...........................................  $    4,472      $      1,384      $      1,835
                                                       ============     =============     =============

Average Common and Equivalent Shares:
   Primary............................................       9,503             7,346              4,658
                                                       ============     =============     ==============

Net Income Per Common Share:
   Primary............................................ $      0.52      $        0.19     $        0.41
                                                       ============     ==============    ==============
                                                       
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.







                                       32

<PAGE>
<TABLE>
<CAPTION>
                                ITEX CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
            For the Fiscal Years Ended July 31, 1997, 1996, and 1995
                                 (In thousands)

                                                          Unrealized
                                    Additional            Gain (Loss)
                    Common Stock      Paid-in   Retained      on       Treasury  Prepaid
                  ----------------
                   Shares   Amount    Capital   Earnings   Securities    Stock   Printing     Total
                  --------  ------  ----------  --------  -----------  --------  --------  -----------
<S>               <C>       <C>     <C>         <C>       <C>          <C>       <C>       <C>
Balance, July 
  31, 1994          3,416   $   34  $    6,224  $   1,247 $       (4)  $   (69)  $         $    7,432

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                                                                                 1,079
  services            300        3       1,076
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
Prepaid printing                                                                                1,480
                                                                                    (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
Stock sold for                                     
  cash                175       2         422                                                     424
Stock and options
  issued for goods
  and services        228       2       1,214                                29                 1,245
Prepaid printing                                                                     230          230
Tax benefit from
  stock options                                   1,092                                         1,092
  exercised
Unrealized Gain
  (Loss)                                                         (72)                             (72)
Net income,                                                                                                            
  fiscal 1997                                     4,472                                         4,472
                  --------  ------  ----------  --------  -----------  --------  --------  -----------

Balance, July       7,207   $  72   $  19,114   $ 8,938   $       60   $   ---   $  (410)  $   27,774
  31, 1997        ========  ======  ==========  ========  ===========  ========  ========  ===========

</TABLE>








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

                                       33

<PAGE>
<TABLE>
<CAPTION>
                                                 ITEX CORPORATION
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                  (In thousands)
                                                                 For the Fiscal Years Ended July 31,
                                                            --------------------------------------------
                                                                1997            1996            1995
                                                            ------------    ------------    ------------
<S>                                                         <C>             <C>             <C>
Cash Flows from Operating Activities
    Net income............................................  $     4,472     $     1,384     $     1,835
    Adjustments:
       Equity in net income of foreign affiliate and
            related deferred tax effect in 1997 and 1996..       (1,247)             90            (958)
       Depreciation and amortization......................          619             290             215
       Services paid for in stock and options.............          438             740             660
       Net trade revenue earned over trade costs  ........       (5,451)         (2,974)         (2,137)
    Changes in operating assets and liabilities:
       Accounts and notes receivable......................           25            (596)            288
       Deferred taxes.....................................         (170)            175             (48)
       Prepaids and other assets..........................          239            (224)            189
       Accounts payable and other current liabilities.....          (64)            239              13
       Portion of receivables due to brokers..............           44             (73)            (32)
       Income taxes payable...............................          746            (469)            388
       Deferred revenue...................................          ---             ---          (1,000)
                                                            ------------    ------------    ------------
         Net cash (used in) operating activities..........         (349)         (1,418)           (587)
                                                            ------------    ------------    ------------

Cash Flows From Investing Activities
    Business Exchange International, Inc. and other
        acquisitions                                               (345)         (2,158)            ---
    Equipment, information systems and other..............          (53)           (450)           (227)
                                                            ------------    ------------    ------------
          Net cash (utilized in) investing activities.....         (398)         (2,608)           (227)
                                                            ------------    ------------    ------------

Cash Flows From Financing Activities
    Proceeds from sales of common stock...................          424           3,691           2,010
    Proceeds from notes payable...........................          ---             237             814
    Repayments of notes payable...........................         (165)           (125)           (937)
                                                            ------------    ------------    ------------
          Net cash provided by financing activities.......          259           3,803           1,887
                                                            ------------    ------------    ------------

Net increase (decrease) in cash and equivalents...........         (488)          ( 223)          1,073
Cash and cash equivalents at beginning of period..........        1,301           1,524             451
                                                            ------------    ------------    ------------

Cash and Cash Equivalents at End of Period................  $       813     $     1,301     $     1,524
                                                            ============    ============    ============
Supplemental Cash Flow Information
Cash paid for interest....................................  $        25     $        29     $        30
Cash paid for income taxes................................          ---             610             180

Non-Cash Investing and Financing Activities
Investments, equipment, inventory, information systems
  development services, prepaids, customer lists,
  marketable securities and goodwill acquired for
  common stock, ITEX trade dollars, and other assets......        9,396           4,846           4,240
</TABLE>

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



                                       34

<PAGE>
                                ITEX CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - 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  adjustments to
trade dollar revenue may be offset by corresponding adjustments to expenses paid
in trade dollars.

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 by the Company and U.S.  dollars--in
tandem--to  pay for goods and  services  used by the Company in its  operations.

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  realizable  value.  The Company would adjust the carrying  value of the
trade  dollars if the 

                                       35

<PAGE>
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 with 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 with 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  acquires  and sells  inventories  for trade
dollars or other nonmonetary consideration, 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 from
Cash  Equivalent  Credits.  The Company  arranges the sale of the  inventory for
cash, which is retained by the Company.

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

                                       36

<PAGE>
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  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 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 or
based on other measures of value, if more compelling .

                                       37

<PAGE>
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.

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.

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.

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. Goodwill and Purchased Member lists are stated at cost
and are amortized over periods ranging from 5 to 20 years.

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

                                       38
<PAGE>
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, 1997.

NOTE 2 - TRADE DOLLARS

At July 31, 1997, the Company had earned 786,000 ITEX Trade Dollars in excess of
the amount of Trade Dollars expended by the Company.  The Company has classified
the net positive  Trade Dollar  balance as a current  asset  because the Company
expects to utilize  the full  amount  within  the next 12  months.  The  Company
intends to use these Trade  Dollars to purchase  goods and  services  from other
members of the  Exchange  for use by the  Company in its  operations  or for the
purchase of equity securities of other companies.

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." The
ITEX  Trading  Rules that  govern the  Exchange  specifically  provide  that the
Company may expend Trade  Dollars in excess of earned within  certain  guideline
amounts.  This  practice is consistent  with  regulations  of the  International
Reciprocal Trade Association  ("IRTA"),  the leading barter industry association
which, among other things,  provides  regulations and other guidance on business
practices and ethics within the industry.  The ability to borrow trade  dollars,
just as other members of the exchange may,  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 for sale to Exchange  members to offset
any  amounts  of Trade  Dollars  expended  in excess of  earned.  This  could be
accomplished  by the sale for Trade Dollars of the assets for which  acquisition
resulted in the Trade Dollars  issued in excess of earned or other  inventories,
by otherwise earning Trade Dollars, or a combination of both.

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.


                                       39
<PAGE>
NOTE 3 - NOTES RECEIVABLE

At July 31, 1997 and 1996, notes receivable consisted of the following:

                                                             July 31,
                                                   ----------------------------
                                                       1997            1996
                                                   ------------    ------------
                                                   (in thousands, except monthly
                                                          payment amounts)

  Note receivable in five equal annual
     installments, including interest at 6% per
     annum                                         $       480     $       600
  Note receivable from Business Exchange
     International, Inc., payable over a fifteen-
     year period in monthly installments of
     $3,513, including interest at 8%                      300             300
  Note receivable from former officer of SLI,
     Inc., currently due, with interest  at  8%            125             125
  Note receivable from ITEX USA, Inc.,
     currently due, with interest at 9%                    106             106
  Other                                                     84             226
                                                   ------------    ------------
                                                         1,095           1,357
  Less, current portion                                   (285)           (360)
                                                   ------------    ------------
                                                   $       810     $       997
                                                   ============    ============


<PAGE>



NOTE 4 -  INVENTORY FOR PRINCIPAL PARTY TRADING

Following are the components of inventory for principal party trading:

                                                             July 31,
                                                   ----------------------------
                                                       1997            1996
                                                   ------------    ------------
                                                          (in thousands)

  Prepaid media advertising duebills               $     4,190     $     3,530
  Hotel roomnights                                       1,006           1,482
  Health products                                          653            ----
  Electronic products                                      278            ----
  Condominium timeshares                                   570            ----
  Miscellaneous inventory                                  242             190
                                                   ------------    ------------
                                                   $     6,939     $     5,202
                                                   ============    ============










                                       40

<PAGE>
NOTE 5 - AVAILABLE-FOR-SALE SECURITIES

Following is  information  about the value of  available-for-sale  securities at
July 31, 1997 and 1996:
<TABLE>
<CAPTION>
                                                 Gross          Gross                
                                               Unrealized     Unrealized       Market
                                   Cost          Gains          Losses         Value
                               ------------   ------------   ------------   ------------
<S>                            <C>            <C>            <C>            <C>
  July 31, 1997:
  Convertible preferred stock  $     3,928    $     ----     $       132    $     3,796
  Stock dividends receivable            90          ----            ----             90
  Common stock (restricted)          3,010            418            226          3,202
                               ------------   ------------   ------------   ------------
                               $     7,028    $       418    $       358    $     7,088
                               ============   ============   ============   ============

  July 31, 1996:
  Convertible preferred stock  $     3,163    $       138    $              $     3,301
  Stock dividends receivable           327                                          327
  Subordination fee receivable         255                            (6)           249
                               ------------   ------------   ------------   ------------
                               $     3,745    $       138    $        (6)   $     3,877
                               ============   ============   ============   ============
</TABLE>
Subsequent  to July 31, 1977 and through  October 28,  1997,  the Company sold a
portion of its  available-for-sale  securities for cash,  realizing  proceeds of
$3,218,000, substantially increasing the liquidity of the Company.

During October 1997, the Company,  through its wholly-owned  foreign subsidiary,
Associated  Reciprocal  Traders,  Ltd.,  acquired a 60%  interest in 16 acres of
improved but  undeveloped  resort  property  known as the Villas  Punta  Ballena
Samana Resort (the "Samana Resort"),  along with associated  plans,  engineering
drawings,  permits  and  approvals  for  the  resort,  and  a  commitment  for a
construction loan of approximately  $40,000,000.  Part of the purchase price was
paid by the Company's conveyance to the seller of available-for-sale  securities
of $5,142,000.


NOTE 6 - NATURAL RESOURCE INTERESTS

On July 31, 1997, the Company commenced a partial redeployment of its assets and
investment  strategy by investing in natural  resources  located on four mineral
properties in the State of  Washington.  In exchange for these  properties,  the
Company  issued  130,000  shares  of  common  stock,  paid  $20,000  in cash and
transferred  media inventory,  hotel room inventory,  and fine art paintings and
sculpture.  The total  carrying  value of the  acquired  mineral  properties  of
$6,576,000 has been confirmed in an appraisal by a firm of independent qualified
mining consultants. The four properties contain deposits including limestone and
high-grade calcium carbonate,  high-grade and very-high-grade calcium carbonate,
limestone and medium-grade calcium carbonate,  quartzite flagstone,  and olivine
and dunite. Subsequent to July 31, 1997, the Company obtained several additional
mineral property claims at nominal cost by original claim staking.





                                       41
<PAGE>
NOTE 7 - 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, 1997 and 1996, the unamortized  balance of member lists consisted of
the following:

                                                      July 31,
                                            ---------------------------
                                                1997           1996
                                            ------------   ------------
                                                   (in thousands)
   Cost                                     $       142    $       142
   Accumulated amortization                         (91)           (60)
                                            ------------   ------------
                                            $        51    $        82
                                          ==============   ============

Amortization expense for member lists was $31,000,  $28,000, and $21,000 for the
fiscal years ended July 31, 1997, 1996, and 1995, 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, 1997 and 1996, the unamortized balance consisted of the following:

                                                       July 31,
                                            ---------------------------
                                                1997           1996
                                            ------------   ------------
                                                   (in thousands)
   Cost                                     $       348    $       348
   Accumulated amortization                        (174)          (104)
                                            ------------   ------------
                                            $       174    $       244
                                            ============   ============

Amortization expense was $70,000, $70,000 and $35,000 for the fiscal years ended
July 31, 1997, 1996, and 1995, 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, 1997 and 1996, the unamortized cost consisted of the following:

                                                      July 31,
                                            ---------------------------
                                                1997           1996
                                            ------------   ------------
                                                  (in thousands)
   Cost                                     $       658    $       658
   Accumulated amortization                         (82)           (47)
                                            ------------   ------------
                                            $       576    $       611
                                            ============   ============

Amortization expense was $36,000, $33,000 and $14,000 for the fiscal years ended
July 31, 1997, 1996 and 1995, respectively.

                                       42

<PAGE>
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, 1997 and 1996, the unamortized balance consisted of the following:

                                                      July 31,
                                            ---------------------------
                                                1997           1996
                                            ------------   ------------
                                                   (in thousands)
   Cost                                     $       385    $       385
   Accumulated amortization                        (112)           (23)
                                            ------------   ------------
                                            $       273    $       362
                                            ============   ============

Amortization  expense was  $89,000,  and $22,000 for the fiscal years ended July
31, 1997 and 1996.

NOTE 8 - OTHER ASSETS

At July 31, 1997 and 1996,  property and equipment,  which are included in Other
assets, consisted of the following:

                                                      July 31,
                                            ---------------------------
                                                1997           1996
                                            ------------   ------------
                                                  (in thousands)

   Office furniture and fixtures            $        96    $       111
   Computer equipment                               167            486
   Vehicles                                          29             29
   Leasehold improvements                           112            118
                                            ------------   ------------
                                                    404            744
   Less, accumulated depreciation                  (195)          (491)
                                            ------------   ------------
                                            $       209    $       253
                                            ============   ============

Depreciation  expense for property and  equipment  was  $108,000,  $91,000,  and
$68,000 for the fiscal years ended July 31, 1997, 1996, and 1995, respectively.

At July 31, 1997 and 1996,  capitalized  equipment leases, which are included in
Other assets, consisted of the following:

                                                       July 31,
                                            ---------------------------
                                                1997           1996
                                            ------------   ------------
                                                   (in thousands)

   Computer and other equipment             $       175    $       175
   Less, accumulated depreciation                  (115)           (72)
                                            ------------   ------------
                                            $        60    $       103
                                            ============   ============

Depreciation expense for capitalized  equipment leases was $42,000,  $41,000 and
$31,000 for the fiscal years ended July 31, 1997, 1996, and 1995, respectively.

At July 31, 1997,  Other assets  includes  costs of  purchasing  and  developing
certain of the  Company's  information,  communication,  and  Internet  systems.
During fiscal 1997

                                       43

<PAGE>
and 1996,  the Company  continued  work on  development  projects  that had been
commenced in prior years.  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, 1997, the Company spent a total
of $166,000 on research and  development for its  communication  and information
systems, of which $31,000 was capitalized. 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. During
the fiscal year ended July 31,  1995,  the Company  spent a total of $169,000 on
research and development for its communication and information  systems,  all of
which was charged to expense.

When projects are completed and ready for general use, their costs are amortized
over a four-year  period.  Amortization  expense  recognized  during fiscal 1997
totaled $150,000.

NOTE 9 - BROKER PORTION OF ACCOUNTS RECEIVABLE

Independent brokers and brokers in Company-owned  retail trade locations service
the Company's  clients.  Brokers are entitled to a portion of collections by the
Company from customers of the brokers, which is then payable within 35 days. The
liability  for amounts  estimated to be collected in the future was $552,000 and
$508,000 at July 31, 1997 and 1996, respectively.

NOTE 10 - BANK LINE OF CREDIT

On December 4, 1996,  the Company's  primary bank agreed to a new line of credit
arrangement  with a term  through  December  31,  1997.  Pursuant to the line of
credit,  the Company may 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, 1997,  the Company had no borrowings  outstanding  under the bank
credit facility.  Based on available  collateral,  the entire facility amount of
credit of $250,000 was available to the Company as of July 31, 1997.















                                       44

<PAGE>
NOTE 11 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Notes Payable

At July 31, 1997 and 1996,  long-term debt (including capital lease obligations)
consisted of the following:
<TABLE>
<CAPTION>
                                                                      July 31,
                                                          -------------------------------
                                                               1997              1996
                                                          --------------   --------------
                                                                     (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

   Note payable at $8,300 per month,  including interest
   at 6% per annum                                                   78              185

   Note  payable at $600 per month,  including  interest
   at 8% per annum, collateralized by a vehicle
                                                                     21               26
   Capital leases                                                    65              108
   Other                                                             28             ---
                                                          --------------   --------------
                                                                    192              330
   Less, current maturities                                        (166)            (138)
                                                          --------------   --------------
                                                          $          26    $         192
                                                          ==============   ==============
</TABLE>
The annual maturity of long-term debt (including capital leases) is as follows:

                                                          (in thousands)
                      Fiscal Year Ending July 31,
                           1998                           $         166
                           1999                                      26

Capital Leases

The Company  leases  equipment  under six  noncancellable  capital  leases.  The
leases,  which expire during the years 1998 through 1999,  have terms from three
to five years and  provide for  aggregate  monthly  payments  of $4,200.  Future
payments are included in the annual maturity  schedule above.  Following are the
separate  details of minimum  future lease payments under capital leases for the
next five years are as follows:

                                                              (in thousands)

                      Fiscal Year Ending July 31,
                           1998                               $          44
                           1999                                          26
                                                              --------------
                                                                         70
                      Less, imputed interest                             (5)
                                                              --------------
                      Present value of minimum lease payments            65
                      Less, current portion                             (39)
                                                              --------------
                                                              $          26
                                                              ==============



                                       45

<PAGE>
NOTE 12 - CAPITAL STOCK

Private  Placements.  During the year ended July 31, 1997, the Company  received
proceeds of $179,000 from a private placement of 55,000 units at $3.25 per unit,
each unit consisting of one share of common stock and one warrant.  Each warrant
entitles the holder to purchase one share of common stock for $3.25 through June
18, 1999 and for $4.00 thereafter through June 18, 2000.

During the fiscal  year ended July 31,  1996,  the  Company  completed a private
placement with Newcastle  Services Ltd.  ("Newcastle"),  a foreign  corporation,
which then owned a 51% interest in  Associated  Reciprocal  Traders,  Ltd.,  the
Company's  then  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.

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 

                                       46

<PAGE>
purchase  price that was due for the calendar  quarter ended  September 30, 1996
and following quarters.  Therefore, the Company may cancel 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 Options.  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.

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.

The Board of Directors  adopted a new stock option plan applicable to directors,
officers, employees, and consultants of the Company effective December 27, 1996,
pursuant to which 1,000,000 shares of common stock were reserved for issuance at
an exercise price of $3.75 per share.  Exercise  prices for the options  granted
under  the new plan are  equal to  market  value on the date of grant and may be
exercisable for up to five years.

During  the fiscal  year ended July 31,  1996,  the  Company  received  proceeds
totaling  $1,437,000  from the  exercise of stock  options to  purchase  687,000
shares of common stock.  During the fiscal year ended July 31, 1997, the Company
received  proceeds  totaling  $245,000  from the  exercise  of stock  options to
purchase 120,000 shares of common stock.










                                       47

<PAGE>
Following  is a  summary  of  activity  under  all  stock  option  plans for the
three-year period ended July 31, 1996:
<TABLE>
<CAPTION>
                                                            Option Price (equal to Market
                                      Number of                Value) at Date of Grant
                                                       --------------------------------------
                                       Shares                Per Share               Total
                                   ----------------    -----------------------    -----------
<S>                                <C>                 <C>                        <C>       
   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...................          955,000            1.94-2.50             2,081,000
       Exercises................          (10,000)              1.00                 (10,000)
                                   ----------------                               -----------
   Balance at July 31, 1995.....        1,323,000            1.00-3.38             2,932,000
       Grants...................          905,000               6.13               5,541,000
       Exercises................         (687,000)           1.94-2.50            (1,437,000)
                                   ----------------                               -----------
   Balance at July 31, 1996.....        1,541,000            1.00-6.13             7,036,000
       Grants...................          775,000            3.50-3.75             2,851,000
       Exercises................         (120,000)           1.00-2.50              (245,000)
                                   ----------------                               -----------
   Balance at July 31, 1997.....        2,196,000            1.00-6.13            $9,642,000
                                   ================                               ===========

   Number of shares exercisable:
       July 31, 1997............       2,196,000
                                   ================
       July 31, 1996............       1,541,000
                                   ================
</TABLE>

Effective  September 3, 1997, the Board of Directors  adopted a new stock option
plan pursuant to which options to purchase up to 965,000 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.  Pursuant to the new stock option plan, options to
purchase  765,000  shares were granted on September 3, 1997 at an exercise price
of $3.19 per share.

The Company intends to request action by shareholders on stock option plans that
were  adopted  on  December  27,  1996 and  September  3, 1997 by the  Company's
shareholders at the annual meeting of the Company's  shareholders  scheduled for
January  8,  1998.  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 stock
option  plans that were  adopted on December  15,  1995,  December  27, 1996 and
September 3, 1997.

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 totaling $640,000, of which $410,000 and $640,000 had not been
performed as of July 31, 1997 and 1996, respectively. The Company has classified
these balances as a reduction of stockholders' equity at July 31, 1997 and 1996,
rather than as a prepaid expense and an increase to equity.  The Company expects
to use the balance of prepaid  printing  services  remaining at July 31, 1997 in
future periods.

                                       48

<PAGE>
Stock-Based  Compensation.  The  Company  has adopted  FASB  Statement  No. 123,
"Accounting for Stock-Based  Compensation"  as of August 1, 1996.  Statement 123
allows for the Company to account for its stock option plans in accordance  with
APB  Opinion  No.  25,  "Accounting  for Stock  Issued to  Employees"  using the
intrinsic value method. The Company issued options to purchase 405,000 shares of
common stock to employees during fiscal 1997.

The  following  table  summarizes  the  difference  between  the fair  value and
intrinsic  value  methods  and the pro forma net income and net income per share
amounts for fiscal 1997 had the Company adopted the fair  value-based  method of
accounting for stock-based compensation.

                                                    Year Ended July 1, 1997
                                                     1997             1996
                                                --------------   -------------
                                                     (in thousands, except 
                                                        per share amount)
   Difference between fair value and intrinsic
      value methods (additional compensation
      expense)                                  $         576    $      3,307

   Net income                                           4,121            (633)

   Net income (loss) per share                           0.48           (0.11)


The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model,  with  the  following  weighted  average
assumptions  used for grants in fiscal  1997 and 1996:  dividend  yield of 0.0%,
expected average annual  volatility of 63%,  average annual  risk-free  interest
rate of 6.0%, and expected lives of four years and nine years, respectively.

Because the Statement  123 method of accounting  has not been applied to options
granted prior to August 1, 1996, the resulting pro forma  compensation  cost may
not be  representative  of that to be  expected in future  years.  The impact on
future years is not known or reasonably estimable.

Statement 123 also applies to  transactions in which an entity issues its equity
instruments  to acquire goods or services from  nonemployees.  Accordingly,  the
implementation  of  Statement  123 may have a material  effect on the  Company's
financial  statements  and the pro forma  disclosures  in the notes  thereto  in
future periods.





                                       49

<PAGE>
NOTE 13 - 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, 1997, 1996, and 1995:

                                           Fiscal Years Ended July 31,
                                 --------------------------------------------
                                       1997           1996           1995
                                 --------------   ------------   ------------
                                                 (in thousands)
   Corporate Trading Revenue
       Trade                     $       9,893    $    12,003    $    12,402
       Cash                              1,709          4,933          1,808
                                 --------------   ------------   ------------
                                        11,602         16,936         14,210
                                 --------------   ------------   ------------
   Trade Exchange Revenue
       Trade                             7,566          5,427          4,204
       Cash                             10,016          8,593          5,214
                                 --------------   ------------   ------------
                                        17,582         14,020          9,418
                                 --------------   ------------   ------------
   Total Revenue
       Trade                            17,459         17,430         16,606
       Cash                             11,725         13,526          7,022
                                 --------------   ------------   ------------
                                 $      29,184    $    30,956    $    23,628
                                 ==============   ============   ============

NOTE 14 - FOREIGN LICENSE AGREEMENTS

On December 19, 1996,  the Company  announced  the signing of an agreement  with
Ihlas Holdings, a major Turkish  corporation,  to license an ITEX Trade Exchange
in Turkey,  to be called  Ihlas ITEX Barter SA. Under the  agreement,  which was
effective  January 1, 1997,  Ihlas Holdings  receives  exclusive use of the ITEX
name, trademarks,  and proprietary barter accounting and management software for
use in Turkey.  The Company will receive  royalties based on trade  transactions
generated through the new system,  which will enable Ihlas ITEX clients to trade
with ITEX members in other countries.  Ihlas Holdings is one of Turkey's largest
corporations  and has 57  subsidiaries,  which  include  interests in chemicals,
textiles,  food,  electronics,   health  care,  construction,   media,  banking,
insurance,  and international trade. Ihlas has already taken steps to expand the
Ihlas ITEX barter network into nearby Kazakhistan, Turkistan, and Azerbijan.

The Company has license  arrangements with companies operating in Canada,  South
Africa, and Australia that were established in prior fiscal years. During fiscal
1997,  the Company has signed new agreements  with licensees in Turkey,  Norway,
New  Zealand  and Romania and has  extended  the license  arrangements  in South
Africa and Australia.  In fiscal 1997, the Company reported revenue from foreign
licensees totaling $386,000. The Company has also started to realize association
and  transaction fee revenue based on activity of the foreign  licensees,  which
amounted to $15,000 in fiscal 1997.











                                       50

<PAGE>
NOTE 15 - INCOME TAXES

Comparative analysis of the provisions for income taxes follows:

                                       Fiscal Years Ended July 31,
                        ----------------------------------------------------
                              1997               1996              1995
                        --------------      -------------      -------------
                                           (in thousands)
     Current:
       Federal           $    1,603         $       607         $       475
       State                    244                 125                  94
                        --------------      -------------      -------------
                              1,847                 732                 569
                        --------------      -------------      -------------
     Deferred
       Federal                  (76)                147                 (40)
       State                    (16)                 29                  (7)
                        --------------      -------------      -------------
                                (92)                176                 (47)
                        --------------      -------------      -------------
                        $     1,755         $       908        $        522
                        ==============      =============      =============

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,
                               -----------------------------------------
                                   1997          1996           1995
                               ------------   -----------   ------------
                                            (in thousands)
     Taxes at U.S. Federal
       statutory rate          $     1,417    $      757    $       444
     State income taxes                295           157             92
     Other                              43            (6)           (14)
                               ------------   -----------   ------------
                               $     1,755    $      908    $       522
                               ============   ===========   ============

At July 31, 1997 and 1996,  deferred tax (assets)  liabilities  consisted of the
following:

                                                          July 31,
                                               ----------------------------
                                                   1997            1996
                                               ------------   -------------
                                                      (in thousands)

        Current deferred tax liabilities       $       ---    $      1,253
        Noncurrent deferred tax liabilities             101            265
        Current deferred tax assets                    ---            ---
        Noncurrent deferred tax assets                 ---            ---
        Valuation allowance                            ---            ---
                                               ------------   -------------
                                               $       101    $      1,518
                                               ============   =============

On November 27,  1996,  the 51% owner of  Associated  Reciprocal  Traders,  Inc.
("ART"),  then 49% owned by the  Company,  informed the Company of its intent to
take immediate steps to distribute all the assets of ART 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 was  approximately  $1,590,000.  As a
result of the  perceived  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 was reported as a reduction of the Company's share of equity in net income



                                       51

<PAGE>
(loss) of foreign  affiliate in the statement of operations.  This decreased net
income by $1,247,000, or $0.17 per share.

During fiscal 1997, the Company  explored  alternative  ways of terminating  the
relationship  with the other stockholder of ART and during the quarter ended May
7, 1997,  it was  determined  that this  could be  accomplished  by the  Company
purchasing the other stockholder's interest, in which case the Company would not
repatriate  the foreign  assets of ART. In the  quarter  ended May 7, 1997,  the
Company reversed the deferred  liability for income taxes of $1,247,000 that had
been recorded at July 31, 1997 as described above. On July 30, 1997, the Company
completed the purchase of the remaining 51% interest.

NOTE 16 - 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.  This  modified
version of the treasury stock method,  also referred to as "the 20%  provision,"
is  required  if  the  number  of  shares  issuable  from  the  exercise  of all
outstanding options and warrants exceeds 20% of the number of shares outstanding
at the end of the period.

Under the 20%  provision,  all options and  warrants are assumed to be exercised
(3,737,000  shares at July 31,  1997) but an amount  equal to only 20% of shares
outstanding   (1,441,000  shares  at  July  31,  1997)  may  be  assumed  to  be
repurchased,  which  results  in  incremental  shares  for the  income per share
computation  of  2,296,000   shares,   which  when  added  to  7,207,000  shares
outstanding  at July 31, 1997,  results in a total number of shares of 9,503,000
for the denominator in the income per share  computation for the year ended July
31, 1997.

The numerator for the  computation is equal to net income  increased by a factor
equivalent  to interest  income or a reduction  in interest  expense  that would
result from the use of funds that would be  available  from the  conversion  not
used to repurchase stock because of the 20% limitation.  For the year ended July
31, 1997,  that would result in an increase to net income from  interest  income
and reduction of interest expense, after tax effect,  totaled $448,000.  Because
of these increases in net income that are required by the 20% provision,  income
per share  cannot be  directly  computed  using net  income as  reported  in the
statement of operations.

The effect of the  calculation of income per share using the 20% provision is to
significantly  increase the  denominator of the  computation and to make a small
increase to the  numerator  because  the  earning of only an interest  factor is
presumed on  available  excess  funds.  This results in a decrease in income per
share in  comparison  to income per share  computed  using the normal  "treasury
stock method".








                                       52

<PAGE>
NOTE 17 - FOREIGN SUBSIDIARY

The  Company  has  a  wholly-owned  foreign  subsidiary,  Associated  Reciprocal
Traders,  Inc.  ("ART"),  which  engages in  international  business,  including
commercial barter  transactions as a buyer and seller of goods and services with
companies and businesses in the international  corporate barter marketplace.  In
1993 the Company  purchased a 49% interest in ART and through July 31, 1996, the
Company  accounted for its  investment in and share of net income or loss of ART
by the equity method. All of the undistributed earnings of the 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  provided  for  income  taxes  on  its  share  of  ART's
undistributed  earnings.  As a result of the perceived  inability to continue to
reinvest its share of ART's  earnings,  in the fourth quarter of fiscal 1996 the
Company  recognized a deferred  provision for income taxes of $1,247,000,  which
reduced  net income for the year  ended  July 31,  1996 by $0.17 per share.  The
deferred tax accrual which was reported as a reduction of the Company's share of
equity in net income (loss) of foreign  affiliate in the statement of operations
for the  fiscal  quarter  ended  July 31,  1996.  Commencing  August 1, 1996 and
through July 30, 1997,  the Company  accounted for its  investment in ART by the
cost method.

During fiscal 1997, the Company  explored  alternative  ways of terminating  the
relationship  with the other stockholder of ART and during the quarter ended May
7, 1997,  it was  determined  that this  could be  accomplished  by the  Company
purchasing the other stockholder's interest, in which case the Company would not
repatriate  the foreign  assets of ART. In the  quarter  ended May 7, 1997,  the
Company reversed the deferred  liability for income taxes of $1,247,000 that had
been recorded at July 31, 1996 as described above.

On July 30,  1997,  the Company  completed  the  purchase of the  remaining  51%
interest.  The purchase  price was  $2,840,000,  which was paid by conveyance of
certain of the Company's  available-for-sale  securities and investments in fine
art. The  acquisition  resulted in the  purchase of the  seller's  interest in a
portfolio  of  marketable   securities  held  by  ART.  The  Company  has  fully
consolidated the assets and liabilities of ART in the consolidated balance sheet
at July 31,  1997.  The  previously  owned 49%  interest in the assets of ART is
carried in the  consolidated  balance sheet at July 31, 1997 based on historical
cost. The newly-purchased share has been accounted for by allocating the cost of
the purchase of the 51% interest to the underlying  marketable  securities based
on respective fair values.

During  October  1997,  ART  acquired a 60% interest in 16 acres of improved but
undeveloped resort property known as the Villas Punta Ballena Samana Resort (the
"Samana Resort"), along with associated plans, engineering drawings, permits and
approvals  for  the  resort,  and  a  commitment  for  a  construction  loan  of
approximately $40,000,000.  The Samana Resort is located in the northeast corner
of the Dominican  Republic on the Bay of Samana.  The transaction was structured
as the  purchase  of a 60% equity  interest  in Villas  Punta  Ballena C. por A.
("VPB"),  a  Dominican  Republic  corporation,  the holder of the Samana  Resort
property.  VPB has never had any business operations other than ownership of the
Samana Project.

                                       53

<PAGE>
The total  purchase  price  consisted of cash of  $1,250,000,  ITEX  Corporation
common  stock to have a market  value at time of  issuance  of  $1,000,000,  and
available-for-sale securities totaling $5,142,000 from the portfolio of ART. The
purchase price is to be paid in  installments  ranging from payments at the time
of contract signing to the final payment of ITEX Corporation  common stock which
is due within five days of the  commencement of substantial  construction on the
property.  The value of the acquired  assets has been  determined by independent
appraisal of the property.

ART had no  operations  in the fiscal  year ended July 31,  1997.  Following  is
summary balance sheet data of ART as of July 31, 1996:

                                                           (in thousands)

     Total assets                                         $         5,679
                                                        ======================

     Current liabilities                                  $            84
     Stockholders' equity                                           5,595
                                                        ----------------------
     Total liabilities and equity                         $         5,679
                                                        ======================

The assets of ART as of July 31, 1996 consisted primarily of  available-for-sale
securities, none of which were securities of ITEX Corporation.

Following is financial  information for the Company's  foreign  subsidiary as of
July 31, 1997 and for the year then ended:

                                                           (In thousands)

     Revenue................................            $            ---
                                                        ==================
     Income (loss) from operations..........            $            ---
                                                        ==================
     Identifiable assets....................            $          6,415
                                                        ==================

NOTE 18 - BUSINESS CONCENTRATIONS

One customer  accounted for $6,150,000 or 53% of corporate  trading  revenue and
21% of total revenue for the year ended July 31, 1997.

One customer accounted for approximately  $3,200,000 or 19% of corporate trading
revenue and 10% of total revenue for the year ended July 31, 1996.

Three customers accounted for approximately $6,200,000 or 44% of corporate trade
revenue and 26% of total operating revenues for the year ended July 31, 1995.

The  Company  maintains  its major cash  balances at one  financial  institution
located in Portland,  Oregon.  The  balances are insured by the Federal  Deposit
Insurance  Corporation up to $100,000. At July 31, 1997, the Company's uninsured
cash balance totaled $713,000.

                                     54

<PAGE>
NOTE 19 - 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 thefirst 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
                                                 ===============

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.
Subsequently,  the  Company  transferred  the rights to use of the name  "Travel
Agents  Hotel  Guide".  The  Company  continues  to obtain  hotel room nights in
exchange for  advertising  on the  Company's  web site.  The purchase  price was
allocated as follows:
                                                  (in thousands)


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

                                       55

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

NOTE 20 - 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 now known as IME, Inc., 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 December 20, 1996 SLI filed a motion for partial summary judgment  requesting
that the court rule as a matter of law that the contract is unambiguous and that
the defendants had breached the contract for sale of the 50% interest in the BXI
trade exchange.  If the court found in favor of SLI on these issues,  the motion
asked that the court declare that SLI is 50% owner of the company which owns the
BXI trade  exchange or,  alternatively,  order the  defendants  to take whatever
steps are necessary to transfer the assets of the BXI trade  exchange to BXI. On
March 12,  1997 the court  ruled  from the bench and  granted  SLI's  motion for
partial summary judgment.  On April 8, 1997, the court rejected objections filed
by the  defendants  to the  proposed  judgment  and on April 21,  1997, a formal
judgment  was  entered in favor of SLI.  The  critical  portion of the  judgment
declares  that BEI is the owner of the BXI Trade  Exchange.  The  judgment  also
awards certain  supplemental  relief to effectuate this  declaration,  including
requiring the  defendants:  (a) transfer all assets of the BXI Trade Exchange to
BEI, (b) to provide the court and SLI with  certificates of title to reflect the
fact that BEI owns all assets of the BXI Trade Exchange, and (c) to preserve the
status quo by operating the BXI Trade Exchange in the usual and ordinary  course
of business in conformity with all applicable laws and regulations.

On May 2, 1997, the defendants filed notices of appeal from the judgment entered
against  them.   Defendants   concurrently  filed  a  "Deposit  of  Instruments"
consisting of a "Bill of Sale" and a  "Certificate  of  Ownership".  The Bill of
Sale  purports  to convey all the assets of the BXI Trade  Exchange  to BEI upon
payment of $1,783,000 and if the judgment is affirmed on appeal. The Certificate
states that BEI will own the assets of the BXI Trade Exchange if the judgment is
affirmed on appeal.

                                       56

<PAGE>
The Company believes that these documents do not comply with the requirements of
the  judgment.  SLI  immediately  filed an objection to the  sufficiency  of the
documents  and  asked  that  the  defendants  be  required  to  file a bond in a
sufficient  sum to assure SLI that the judgment will be complied with when it is
upheld on appeal.  A hearing to require a bond of between  $2.5 million and $3.5
million or,  alternatively,  to appoint a receiver was heard on June 3, 1997. By
letter ruling dated June 30, 1997, the Circuit court judge:  (a) ordered that in
order to obtain a stay pending appeal of the judgment,  the defendants must post
a bond  totaling  $1.2  million  and  deposit an  unconditional  certificate  of
ownership and bill of sale, and (b) awarded to SLI $193,000 in attorney fees and
$16,000 in costs.  Pursuant to legal action subsequent to entry of the judgment,
the Court  increased  the attorney fees award to $218,000 and the costs award to
$21,000.

On September 15, 1997, the parties  participated in a mediation program mandated
by the Oregon Court of Appeals.  The parties and their attorneys met for several
hours with a neutral mediator. Mediation does not result in a binding resolution
of the disputes  between the parties.  However,  the Company  believes  that the
mediation  process was  fruitful in that it resulted in a framework  under which
the  parties  may yet be able to settle  the  disputes  without  exhausting  the
litigation  process.  As part of the  efforts  at  settling,  SLI has  agreed to
temporarily  pause  its  actions  in  Nevada  and  California   directed  toward
preserving its interest in the BXI Trade Exchange.


NOTE 21 - 401(k) SAVINGS PLAN AND BONUS 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
$18,000, $10,000 and $7,000 for the plan years ended December 31, 1996, 1995 and
1994, respectively.

The company has a bonus plan for its officers. Bonuses applicable to fiscal 1997
totaled $109,000.

N0TE 22 - 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 Years Ending July 31,
          1998                               $     193
          1999                                     182
          2000                                     183
          2001                                     188
          2002                                      78

Of the minimum rental commitment due in fiscal 1998, $185,000 is payable in cash
and $8,000 is payable in ITEX trade dollars.

                                       57

<PAGE>
N0TE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial  Accounting  Standards Board Statement No. 107 requires the disclosure
of fair value for financial  instruments.  The following disclosures are made in
accordance with the requirements of that Statement. The estimated fair value has
been determined by the Company using  appropriate  valuation  methodologies  and
available or quoted market information.
                                               Carrying Amount      Fair Value
                                               ---------------   ---------------
                                                   (in thousands)
     Assets:
     -------
     Cash                                      $          813    $          813

     Trade dollars                                        786               786

     Accounts receivable                                1,084             1,084

     Notes receivable, current portion                    285               285

     Available-for-sale securities                      7,088             7,088


     Liabilities:
     ------------
     Accounts payable                                     246               246

     Portion of receivables due to brokers                552               552

     Current portion of long-term indebtedness            166               166

     Long-term portion of long-term
       indebtedness                                        26                26

Cash, trade dollars,  accounts receivable,  notes receivable,  accounts payable,
and portion of  receivables  due to brokers.  The  carrying  value of such items
approximates their fair value at July 31, 1997.

Available-for  sale  securities.   These  have  been  valued  using  appropriate
valuation methodologies and available or quoted market prices.

Current and long-term portion of long-term indebtedness. Fair value of such debt
is based on rates  currently  available to the Company for debt of similar terms
and  remaining  maturities.  There are no quoted  market  prices for the debt or
similar debt.













                                       58

<PAGE>

                                     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 10-K:

             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 effective August 24, 1995, 
                 File No. 33-95900)

         10.3    ITEX  Corporation  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 ( incorporated by reference from 
                 Form 10-K filed November 12, 1996)

         10.6    Purchase and Sale Agreement with Pacific Mineral Resources, 
                 Inc., dated July 30, 1997

         10.7    Acquisition Agreement with Newcastle Services, Ltd., dated Jul
                 31, 1997

         10.8    Stock  Purchase  Agreement  with  Villas  Punta  Ballena P. por
                 A. and others  dated  October  16, 1997 (incorporated by 
                 reference from Form 8-K filed October 23, 1997)

         21.     Subsidiaries of the Company:
                   Barter Exchange, Inc., incorporated in Nevada
                   IME, Inc.,  incorporated in Nevada  (previously known as SLI,
                    Inc.)
                   ITEX Marketing Services, Inc., incorporated in Nevada
                   Associated Reciprocal Traders, Ltd., incorporated in the
                     British Virgin Islands

        23.    Consent of Independent Certified Public Accountants

        27.    Financial Data Schedule for the Fiscal Year Ended July 31, 1997



                                       59


<PAGE>
                                                                    Exhibit 10.6
                           PURCHASE AND SALE AGREEMENT


         This  PURCHASE AND SALE  AGREEMENT  (the  "Agreement")  is entered into
effective July 30, 1997 (the AEffective  Date@),  by and between Pacific Mineral
Resources,  Inc., a Nevada  corporation with principal offices at 1050 Flamingo,
Suite  134,  Las  Vegas,  Nevada  (ASeller@),  and  ITEX  Corporation,  a Nevada
corporation  with  principal  offices  at One  Lincoln  Center,  P.O.  Box 2309,
Portland, OR 97208-2309 (APurchaser@).

         WHEREAS,  Seller wishes to sell and Purchaser wishes to purchase all of
Seller's  right,  title and  interest  in and to  certain  non-metallic  mineral
deposits  for the  consideration  hereafter  recited,  all as more  specifically
described below;

         NOW,  THEREFORE,  in  consideration  of the mutual  promises  contained
herein,  the benefits to be derived by each party hereunder,  and other good and
valuable  consideration,  the  receipt  and  sufficiency  of  which  are  hereby
expressly acknowledged, Seller and Purchaser agree as follows:

1.       Purchase and Sale

         Seller agrees to assign,  transfer,  set over and sell to Purchaser all
         of  Seller's  right,  title  and  interest  in and to the  non-metallic
         mineral  deposits  (hereafter the  "Properties")  Properties  which are
         situated in the State of Washington  and more  particular  described in
         Exhibit "A" hereto which is incorporated herein by this reference.

2.       Purchase Price

         The purchase price for the Properties shall be US$6,495,000.00, payable
in the form of:

         A.       US$20,000 in cash, where $10,000 is payable at Closing and 
                  $10,000 to be paid 30 days after Closing;

         B.       130,000  shares  of the  newly  issued  common  stock  of ITEX
                  Corporation  (the  AShares@) in a transaction  exempt from the
                  registration  requirements  of the  Securities Act of 1933, as
                  amended (the "Act").  The Shares will be "restricted stock" as
                  that  term is  defined  pursuant  to the Act and  will  bear a
                  legend  substantially to the effect that the Shares may not be
                  transferred  without  being  registered  under the Act or ITEX
                  Corporation  receiving an opinion of counsel  satisfactory  to
                  ITEX  Corporation  that  an  exemption  from  registration  is
                  available and will  otherwise be subject to Rule 144 under the
                  Act;

         AND

         C. Various items set forth on Exhibit AB@ hereto which is  incorporated
herein by this reference.

3.       Closing and Deliveries

         A.       Closing Date.  Unless  otherwise  agreed  between the parties,
                  closing (the "Closing") shall occur at the office of Purchaser
                  on or before July 30, 1997, or at such other time and place as
                  shall be mutually agreed to in writing by the Parties.


<PAGE>
         B.       Deliveries  by Seller.  At closing,  Seller shall  deliver the
                  following  to  Purchaser,  in  addition to all other steps and
                  actions  as  Purchaser  may  reasonably   request  or  as  may
                  otherwise   by  necessary  to   consummate   the   transaction
                  contemplated hereby.

                  (i)  Properly   executed  Power  of  Attorney   providing  for
                  signature  authority  for the person  whose name is affixed to
                  this Agreement on behalf of Pacific Mineral  Resources,  Inc.;
                  and

                  (ii) All  certificates  or other  documents  sufficient in the
                  judgment of Purchaser to demonstrate that the Properties which
                  are included in this  transaction  are legitimate and existing
                  interests and that said  Properties  will be  transferrred  to
                  Seller  within a  reasonable  period of time at which time the
                  Properties will be recorded with the appropriate county, state
                  and federal  authorities and thence  transferred into the name
                  of Purchaser or that of its designee.

         C.       Deliveries by Purchaser.  At closing, or as soon thereafter as
                  practicable,  Purchaser shall deliver the following to Seller,
                  in addition to all steps and actions as Seller may  reasonably
                  request or as may  otherwise be necessary  to  consummate  the
                  transaction contemplated hereby:

                  (i) A  certificate  or  certificates  for  130,000  restricted
                  shares of ITEX Corporation stock.

                  (ii) A bill  of sale  transferring  all  items  set  forth  on
                  Exhibit AB@ free and clear of all liens and encumbrances. Said
                  goods  shall be  delivered  at  Purchaser=s  primary  place of
                  business,  or such other place as the Parties may agree. Title
                  to and risk of loss of the  items  shall  pass to Seller as of
                  the Closing date.


4.       Representations and Warranties of Seller

         Seller hereby represents and warrants to Purchaser that:
     
         A.       Representations of Seller Regarding Issuance of the Shares.  
                  Seller hereby represents and warrants to Purchaser that:

                  (i) Seller is a corporation  duly organized and existing under
                  the laws of the state of Nevada.

                  (ii)  Seller  acknowledges  that the  receipt of the Shares as
                  consideration  involves  a high  degree  of risk  and  further
                  acknowledges  that it can bear the economic  risk of receiving
                  the Shares as  consideration,  including the total loss of its
                  investment.

                  (iii)  Seller  understands  that the issuance of the Shares is
                  being made pursuant to an exemption  from  registration  under
                  state  law and with the  Securities  and  Exchange  Commission
                  afforded by Section  4(2) of the  Securities  Act of 1933 (the
                  "Act") and/or Regulation D adopted by the Commission  relating
                  to   transactions  by  an  issuer  not  involving  any  public
                  offering. Consequently, the Shares are "restricted securities"
                  as that term is defined under the federal  securities laws and
                  the materials submitted to Seller have not been subject to the

<PAGE>
                  review  and  comment  by  the  Staff  of the  Commission,  the
                  National Association of Securities Dealers,  Inc. or any state
                  securities  regulators.  Therefore,  ITEX is relying  upon the
                  truth  and  accuracy  of  the   representations,   warranties,
                  agreements,  acknowledgments  and understandings of Seller set
                  forth herein and in order to determine  the  applicability  of
                  such  exemptions and the  suitability of Seller to acquire the
                  Shares. As a consequence  thereof,  Seller understands that it
                  must  bear the  economic  risks of  receiving  the  Shares  as
                  consideration  for at least one year  under Rule 144 under the
                  Act because the securities have not been registered  under the
                  Act, and  therefore  are subject to  restrictions  on transfer
                  such  that  the  securities  may  not  be  sold  or  otherwise
                  transferred  unless they are registered  under the Act and any
                  applicable  state  securities  law or an  exemption  from such
                  registration is available.

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

                  (v) In evaluating this investment,  Seller  acknowledges  that
                  none  of  the  information  contained  in  this  Agreement  or
                  received from Purchaser  constitutes  legal or tax advice from
                  Purchaser or any of its  representatives,  and that Seller has
                  had full and complete  opportunity to consult the legal,  tax,
                  financial and other advisors of its choice.

                  (vi) Seller is acquiring  the Shares for  investment  purposes
                  and has no  present  intention  to sell the  Shares.  However,
                  because   Seller  has  elected  to  report  income  under  IRS
                  subchapter  S,  Seller  does  intend to convey the Shares to a
                  maximum  of two of its  shareholders  who will be bound by the
                  same terms and representations as contained in this Agreement.
                  Seller  agrees  not  to  make  any  disposition  of all or any
                  portion  of the Shares  unless and until  there is in effect a
                  registration  statement  under the Act covering  such proposed
                  disposition  and such  disposition is made in accordance  with
                  such  registration  statement,  or Seller shall have furnished
                  Purchaser  with  an  opinion  of  counsel,   satisfactory   to
                  Purchaser  and its  counsel,  that such  disposition  does not
                  require registration under the Act.

                  (vii)  Seller is not an  underwriter  of, or  dealer  in,  the
                  Shares;  and  Seller  is  not  participating,  pursuant  to  a
                  contractual agreement, in the distribution of the Shares other
                  than as set forth in 4.A.(vi) above.

                  (viii)  The  certificate   representing  the  Shares  acquired
                  hereunder   will  bear  a  legend  on  the  face   thereof  in
                  substantially the following form:

                  "These   securities  have  not  been   registered   under  the
                  Securities  Act of 1933,  and may not be offered,  offered for
                  sale,  or sold in the  absence  of an  effective  registration
                  statement under the Act or an opinion of counsel  satisfactory
                  to the corporation that registration is not required."

                  (ix) Seller  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 Shares, or has passed or

<PAGE>
                  made,  or  will  pass  on  or  make,  any   recommendation  or
                  endorsement of the Shares.

                  (x)  Seller  is  an   "accredited   investor"  as  defined  in
                  Regulation  D inasmuch  as Seller is an entity in which all of
                  the equity owners are accredited investors (check if true):

                             XX the net worth (or joint net worth  with  spouse)
                           of  all  equity  owners  of  Seller  at the  time  of
                           execution of this Agreement exceeds $1,000,000.00.

                                       the   equity   owners  of   Seller   have
                           individual income in excess of $200,000.00 in each of
                           the two (2) most  recent  years or joint  income with
                           spouse in excess of  $300,000  in each of those years
                           and said equity  owners of Seller  have a  reasonable
                           expectation  of reaching the same income level in the
                           current year.

                  (xi) Seller  acknowledges  that it has received  copies of all
                  Forms 10-K and 10-Q it has requested.

                  (xii) 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  Shares,  and  shall
                  survive  thereafter.  If Seller  has  knowledge,  prior to the
                  acceptance of this Agreement that any such representations and
                  warranties  shall  not be true and  accurate  in any  respect,
                  Seller, prior to such acceptance,  will give written notice of
                  such fact to Purchaser  specifying which  representations  and
                  warranties are not true and accurate and the reasons therefor.

         B.       Seller the Owner.  Seller  represents  and warrants that it is
                  the owner of the Properties  described in Exhibit "A".  Seller
                  further  represents and warrants that the Properties have been
                  properly  physically staked and recorded,  that all applicable
                  fees and charges have been paid, and that all applicable  laws
                  and  regulations   pertaining  to  the  Properties  have  been
                  complied with by Seller.

         C.       Title and  Related  Matters.  Seller  has good and  marketable
                  title to the  Properties on Exhibit AA@ to this Agreement free
                  and clear of all  mortgages,  security  interests,  royalties,
                  liens, pledges, charges, or encumbrances, except (a) statutory
                  liens or claims not yet delinquent; and (b) such imperfections
                  of title and  easements  as do not,  and will not,  materially
                  detract from, or interfere  with,  the present or proposed use
                  of the  properties  subject  thereto  or  affected  thereby or
                  otherwise  materially  impair present  business  operations on
                  such properties.

         D.       Litigation  and  Proceedings.  There  are no  actions,  suits,
                  administrative  or  other  proceedings   pending  or,  to  the
                  knowledge of Seller  threatened by or against Seller affecting
                  the Properties  described on Exhibit AA@ and to be transferred
                  to  Purchaser  as set  forth in this  Agreement,  at law or in
                  equity,  before  any  court or other  governmental  agency  or
                  instrumentality, domestic or foreign, or before any arbitrator
                  of any kind. Seller does not have any knowledge of any default
                  on its  part  with  respect  to  any  judgment,  order,  writ,
                  injunction,  decree,  award, rule, or regulation of any court,
                  arbitrator, or governmental agency or instrumentality.
<PAGE>
         E.       No Conflict  with Other  Instruments.  The  execution  of this
                  Agreement and the consummation of the transaction contemplated
                  by this Agreement will not result in the breach of any term or
                  provision  of, or  constitute  an event of  default  under any
                  material indenture, mortgage, deed of trust, or other material
                  contract,  agreement, or instrument to which Seller is a party
                  or to  which  any  of  its  properties  or  operations  or the
                  Properties are subject.

         F.       Compliance with Laws, Rules and Regulations.  
                  -------------------------------------------
                  With respect to the Properties,  Seller is not in default with
                  respect to any order, writ, injunction, or decree of any court
                  or federal, state, municipal or other governmental department,
                  commission,  board,  bureau,  agency or  instrumentality,  and
                  there  are  no  actions,   suits,   claims,   proceedings   or
                  investigations   pending  or,  to  the   knowledge  of  Seller
                  threatened against it at law or in equity, or before or by any
                  territorial  federal,  state,  municipal or other governmental
                  court,  department,   commission,  board,  bureau,  agency  or
                  instrumentality,  in connection with the Properties. Purchaser
                  has  complied  in  all  material   respects   with  all  laws,
                  regulations,  orders and state and federal  regulatory filings
                  applicable to the Properties.

         G.       Consent of Third  Parties.  Seller will obtain the consent and
                  approval  of any  and all  third  parties  for the  conveyance
                  reflected  by  this  Agreement,   if  any,  and  will  provide
                  Purchaser  with  written  evidence  of all such  consents  and
                  approvals, to the reasonable satisfaction of Seller.

         H.       Information.  No representation or warranty  contained herein,
                  nor  statement  in  any  document,   certificate  or  schedule
                  furnished  or to be  furnished  pursuant to this  Agreement by
                  Purchaser or in connection with the  transaction  contemplated
                  hereby,  contains  or  contained  any  untrue  statement  of a
                  material  fact, nor does or will omit to state a material fact
                  necessary to make any  statement of fact  contained  herein or
                  therein not misleading.

         I.       Substitute  Properties.  Seller  warrants  that it  will  make
                  available  certain  Substitute  Properties  of  equivalent  or
                  greater  value to Purchaser  upon  Purchaser's  request if any
                  defect in recording or valuation of the  Properties  listed on
                  Exhibit "A" becomes  apparent  during the first six (6) months
                  after Closing.

5.       Representations and Warranties of Purchaser

         A.       Seller hereby represents and warrants to Purchaser that:

                  (i)  Organization.  Purchaser  is, and will be on the  Closing
                  Date, a corporation duly organized,  validly existing,  and in
                  good  standing  under the laws of Nevada and has the corporate
                  power,  and  is  and  will  be  duly  authorized,   qualified,
                  franchised,   and   licensed   under  all   applicable   laws,
                  regulations,  ordinances, and orders of public authorities, to
                  own all of its  properties  and  assets  and to  carry  on its
                  business  in  all  material   respects  as  it  is  now  being
                  conducted, and there are no other jurisdictions in which it is
                  not so  qualified in which the  character  and location of the
                  assets  owned by it or the  nature  of the  material  business

<PAGE>
                  transacted by it requires qualification,  except where failure
                  to do so  would  not have a  material  adverse  effect  on its
                  business,  operations,  properties,  assets, or condition. The
                  execution  and  delivery of this  Agreement  does not, and the
                  consummation   of  the   transactions   contemplated  by  this
                  Agreement  in  accordance  with the  terms  hereof  will  not,
                  violate any provision of Purchaser=s articles of incorporation
                  or  bylaws,  or other  agreement  to which it is a party or by
                  which it is bound.

                  (ii)  Approval  of  Agreements.   Purchaser  has  full  power,
                  authority,  and legal right and has taken,  or shall take, all
                  action required by law, its articles of incorporation, bylaws,
                  and  otherwise  to execute and deliver this  Agreement  and to
                  consummate the transaction herein  contemplated.  The board of
                  directors  of  Purchaser  has   authorized  and  approved  the
                  execution, delivery, and performance of this Agreement and the
                  transaction  contemplated hereby. This Agreement has been duly
                  authorized,  executed,  and  delivered by Purchaser and is the
                  legal, valid and binding obligation of Purchaser,  enforceable
                  in accordance with its terms,  except as such  enforcement may
                  be limited by bankruptcy,  insolvency, or other laws affecting
                  enforcement  of  creditors=  rights  generally  and by general
                  principles of equity.

                  (iii)    Financial Statements.

                           (a)  Included  in the  quarterly  and annual  reports
                           filed by Purchaser  with the  Securities and Exchange
                           Commission  are the balance sheets of Purchaser as of
                           the  dates  of each  such  report,  and  the  related
                           statements of  operations,  stockholder=s  equity and
                           cash flows for the periods indicated therein.

                           (b) All such financial  statements have been prepared
                           in  accordance  with  generally  accepted  accounting
                           principles   consistently   applied   throughout  the
                           periods  involved.  The balance  sheets of  Purchaser
                           present fairly,  as of their  respective  dates,  the
                           financial  position of  Purchaser.  Purchaser did not
                           have,  as of the  date of any  such  balance  sheets,
                           except as and to the  extent  reflected  or  reserved
                           against  therein,   any  liabilities  or  obligations
                           (absolute or contingent) which should be reflected in
                           a balance  sheet or the  notes  thereto  prepared  in
                           accordance   with   generally   accepted   accounting
                           principles,  and all assets reflected therein present
                           fairly the assets of Purchaser,  in  accordance  with
                           generally   accepted   accounting   principles.   The
                           statements of operations,  stockholder=s  equity, and
                           cash flows present fairly the financial  position and
                           results  of  operations  of  Purchaser  as  of  their
                           respective  dates  and  for  the  respective  periods
                           covered  thereby.   Purchaser  maintains  a  standard
                           system of accounting  established and maintained in a
                           manner   permitting  the   preparation  of  financial
                           statements  in  accordance  with  generally  accepted
                           accounting principles.

                  (iv)  Information.  The information  concerning  Purchaser set
                  forth in this Agreement is, as of the respective dates of such
                  information,  complete and  accurate in all material  respects

<PAGE>
                  and did not contain any untrue statement of a material fact or
                  omit to state a material fact required to make the  statements
                  made,  in light of the  circumstances  under  which  they were
                  made, not misleading.  Purchaser shall cause all  instruments,
                  documents,  and other data to be  updated up to and  including
                  the Closing Date.

                  (v)  Warranties   Concerning  the  Shares.   Purchaser  hereby
                  warrants   that  the   Shares   are  free  from  any  and  all
                  encumbrances, claims and restrictions not heretofore disclosed
                  in  writing,  or any other fact which  would  defeat,  hinder,
                  diminish or affect in any way whatsoever the issuance, sale or
                  value of said Shares to Seller.

         B.       Title and Related  Matters.  Purchaser has good and marketable
                  title  to the  items  on  Exhibit  AB@ as set  forth  in  this
                  Agreement free and clear of all mortgages, security interests,
                  royalties,  liens, pledges,  charges, or encumbrances,  except
                  (a) statutory liens or claims not yet delinquent; and (b) such
                  imperfections  of title and easements as do not, and will not,
                  materially  detract  from, or interfere  with,  the present or
                  proposed  use of the  properties  subject  thereto or affected
                  thereby  or  otherwise   materially  impair  present  business
                  operations on such properties.

                  C.  Litigation  and  Proceedings.   
                      -----------------------------
                  There  are  no  actions,   suits,   administrative   or  other
                  proceedings   pending  or,  to  the   knowledge  of  Purchaser
                  threatened  by or  against  Purchaser  affecting  the items on
                  Exhibit AB@ as set forth in this  Agreement to be  transferred
                  to Seller as set forth in this Agreement, at law or at equity,
                  before   any   court   or   other   governmental   agency   or
                  instrumentality, domestic or foreign, or before any arbitrator
                  of any  kind.  Purchaser  does not have any  knowledge  of any
                  default on its part with respect to any judgment, order, writ,
                  injunction,  decree,  award, rule, or regulation of any court,
                  arbitrator, or governmental agency or instrumentality.

         D.       No Conflict  with Other  Instruments.  The  execution  of this
                  Agreement and the consummation of the transaction contemplated
                  by this Agreement will not result in the breach of any term or
                  provision  of, or  constitute  an event of  default  under any
                  material indenture, mortgage, deed of trust, or other material
                  contract,  agreement,  or instrument  to which  Purchaser is a
                  party or to which  any of its  properties  or  operations  are
                  subject.

6.       Termination

         This Agreement may be terminated any time prior to Closing:

         (A)      By Purchaser or Seller:

                  (i)      With  written  notice prior to Closing if there shall
                           be any actual or  threatened  action or proceeding by
                           or before  any court or any other  governmental  body
                           which shall seek to restrain, prohibit, or invalidate
                           the  transaction  contemplated  by this Agreement and
                           which, in the judgment of such party giving notice to
                           terminate and based upon the advice of legal counsel,
                           make it inadvisable to proceed with the  transactions

<PAGE>
                           contemplated by this Agreement; or

         (B)      By Seller:

                  (i)      With written notice pursuant  hereto,  on or prior to
                           Closing, if Purchaser fails to, or does not appear in
                           Seller's sole  discretion,  to be able to comply with
                           the  covenants  or   agreements   contained  in  this
                           Agreement,  or  if  any  of  the  representations  or
                           warranties  of  Purchaser  contained  herein  is,  or
                           becomes,  false or  misleading  or  inaccurate in any
                           material respect.

         (C)      By Purchaser:

                  (i)      With written  notice prior to Closing if Seller fails
                           to comply with the covenants or agreements  contained
                           in this Agreement;  if Purchaser is not satisfied, in
                           Purchaser's sole discretion,  as to the nature of any
                           contingent  liabilities,   if  any,  related  to  its
                           acquisition  and ownership of the  Properties;  or if
                           any of the  representations  or  warranties of Seller
                           contained  herein or in such related  agreements are,
                           or becomes,  false or misleading or inaccurate in any
                           material respect.

7.       Costs and Expenses

         All costs and expenses in the proposed  sale and transfer  described in
         this Agreement  shall be borne by Purchaser and Seller in the following
         manner:

         (A)      Attorneys  Fees and Costs.  Each party,  Seller and Purchaser,
                  having  been   represented  by  their  own  attorney  in  this
                  transaction, shall pay the fees of its attorney, except as may
                  be expressly set forth herein to the contrary;

         (B)      Recording,   Transfer  and   Publishing   Fees.  The  cost  of
                  recording,  transferring  and publishing any notice related to
                  the  Properties  required by applicable law and all attorney's
                  fees relating to  compliance  with said  provisions,  shall be
                  borne by Seller;


         (C)      Other Costs. Each party shall bear its reasonable share of all
                  other Closing costs and expenses arising from this Agreement.

9.       Miscellaneous

         (A)      Authority.  The  persons  executing  this  Agreement  are duly
                  authorized  to do so and  each  party  has  taken  all  action
                  required by law or otherwise  to properly and legally  execute
                  this Agreement.

         (B)      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:

                  To Seller:                Pacific Mineral Resources, Inc.
                            1050 Flamingo, Suite 134
                               Las Vegas, NV 84919


<PAGE>
                  To Purchaser:     ITEX Corporation
                                            One Lincoln Center
                                            P.O. Box 2309
                             Portland, OR 97208-2309

                  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.

         (C)      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.

         (D)      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.

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


         (F)      Applicable  Law.  This  agreement  shall  be  governed  by and
                  construed in accordance  with the laws of the State of Oregon.
                  Venue  shall lie only in the State and  Federal  Courts in and
                  for  the  County  of  Multnomah,  State  of  Oregon  as to all
                  disputes  arising  under  this  agreement,  and such  venue is
                  hereby consented to by the parties hereto.

         (G)      Attorneys'  Fees.  If any  legal  action  or  other  preceding
                  (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,  the  prevailing  party will be  entitled  to
                  recover actual  attorneys' fees  (including  costs for appeals
                  and  collection)  and other  costs  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, or 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)      Broker's or Finder's Fee.  Purchaser  and Seller  warrant that
                  neither has incurred any  liability,  contingent or otherwise,
                  for brokers' for finders' fees or commissions relating to this

<PAGE>
                  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.

         (K)      Amendment or Waiver.  
                  -------------------
                  Every right and remedy  provided  herein  shall be  cumulative
                  with every other right and remedy, either conferred herein, at
                  law, or in equity, and 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  Effective
                  Date, this Agreement may be amended by a writing signed by all
                  parties  hereto,  with  respect to any of the terms  contained
                  herein,  and any terms 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.


         (L)      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.

         (M)      Schedules:  Knowledge.  Each  party is  presumed  to have full
                  knowledge of all  information  set forth in the other  party's
                  schedules  delivered pursuant to this Agreement.  Whenever any
                  negative  representation  is  made to the  "knowledge"  of any
                  party,  it  shall be  deemed  to be a  representation  that no
                  officer  or   director  of  such   party,   after   reasonable
                  investigation, has any knowledge of such matters.

         (N)      Facsimile  Transmission.   A  facsimile,   telecopy  or  other
                  reproduction  of this Agreement may be executed by one or more
                  parties  hereto and such  executed  copy may be  delivered  by
                  facsimile  of similar  instantaneous  electronic  transmission
                  device pursuant to which the signature of or on behalf of such
                  party can be seen,  and such  execution and delivery  shall be
                  considered valid,  binding and effective for all purposes.  At
                  the request of any party hereto,  all parties agree to execute
                  an  original  of this  Agreement  as  well  as any  facsimile,
                  telecopy or other reproduction hereof.

         IN WITNESS  WHEREOF,  the parties have executed this  Agreement the day
and year first above written.

"Seller"
PACIFIC MINERAL RESOURCES, INC.


By     /s/
  Name & Title


"Purchaser"
ITEX CORPORATION


By       /s/
  GRAHAM H. NORRIS, President and CEO
<PAGE>




                                   EXHIBIT "A"

                                   Properties


Four separate unpatented mineral properties commonly referred to as:

1.  BOSSBURG #1

2.  SLATE CREEK #1 AND SLATE CREEK #2

3.  BANKG MOUNTAIN #1

4.  O/S #1 AND O/S #2



<PAGE>



                                    Exhibit B

                                  List of Items

1.  Fine Art Paintings listed on Schedule 1 hereto and valued at $500,000.00

2.  Fine Art Sculptures listed on Schedule 2 hereto and valued at $2,300,000.00

3.  Spot radio advertisements listed on Schedule 3 hereto and valued at 
$1,000,000.00

4.  Other Media credits listed on Schedule 4 hereto and valued at $500,000.00

5.  Television  time due  bills  from  American  Independent  Network  listed on
Schedule 5 hereto and valued at $1,100,000.00

6.  Hotel room night due bill from Palm Villas, Florida, listed on Schedule 6 
hereto and valued at $750,000.00

<PAGE>
                                                                    Exhibit 10.7
                              Acquisition Agreement

<PAGE>

         THIS  ACQUISITION  AGREEMENT  (AAgreement@)  is  entered  into  with an
effective  date of July 31, 1997 (the  AEffective  Date@),  by and between  ITEX
Corporation,  a Nevada Corporation with principal offices at One Lincoln Center,
P.O. Box 2309, Portland,  OR 97208-2309  (AITEX@),  and Newcastle Services Ltd.,
Inc., a non-U.S.  corporation  with  principal  offices at P.O. Box 623, Bank of
Nova Scotia Building, Main Street, Charleston, Nevis, West Indies (ANewcastle@).

                                    Premises

         A. ITEX and Newcastle have  negotiated a transaction  whereby ITEX will
acquire the fifty-one percent (51%) interest in Associated  Reciprocal  Traders,
(AART@), a foreign corporation,  owned by Newcastle in exchange for stock of Sky
Scientific,  Inc.  and  certain  art work owned by ITEX and as set forth in this
Agreement.

         B. The Parties have  reached an  agreement as to the business  terms of
the transaction and desire to set forth the details in this Agreement.

                                    Agreement

         NOW,  THEREFORE,  in consideration of the mutual covenants and promises
contained herein, the Parties agree as follows:

I.       ACQUISITION

         Newcastle shall sell to ITEX and ITEX shall purchase from Newcastle all
         of  Newcastle=s  interest  in  ART.  Newcastle=s  interest  constitutes
         fifty-one  percent (51%) of the issued and outstanding stock of ART and
         will hereafter be referred to as the AART Stock@.

II.      PURCHASE PRICE

         A.       The purchase price for the ART Stock shall be US$3,327,000, 
                  payable in the form of:

                  (i) Transfer to Newcastle  of all of ITEX=s  right,  title and

<PAGE>


<PAGE>

                  interest  in and to the  common  and  preferred  stock  of Sky
                  Scientific,  Inc.,  a U.S.  corporation,  owned by  ITEX,  the
                  precise number and make up of which stock is more particularly
                  described on Exhibit 1 attached hereto; AND

                  (ii)  Transfer to Newcastle of certain art work from among the
                  inventory  of such owned by ITEX and having a total  appraised
                  value of  $590,000,  the  actual  items of which  art work are
                  listed on Exhibit 2 attached hereto, and which will be shipped
                  at the expense of ITEX as reasonably directed by Newcastle.

III.     CLOSING

         A.       The closing  for the  transaction  shall be  ________________,
                  1997,  (the  AClosing  Date@) at 10:00 am at ITEX=s  principal
                  office in Portland, Oregon, or at such other time and place as
                  shall be mutually agreed to in writing by the Parties.

         B.       Deliveries by Newcastle. Newcastle shall deliver the following
                  to ITEX,  in  addition  to all other steps and actions as ITEX
                  may  reasonably  request or as may  otherwise  by necessary to
                  consummate the transaction contemplated hereby.

                  (i)   Certificates  of  good  standing  from  the  appropriate
                  authorities, issued as of a date within five (5) days prior to
                  the Closing  Date,  certifying  that ART and  Newcastle are in
                  good standing as  corporations in the  jurisdictions  in which
                  they are incorporated.

                  (ii)  Copies  of  the  resolutions  of  Newcastle=s  board  of
                  directors or other  governing body  authorizing  the execution
                  and performance of this Agreement.

                  (iii)  All   certificates  or  other  documents   representing
                  Newcastle=s ownership of its 51% interest in ART together with
                  such stock powers or other  instruments  necessary to transfer
                  said certificates or documents on the books of ART.

         C.       Deliveries  by ITEX.  ITEX  shall  deliver  the  following  to
                  Newcastle,  in addition to all steps and actions as  Newcastle

<PAGE>

                  may  reasonably  request or as may  otherwise  be necessary to
                  consummate the transaction contemplated hereby:

                  (i) All certificates  representing ITEX=s ownership of the Sky
                  Scientific,  Inc.  stock,  together  with  such  stock  powers
                  necessary to transfer  said  certificates  or documents on the
                  books of Sky Scientific, Inc.

                  (ii) A bill of sale transferring the works of art as listed on
                  Schedule 2 free and clear of all liens and encumbrances.  Said
                  works of art shall be shipped  or  transferred  as  reasonably
                  directed by Newcastle  at the sole  expense of ITEX.  However,
                  title to and risk of loss of the  works of art  shall  pass to
                  Newcastle as of the Closing Date.

IV.      TERMINATION

         A.       This Agreement may be terminated by the board of directors of 
                  either Party at any time prior to the Closing Date if:

                  (i) A review of all financial and  corporate  information  and
                  proof  of  ownership  of  assets  transferred  and  any  other
                  documents that may be reasonably  requested by a Party to make
                  an  accurate  determination  of the  status  and value of said
                  assets  and to  discharge  the  obligation  of due  diligence,
                  causes the Party to make a reasonable  determination  that the
                  transaction  proposed  in this  Agreement  is not in its  best
                  interests.  Should either Party so determine,  this  Agreement
                  may be terminated, with no further obligation, or an amendment
                  hereto agreeable to both Parties may be proposed; OR

                  (ii)  There  shall  be any  actual  or  threatened  action  or
                  proceeding  before  any court or any  governmental  body which
                  shall  seek  to  restrain,   prohibit,   or   invalidate   the
                  transaction  contemplated  by this Agreement and which, in the
                  judgment of the board of  directors of either  Party,  made in
                  good  faith  and on the  advice  of  legal  counsel,  makes it
                  inadvisable to proceed with the  acquisition  contemplated  by
                  this Agreement; OR


<PAGE>

                  (iii)  Any  of  the  transactions   contemplated   herein  are
                  disapproved  by any  regulatory  authority  whose  approval is
                  required to consummate such  transactions,  or in the judgment
                  of the board of directors of either Party,  made in good faith
                  and  based on the  advice  of  counsel,  there is  substantial
                  likelihood that any such approval will not be obtained or will
                  be obtained only on a condition or  conditions  which would be
                  unduly  burdensome,  making it inadvisable to proceed with the
                  acquisition.

         B.       In the event of termination under this Article, no obligation,
                  right,  or  liability  shall arise  hereunder,  and each Party
                  shall bear all of the  expenses  incurred by it in  connection
                  with  the  negotiation,  preparation,  and  execution  of this
                  Agreement and the transaction contemplated hereby.

V.       REPRESENTATIONS, WARRANTIES, & COVENANTS OF NEWCASTLE

         Newcastle represents, warrants and covenants as follows:

         A.       Organization.  
                  ------------
                  Newcastle  and  ART  are,  and  will be on the  Closing  Date,
                  corporations  duly organized,  validly  existing,  and in good
                  standing under the laws of the  jurisdiction  in which each is
                  incorporated and each has the corporate power, and is and will
                  be duly authorized,  qualified, franchised, and licensed under
                  all applicable laws,  regulations,  ordinances,  and orders of
                  public  authorities  to carry on its  business in all material
                  respects  as it is now  being  conducted.  The  execution  and
                  delivery of this Agreement does not, and the  consummation  of
                  the transactions  contemplated by this Agreement in accordance
                  with the terms  hereof  will not,  violate  any  provision  of
                  Newcastle=s or ART's articles of incorporation  or bylaws,  or
                  other  agreement to which either is a party or by which either
                  is bound.

         B.       Approval of Agreements.  Newcastle has full power,  authority,
                  and legal  right and has  taken,  or shall  take,  all  action
                  required by law, its articles of  incorporation,  bylaws,  and

<PAGE>

                  otherwise  to  execute  and  deliver  this  Agreement  and  to
                  consummate the transaction herein contemplated. This Agreement
                  has been duly authorized, executed, and delivered by Newcastle
                  and is the legal,  valid and binding  obligation of Newcastle,
                  enforceable in accordance with its terms.

         C.       Capitalization.  
                  --------------
                  The   authorized    capitalization    of   ART   consists   of
                  _______________   shares  of  preferred  stock,  par  value  $
                  ________  per  share,  of which  ____________  are  issued and
                  outstanding  as of the  Closing  Date  and  __________________
                  shares of Common Stock, par value $_______ per share, of which
                  __________________  are  issued  and  outstanding  as  of  the
                  Closing Date,  (the AART Stock@).  All issued and  outstanding
                  shares  of  ART  are   legally   issued,   fully   paid,   and
                  nonassessable and not issued in violation of the preemptive or
                  other right of any person as of the Closing Date. There are no
                  dividends or other  amounts due or payable with respect to any
                  of the shares of capital stock of ART.

         D.       Financial Statements.

                  (i) Prior to the Closing Date,  Newcastle will provide to ITEX
                  the following with respect to ART:

                           (1) financial statements (audited, if available), and
                  financial  documentation  for the three (3) years prior to the
                  Effective  Date and all  historical  financial  statements and
                  financial information whether audited or not;

                           (2)  pro-forma financial information;

                           (3)  due-diligence materials;

                           (4)  articles of incorporation and by-laws;

                           (5)  business plans;

                           (6)   proof  of   ownership   of   assets,   accounts

<PAGE>

                  receivable,  bank  statements,  and  copies of  deeds,  liens,
                  mortgages;

                           (7) a  certificate  of good  standing  issued  by the
                  jurisdiction of incorporation;

                           (8)  any  other  documents  that  may  be  reasonably
                  required  by  ITEX  to  complete  its  due  diligence  for the
                  transactions contemplated in this Agreement and to permit ITEX
                  to operate ART upon transfer of the ART stock to ITEX.

                  (ii)  Newcastle  warrants  that all  financial  statements  it
                  provides  have been  prepared  in  accordance  with  generally
                  accepted accounting principles consistently applied throughout
                  the  periods  involved  as  explained  in the  notes  to  such
                  financial  statements.  The ART balance sheets present fairly,
                  in all material  respects,  as of their respective  dates, the
                  financial position of ART. ART did not have, as of the date of
                  any such balance sheets, except as and to the extent reflected
                  or reserved  against  therein,  any liabilities or obligations
                  (absolute  or  contingent)  which  should  be  reflected  in a
                  balance sheet or the notes thereto prepared in accordance with
                  generally accepted accounting principles under which they were
                  prepared,  and all assets reflected therein present fairly the
                  assets of ART in accordance with generally accepted accounting
                  principles  under which they were prepared.  The  consolidated
                  statements of operations,  shareholders= equity and cash flows
                  present fairly the consolidated financial position and results
                  of operations of ART as of their  respective dates and for the
                  respective periods covered thereby.  Newcastle shall cause ART
                  to  continue  to  maintain  a  standard  system of  accounting
                  established   and  maintained  in  a  manner   permitting  the
                  preparation  of  financial   statements  in  accordance   with
                  generally accepted accounting principles under which they were
                  prepared.

                  (iii) The books and records,  financial and otherwise,  of ART
                  are in all  material  respects  complete  and correct and have
                  been   maintained  in  accordance   with  sound  business  and
                  bookkeeping  practices so as to accurately and fairly reflect,

<PAGE>

                  in reasonable  detail, the transactions in and dispositions of
                  the assets of ART.  ART has  maintained  a system of  internal
                  accounting   controls   sufficient   to   provide   reasonable
                  assurances that

                           (1) any  transactions  have been and are  executed in
                  accordance    with    management=s    general   or    specific
                  authorization;

                           (2) such  transactions  are  recorded as necessary to
                  permit the  preparation of financial  statements in conformity
                  with  generally  accepted  accounting  principles or any other
                  criteria   applicable  to  such  statements  and  to  maintain
                  accountability for assets;

                           (3) access to assets is permitted  only in accordance
                   with management=s general or specific authorization; AND

                           (4)  the  recorded   accountability   for  assets  is
                  compared with the existing assets at reasonable intervals, and
                  appropriate action is taken with respect to any differences.

                  (iv) ART has filed or will have filed as of the  Closing  Date
                  all tax returns  required to be filed by it from  inception to
                  the Closing  Date.  All such  returns and reports are accurate
                  and correct in all material  respects.  ART has no liabilities
                  with  respect  to the  payment  of any  taxes  (including  any
                  deficiencies,   interest,   or   penalties)   accrued  for  or
                  applicable  to the period ended on the date of the most recent
                  audited  balance  sheet and  adequately  provided for, and all
                  such dates and years and periods  prior  thereto and for which
                  ART may at said date  have been  liable in its own right or as
                  transferee  of the  assets of, or as  successor  to, any other
                  corporation  or entity,  except for taxes  accrued but not yet
                  due and  payable,  and no  deficiency  assessment  or proposed
                  adjustment  of any such tax return is  pending,  proposed,  or
                  contemplated.  ART has not made any  election  pursuant to the
                  provisions of any  applicable  tax laws (other than  elections
                  that relate solely to methods of accounting,  depreciation, or
                  amortization)  that would have a  material  adverse  effect on

<PAGE>

                  ART,  its  financial  condition,  its  business  as  presently
                  conducted  or  proposed  to  be  conducted,   or  any  of  its
                  respective properties or material assets. Except as disclosed,
                  there are no tax  liens  upon any of the  assets  of ART,  and
                  there are no outstanding  agreements or waivers  extending the
                  statutory period of limitation applicable to any tax return of
                  ART.

         E.       Information.  The information concerning ART and Newcastle set
                  forth in this  Agreement and in any Exhibits  attached  hereto
                  are, as of the respective dates of such information,  complete
                  and accurate in all material  respects and did not contain any
                  untrue  statement  of a  material  fact  or  omit  to  state a
                  material fact required to make the  statements  made, in light
                  of  the   circumstances   under  which  they  were  made,  not
                  misleading. Newcastle shall cause all instruments,  documents,
                  and other data to be updated  after the  Effective  Date up to
                  and including the Closing Date.

         F.       No Options or  Warrants.  There are no  warrants  or  options,
                  other calls,  or commitments of any character  relating to the
                  authorized  and unissued  stock of ART as of the Closing Date.
                  In addition,  from and after the execution of this  Agreement,
                  ART will not issue any  additional  stock  without the written
                  consent of ITEX.

         G.       Absence of Certain  Changes or Events.  Except as set forth in
                  Schedule  5G,  herein,  since the date of the most  recent ART
                  balance  sheet   described  in  Article  V.D,   including  the
                  additional information referred to in Article V.E:

                  (i)      There has not been:

                           (1) any  material  adverse  change  in the  business,
                  operations,   properties,   level  of  inventory,  assets,  or
                  condition of ART taken as a whole, OR

                           (2) any damage,  destruction, or loss to ART (whether
                  or  not  covered  by  insurance)   materially   and  adversely
                  affecting the business,  operations,  properties,  assets,  or

<PAGE>

                  conditions of ART taken as a whole;

                  (ii)     ART has not:

                           (1) amended its articles of incorporation or bylaws;

                           (2)  declared or made,  or agreed to declare or make,
                  any payment or dividends or distributions of any assets of any
                  kind whatsoever to  stockholders or purchased or redeemed,  or
                  agreed to purchase or redeem, any of its capital stock;

                           (3) waived any rights of value which in the aggregate
                  are extraordinary or material considering the business of ART;

                           (4)  made  any  material  change  in  its  method  of
                  management, operation, or accounting;

                           (5) entered into any other material transactions;

                           (6) made any accrual or arrangement for or payment of
                  bonuses or special  compensation  of any kind or any severance
                  or  termination  pay to  any  present  or  former  officer  or
                  employee;

                           (7) increased the rate of compensation  payable or to
                  become  payable by it to any of its  officers or  directors or
                  any of its employees  whose monthly  compensation  exceeds One
                  Thousands Dollars (US$1,000); OR

                           (8) made any increase in any  profit-sharing,  bonus,
                  deferred  compensation,  insurance,  pension,  retirement,  or
                  other employee benefit plan,  payment, or arrangement made to,
                  for, or with its officers, directors, or employees;

                  (iii) ART has not:

                           (1) granted or agreed to grant any options, warrants,
                  or other  rights for its  stocks,  bonds,  or other  corporate
                  securities calling for the issuance thereof;


<PAGE>

                           (2)  borrowed  or  agreed  to  borrow  any  funds  or
                  incurred,  or become  subject to, any material  obligation  or
                  liability (absolute or contingent) except liabilities incurred
                  in the ordinary course of business;

                           (3)  paid  any  material   obligation   or  liability
                  (absolute  or  contingent)  other  than  current   liabilities
                  reflected in or shown on the most recent ART balance sheet and
                  current  liabilities  incurred since that date in the ordinary
                  course of business;

                           (4)  sold  or  transferred,  or  agreed  to  sell  or
                  transfer,  any of its assets,  properties,  or rights  (except
                  assets,  properties,  or  rights  not  used or  useful  in its
                  business  which,  in the  aggregate,  are of a value less than
                  US$5,000);

                           (5) made or permitted any amendment or termination of
                  any contract,  agreement, or license to which it is a party if
                  such amendment or termination is material; OR

                           (6) issued,  delivered, or agreed to issue or deliver
                  any stock,  bonds,  or other  corporate  securities  including
                  debentures   (whether  authorized  and  unissued  or  held  as
                  treasury stock);

                  AND

                  (iv) To the best knowledge of ART is not subject to any law or
                  regulation which materially and adversely  affects,  or in the
                  future  may  adversely  affect,   the  business,   operations,
                  properties, or assets of ART.

         H.       Title and Related Matters.  
                  -------------------------
                  Except as  disclosed  in Schedule 5H hereto or the most recent
                  ART  balance  sheet  and the notes  thereto,  ART has good and
                  marketable   title  to  all  of  its  properties,   inventory,
                  interests in  properties,  and assets,  which are reflected in
                  the most recent ART balance sheet or acquired  after that date

<PAGE>

                  (except those sold or otherwise disposed of since such date in
                  the  ordinary  course  of  business),  free  and  clear of all
                  mortgages,  security  interests,  royalties,  liens,  pledges,
                  charges, or encumbrances, except (a) statutory liens or claims
                  not yet delinquent;  and (b) such  imperfections  of title and
                  easements as do not, and will not, materially detract from, or
                  interfere  with, the present or proposed use of the properties
                  subject  thereto or affected  thereby or otherwise  materially
                  impair present business operations on such properties.

         I.       Litigation and Proceedings. Except as set forth in Schedule 5I
                  hereto, there are no actions,  suits,  administrative or other
                  proceedings  pending or, to the  knowledge of Newcastle or ART
                  threatened   by  or  against  ART  or  affecting  ART  or  its
                  properties,  at law or at  equity,  before  any court or other
                  governmental agency or  instrumentality,  domestic or foreign,
                  or before any arbitrator of any kind.  Newcastle does not have
                  any  knowledge  of any  default on its part or the part of ART
                  with respect to any judgment, order, writ, injunction, decree,
                  award,  rule,  or  regulation  of any  court,  arbitrator,  or
                  governmental agency or instrumentality.

         J.       Contracts.  Except as set forth in Schedule 5J hereto:

                  (i) All contracts, agreements, franchises, license agreements,
                  and other  commitments to which ART is a party or by which its
                  properties  are bound and which are material to the operations
                  or financial condition of ART are valid and enforceable by ART
                  in all material respects;

                  (ii) Neither  Newcastle nor ART is a party to or bound by, and
                  its  properties  are not  subject to, any  material  contract,
                  agreement,  other  commitment  or  instrument;  any charter or
                  other corporate  restriction;  or any judgment,  order,  writ,
                  injunction,  decree,  or award which  materially and adversely
                  affects,  or in the  future may (as far as  Newcastle  can now
                  foresee)   materially  and  adversely  affect,  the  business,
                  operations, properties, assets, or condition of ART;

                  AND
<PAGE>

                  (iii) ART is not a party to any oral or written:

                           (1)  contract  for  the  employment  of any  officer,
                  director,  or employee  which is not terminable on thirty (30)
                  days- (or less) notice;

                           (2) agreement, contract, or indenture relating to the
                  borrowing of money;

                           (3)  guarantee of any  obligation,  other than one on
                  which ART is a primary obligor,  for the borrowing of money or
                  otherwise,  excluding  endorsements  made for  collection  and
                  other  guarantees of  obligations,  which, in the aggregate do
                  not exceed One Thousand Dollars (US$1,000);

                           (4)  consulting  or other  similar  contract  with an
                  unexpired  term  for  more  than  one  year or  providing  for
                  payments in excess of One Thousand  Dollars  (US$1,000) in the
                  aggregate;

                           (5) agreement  with any present or former  officer of
                  ART, OR

                           (6)   contract,   agreement,   or  other   commitment
                  involving  payments  by it of more than One  Thousand  Dollars
                  (US$1,000), in the aggregate.

         K.       Material  Contract  Defaults.  ART is not  in  default  in any
                  material respect under the terms of any outstanding  contract,
                  agreement, lease, or other commitment which is material to its
                  business,  operations,  properties, assets, or condition taken
                  as a whole,  and there is no event of default  or other  event
                  which, with notice and lapse of time or both, would constitute
                  a default in any  material  respect  under any such  contract,
                  agreement,  lease,  or other  commitment  in respect under any
                  such  contract,  agreement,  lease,  or  other  commitment  in
                  respect of which ART has not taken  adequate  steps to prevent
                  such a default from occurring.


<PAGE>

         L.       No Conflict  with Other  Instruments.  The  execution  of this
                  Agreement and the consummation of the transaction contemplated
                  by this Agreement will not result in the breach of any term or
                  provision  of, or constitute  an event of default  under,  any
                  material indenture, mortgage, deed of trust, or other material
                  contract,  agreement,  or instrument to which Newcastle or ART
                  is a party or to which any of the  properties or operations of
                  either is subject.

         M.       Governmental Authorization.  ART has all licenses, franchises,
                  permits,  and  other  governmental   authorizations  that  are
                  legally required to enable it to conduct its businesses in all
                  material  respects as conducted on the date of this Agreement.
                  No  authorization,   approval,   consent,   or  order  of,  or
                  registration,  declaration, or filing with, any court or other
                  governmental body is required in connection with the execution
                  and  delivery  by  Newcastle   of  this   Agreement   and  the
                  consummation   by  Newcastle   or  ART  of  the   transactions
                  contemplated hereby.

         N.       Compliance with Laws and  Regulations.  Newcastle and ART have
                  complied with all applicable  statutes and  regulations of any
                  federal,   state,  or  other  governmental  entity  or  agency
                  thereof,  except to the extent  that  noncompliance  would not
                  materially  and  adversely  affect the  business,  operations,
                  properties,  assets,  or  condition of ART taken as a whole or
                  except to the extent  that  noncompliance  would not result in
                  the occurrence of any material liability for ART.

         O.       Insurance.  All of the insurable properties of ART are insured
                  for  its  benefit  in the  amount  of full  replacement  value
                  (subject to reasonable deductibles) against losses due to fire
                  and other casualty,  with extended  coverage,  and other risks
                  customarily  insured  against  by  persons  operating  similar
                  properties  are  located  and  under  valid  and   enforceable
                  policies issued by insurers of recognized responsibility. Such
                  policy  or  policies   containing   substantially   equivalent
                  coverage will be outstanding  and in full force at the Closing
                  Date,  and copies of said policy or policies have been or will
                  be, prior to Closing, delivered to ITEX.
<PAGE>

VI.      REPRESENTATIONS, COVENANTS, & WARRANTIES OF ITEX

         ITEX represents and warrants as follows:

         A.       Organization.  
                  ------------
                  ITEX is, and will be on the Closing Date, a  corporation  duly
                  organized,  validly  existing,  and in good standing under the
                  laws of the State of Nevada, United States of America, and has
                  the  corporate  power,  and is and  will be  duly  authorized,
                  qualified, franchised, and licensed under all applicable laws,
                  regulations,  ordinances, and orders of public authorities, to
                  own all of its  properties  and  assets  and to  carry  on its
                  business  in  all  material   respects  as  it  is  now  being
                  conducted, and there are no other jurisdictions in which it is
                  not so  qualified in which the  character  and location of the
                  assets  owned by it or the  nature  of the  material  business
                  transacted by it requires qualification,  except where failure
                  to do so  would  not have a  material  adverse  effect  on its
                  business,  operations,  properties,  assets, or condition. The
                  execution  and  delivery of this  Agreement  does not, and the
                  consummation   of  the   transactions   contemplated  by  this
                  Agreement  in  accordance  with the  terms  hereof  will  not,
                  violate any provision of ITEX=s articles of  incorporation  or
                  bylaws,  or other agreement to which it is a party or by which
                  it is bound.

         B.       Approval of Agreements.  
                  ----------------------
                  ITEX has full power, authority, and legal right and has taken,
                  or shall take,  all action  required by law,  its  articles of
                  incorporation,  bylaws,  and  otherwise to execute and deliver
                  this  Agreement  and  to  consummate  the  transaction  herein
                  contemplated.  The board of directors  of ITEX has  authorized
                  and approved the execution,  delivery, and performance of this
                  Agreement  and  the  transaction   contemplated  hereby.  This
                  Agreement has been duly authorized, executed, and delivered by
                  ITEX and is the legal,  valid and binding  obligation of ITEX,
                  enforceable  in  accordance  with its  terms,  except  as such

<PAGE>

                  enforcement may be limited by bankruptcy, insolvency, or other
                  laws affecting  enforcement of creditors= rights generally and
                  by general principles of equity.

         C.       Financial Statements.

                  (i) Included in the  quarterly  and annual  reports files with
                  the Securities and Exchange  Commission are the balance sheets
                  of ITEX as of the dates of each such  report,  and the related
                  statements of operations,  stockholder=s equity and cash flows
                  for the periods indicated therein.

                  (ii) All such  financial  statements  have  been  prepared  in
                  accordance  with  generally  accepted  accounting   principles
                  consistently  applied  throughout  the periods  involved.  The
                  balance sheets of ITEX present fairly,  as of their respective
                  dates,  the financial  position of ITEX. ITEX did not have, as
                  of the date of any such balance  sheets,  except as and to the
                  extent reflected or reserved against therein,  any liabilities
                  or  obligations  (absolute  or  contingent)  which  should  be
                  reflected in a balance sheet or the notes thereto  prepared in
                  accordance with generally accepted accounting principles.  and
                  all  assets  reflected  therein  present  fairly the assets of
                  ITEX,  in  accordance  with  generally   accepted   accounting
                  principles.   The  statements  of  operations,   stockholder=s
                  equity,  and cash flows present fairly the financial  position
                  and results of operations of ITEX as of their respective dates
                  and for the respective periods covered thereby. ITEX maintains
                  a standard system of accounting  established and maintained in
                  a manner permitting the preparation of financial statements in
                  accordance with generally accepted accounting principles.

         D.       Information. The information concerning ITEX set forth in this
                  Agreement and in any Schedules  attached  hereto is, as of the
                  respective dates of such information, complete and accurate in
                  all material respects and did not contain any untrue statement
                  of a material  fact or omit to state a material  fact required
                  to make the  statements  made,  in light of the  circumstances
                  under which they were made, not  misleading.  ITEX shall cause
                  all instruments, documents, and other data to be updated after

<PAGE>

                  the Effective Date up to and including the Closing Date.

         E.       Title and Related Matters.  Except as disclosed in Schedule 6E
                  hereto or the most recent  audited ITEX balance  sheet and the
                  notes thereto, ITEX has good and marketable title to:

                  (i)     the common and preferred stock of Sky Scientific, Inc.
                  as set forth in this Agreement; and

                  (ii)     all art work as set forth in this Agreement

                  free  and  clear  of  all   mortgages,   security   interests,
                  royalties,  liens, pledges,  charges, or encumbrances,  except
                  (a) statutory liens or claims not yet delinquent; and (b) such
                  imperfections  of title and easements as do not, and will not,
                  materially  detract  from, or interfere  with,  the present or
                  proposed  use of the  properties  subject  thereto or affected
                  thereby  or  otherwise   materially  impair  present  business
                  operations on such properties.

         F.       Litigation and Proceedings.  
                  --------------------------
                  Except  as set  forth in  Schedule  6F  hereto,  there  are no
                  actions,  suits,  administrative or other proceedings  pending
                  or, to the  knowledge  of ITEX  threatened  by or against ITEX
                  affecting the property to be  transferred  to Newcastle as set
                  forth in this Agreement, at law or at equity, before any court
                  or other governmental agency or  instrumentality,  domestic or
                  foreign,  or before any arbitrator of any kind.  ITEX does not
                  have any  knowledge of any default on its part with respect to
                  any judgment, order, writ, injunction, decree, award, rule, or
                  regulation of any court, arbitrator, or governmental agency or
                  instrumentality.

         G.       No Conflict  with Other  Instruments.  The  execution  of this
                  Agreement and the consummation of the transaction contemplated
                  by this Agreement will not result in the breach of any term or
                  provision  of, or constitute  an event of default  under,  any
                  material indenture, mortgage, deed of trust, or other material
                  contract, agreement, or instrument to which ITEX is a party or

<PAGE>

                  to which any of its properties or operations are subject.

         H.       Governmental Authorization. ITEX has all licenses, franchises,
                  permits,  and  other  governmental   authorizations  that  are
                  legally required to enable it to conduct its businesses in all
                  material  respects as conducted on the date of this Agreement.
                  No  authorization,   approval,   consent,   or  order  of,  or
                  registration,  declaration, or filing with, any court or other
                  governmental body is required in connection with the execution
                  and delivery by ITEX of this Agreement and the consummation by
                  ITEX of the transactions contemplated hereby.

         I.       Compliance with Laws and  Regulations.  ITEX has complied with
                  all applicable statutes and regulations of any federal, state,
                  or other governmental entity or agency thereof,  except to the
                  extent that  noncompliance  would not materially and adversely
                  affect  the  business,  operations,   properties,  assets,  or
                  condition  of ITEX  taken as a whole or except  to the  extent
                  that  noncompliance  would not result in the occurrence of any
                  material liability for ITEX.

         J.       Insurance. All of the art work to be transferred to Newcastle,
                  as set forth in this Agreement,  is insured for ITEX=s benefit
                  in the amount of full  appraised  value (subject to reasonable
                  deductibles)  against  losses due to fire and other  casualty,
                  with extended  coverage,  and other risks customarily  insured
                  against by persons  operating  similar  properties are located
                  and under valid and enforceable policies issued by insurers of
                  recognized responsibility.

VII.     SPECIAL COVENANTS TO BE SATISFIED PRIOR TO CLOSING

         A.       Activities of Newcastle, ART and ITEX.

                  (i)  From  and  after  the date of this  Agreement  until  the
                  Closing  Date  and  except  as set  forth  in  the  respective
                  schedules  to be  delivered  by  Newcastle  and ITEX  pursuant
                  hereto or as permitted  and  contemplated  by this  Agreement,
                  Newcastle, ART and ITEX shall each:


<PAGE>

                           (1) carry on its business in substantially the same 
                  manner as it has heretofore;

                           (2)  maintain  in full  force  and  effect  insurance
                  comparable  in  amount  and in scope of  coverage  to that now
                  maintained by it;

                           (3)  perform  in  all  material  respects  all of its
                  obligations under material contracts,  leases, and instruments
                  relating to or affecting its assets, properties, and business;

                           (4) use its best efforts to maintain and preserve its
                  business organization intact, to retain its key employees, and
                  to maintain its relationships  with its material suppliers and
                  customers;

                           (5) duly and timely file for all  taxable  periods on
                  or prior to the Closing  Date all tax  returns  required to be
                  filed by or on behalf of such  entity or for which such entity
                  may be held  responsible  and shall pay, or cause to pay,  all
                  taxes  required  to be shown  as due and  payable  during  the
                  period  commencing on the date of this Agreement and ending on
                  the Closing Date.  All such tax returns shall be prepared in a
                  manner  consistent  with the  preparation  of prior years= tax
                  returns  except  as  required  by law or as  agreed  to by the
                  parties hereto prior to the filing thereof;

                           (6) fully  comply  with and  perform in all  material
                  respects  all  obligations  and  duties  imposed  on it by all
                  federal,   state,  county,  and  local  laws  and  all  rules,
                  regulations, and orders imposed by federal, state, county, and
                  local governmental authorities.

                  (ii) From and after the date of this  Agreement  and except as
                  provided  herein until the Closing Date,  Newcastle  shall NOT
                  permit ART to:

                           (1) make any change in their articles of 
                  incorporation or bylaws;


<PAGE>

                           (2)  take  any  action   described  in  Article  V.F,
                  regarding options or warrants;

                           (3) enter into or amend any contract,  agreement,  or
                  other instrument of any of the types described in such party=s
                  schedules,  except  that a party may  enter  into or amend any
                  contract,  agreement,  or  other  instrument  in the  ordinary
                  course of business; OR

                           (4)  enter  into  any  agreement,  waiver,  or  other
                  arrangement providing for an extension of time with respect to
                  payment by, or assessment  against,  such entity or any of its
                  subsidiaries  of any tax due and payable  with  respect to the
                  period  commencing on the date of this Agreement and ending on
                  the Closing Date.

         B.       Indemnification   by  ITEX.  ITEX  shall  indemnify  and  hold
                  harmless Newcastle and its directors,  officers and employees,
                  from  and  against  any  and  all  losses,  claims,   damages,
                  expenses,  liabilities,  or  actions  to which any of them may
                  become  subject under  applicable law that arise out of or are
                  based  upon  actions or  omissions  of ART  subsequent  to the
                  transfer  of the  ART  Stock  to  ITEX  as set  forth  in this
                  Agreement.

                  This indemnity  agreement  shall remain  operative and in full
                  force and effect,  regardless of any investigation  made by or
                  on behalf of Newcastle and shall survive the  consummation  of
                  the transaction contemplated by this Agreement.

         C.       Indemnification  by Newcastle.  Newcastle  shall indemnify and
                  hold harmless ITEX and its directors,  officers and employees,
                  from  and  against  any  and  all  losses,  claims,   damages,
                  expenses,  liabilities,  or  actions  to which any of them may
                  become  subject under  applicable law that arise out of or are
                  based upon  actions or  omissions of ART prior to the transfer
                  of the ART Stock to ITEX as set forth in this Agreement.

                  This indemnity  agreement  shall remain  operative and in full
                  force and effect,  regardless of any investigation  made by or

<PAGE>

                  on behalf of ITEX and shall  survive the  consummation  of the
                  transaction contemplated by this Agreement.

         D.       Third-Party  Consents.  Newcastle  and ITEX agree to cooperate
                  with each other in order to obtain any third-party consents to
                  this Agreement and the transaction  herein  contemplated  that
                  are required.

VIII.    CONDITIONS PRECEDENT TO OBLIGATIONS OF ITEX

         The  obligations  of ITEX  under  this  Agreement  are  subject  to the
         satisfaction   at  or  before  the  Closing   Date,  of  the  following
         conditions:

         A.       Accuracy   of   Representations.   The   representations   and
                  warranties  made by Newcastle in this Agreement were true when
                  made and shall be true at the Closing Date (except for changes
                  therein permitted by this Agreement), and Newcastle shall have
                  performed  or  complied  with  all  covenants  and  conditions
                  required by this Agreement to be performed or complied with by
                  Newcastle prior to or at the Closing.

         B.       No Material  Adverse Change.  Prior to the Closing Date, there
                  shall not have  occurred  any material  adverse  change in the
                  financial condition, business, or operations of ART, nor shall
                  any event have occurred  which,  with the lapse of time or the
                  giving of  notice,  may cause or create any  material  adverse
                  change in the financial condition,  business, or operations of
                  ART.

         C.       Good  Standing.  ITEX  shall  receive  a  certificate  of good
                  standing from the appropriate  authorities,  dated within five
                  (5) days prior to the Closing Date,  certifying that ART is in
                  good standing as a corporation of the jurisdiction  wherein it
                  is incorporated.

         D.       Other Items. ITEX shall have received such further  documents,
                  certificates,  or  instruments  relating  to  the  transaction
                  contemplated hereby as ITEX may reasonably request.


<PAGE>

IX.      CONDITIONS PRECEDENT TO OBLIGATIONS OF NEWCASTLE

         The  obligations  of Newcastle  under this Agreement are subject to the
         satisfaction   at  or  before  the  Closing   Date,  of  the  following
         conditions:

         A.       Accuracy   of   Representations.   The   representations   and
                  warranties  made by ITEX in this Agreement were true when made
                  and shall be true at the  Closing  Date  (except  for  changes
                  therein  permitted  by this  Agreement),  and ITEX  shall have
                  performed  or  complied  with  all  covenants  and  conditions
                  required by this Agreement to be performed or complied with by
                  ITEX prior to or at the Closing.

         B.       No Material  Adverse Change.  Prior to the Closing Date, there
                  shall not have  occurred  any material  adverse  change in the
                  financial  condition,  business,  or operations  of ITEX,  nor
                  shall any event have occurred which, with the lapse of time or
                  the giving of notice, may cause or create any material adverse
                  change in the financial condition,  business, or operations of
                  ITEX.

         C.       Other  Items.  Newcastle  shall  have  received  such  further
                  documents,   certificates,  or  instruments  relating  to  the
                  transaction  contemplated  hereby as Newcastle may  reasonably
                  request.

X.       MISCELLANEOUS

         A.       Survival.  All  representations,  warranties  and covenants in
                  this  Agreement  or  pursuant   hereto  shall  be  deemed  and
                  construed to be  continuing  representations,  warranties  and
                  covenants  which  shall  survive  the  Closing  Date  and  the
                  execution and delivery of all instruments and documents herein
                  provided for and any  investigation at any time made on behalf
                  of either party..

         B.       Headings.  Article  and  Section  headings  contained  in this
                  Agreement are for reference purposes only and shall not affect
                  in  any   way  the   meaning   of   this   Agreement   or  its

<PAGE>

                  interpretation.

         C.       Entire  Agreement.  This  Agreement  and the  Exhibits  hereto
                  constitute the entire agreement between the parties pertaining
                  to  the  subject   matter   hereof  and  supersede  all  prior
                  agreements,  understandings,   negotiations  and  discussions,
                  whether oral or written, of the parties.

         D.       Binding Effect. This Agreement shall be binding upon and inure
                  to the benefit of the respective successors and assigns of the
                  parties hereto.

         E.       Notices.  Any  notices  or other  communications  required  or
                  permitted  hereunder shall be sufficiently  given if delivered
                  personally or sent by registered  or certified  mail,  postage
                  prepaid, as follows:


                  To ITEX Corp:
                           One Lincoln Center
                           P.O. Box 2309
                           Portland, OR 97208-2309

                  To Newcastle Services Ltd.
                           P.O. Box 623, Bank of Nova Scotia Building
                           Main Street
                           Charleston, Nevis
                           West Indies

                  or at such other  address as shall be  furnished in writing by
                  the party to the other, and shall be deemed to have been given
                  as of the date so delivered or deposited in the United  States
                  mail, as the case may be.

         F.       Counterparts.  This  Agreement  may be executed in one or more
                  counterparts,  each of  which  shall  be  deemed  an  original
                  instrument and together shall constitute the entire Agreement.

         G.       Applicable  Law.  This  agreement  shall  be  governed  by and
                  construed in accordance  with the laws of the State of Oregon,

<PAGE>

                  United States of America,  and in the English language.  Venue
                  shall lie only in the State and Federal  Courts in and for the
                  County  of  Multnomah,  State  of  Oregon  as to all  disputes
                  arising  under  this  agreement,  and  such  venue  is  hereby
                  consented to by the parties hereto.

         H.       No Representation  Regarding Tax Treatment.  No representation
                  or warranty is being made by any party to any other  regarding
                  the treatment of this transaction for federal and state income
                  taxation.  Each party has relied exclusively on its own legal,
                  accounting,  and other tax adviser  regarding the treatment of
                  this  transaction for federal and state income taxes and on no
                  representation, warranty, or assurance from any other party or
                  such other party=s legal, accounting, or other adviser.

         I.       Attorney=s  Fees. In the event that any party  institutes  any
                  action or suit to enforce this  Agreement or to secure  relief
                  from any default  hereunder or breach  hereof,  the  breaching
                  party or parties shall  reimburse the  non-breaching  party or
                  parties for all costs,  including reasonable  attorney=s fees,
                  incurred  in   connection   therewith   and  in  enforcing  or
                  collecting any judgment rendered therein.

         J.       Schedules;   Knowledge.   Whenever  in  any  section  of  this
                  Agreement  reference is made to  information  set forth in the
                  schedules  provided  by either  Party,  such  reference  is to
                  information  specifically  set  forth  in such  schedules  and
                  clearly  marked to identify  the section of this  Agreement to
                  which the information relates.  Whenever any representation is
                  made to the Aknowledge@ of either Party, it shall be deemed to
                  be a representation that no officer or director of such party,
                  after reasonable investigation,  has any knowledge contrary to
                  the statements made (or omitted) regarding such matters.

         K.       Third-Party  Beneficiaries.  This  Agreement is solely between
                  ITEX and Newcastle and,  except as specifically  provided,  no
                  director, officer,  stockholder,  employee, agent, independent
                  contractor,  or any other  person or entity shall be deemed to
                  be a third party beneficiary of this Agreement.


<PAGE>

         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  such  remedies  may be  enforced
                  concurrently, 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 Closing Date,
                  this  Agreement  may be  amended  by a writing  signed by both
                  Parties, with respect to any of the terms herein, and any term
                  or  condition of this  Agreement  may be waived or the time of
                  performance thereof may be extended by a writing signed by the
                  Party for whose benefit the provision is intended.

         M.       Brokers.  Each party  represents  that there are no brokers or
                  finders involved in the contemplated transaction.


         IN WITNESS  WHEREOF,  the parties have duly executed  this  Acquisition
Agreement on the date above written.


ITEX Corporation
a Nevada corporation



By     /s/
   Name & Title:

                           Date:

Newcastle Services Ltd.
a corporation

  

By     /s/
   Name & Title:
                            Date:
<PAGE>



Exhibit 1
Description of Sky Scientific Financial Inc. Stock

Two Hundred Fifty  Thousand  (250,000)  shares of Class A Preferred  Stock,  par
value $0.001 per share,  face value Ten Dollars  (US$10.00) per share,  together
with all accrued dividends.


<PAGE>



                                    Exhibit 2
                             Description of Fine Art


<PAGE>
                                                                      EXHIBIT 23

               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 10-K) for the fiscal year ended July 31, 1997.

Andersen, Andersen, & Strong, L.C.
Salt Lake City, Utah
October 28, 1997



















                                       60

<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:    October 28, 1997

                             ITEX CORPORATION


   October 28, 1997          /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.                                      October 28, 1997
--------------------------------------------------------------------------------
Graham H. Norris, Chairman of the Board of Directors, President and
Chief Executive Officer (principal executive officer and director)

/s/  Joseph M. Morris                                           October 28, 1997
--------------------------------------------------------------------------------
Joseph M. Morris, Senior Vice President and Chief Financial Officer
(principal accounting officer and director)

/s/  Mary Scherr                                                October 28, 1997
--------------------------------------------------------------------------------
Mary Scherr, Vice President of Broker Development, Director

/s/  Dr. Evan B. Ames                                           October 28, 1997
--------------------------------------------------------------------------------
Dr. Evan B. Ames, Director

/s/  Robert Nelson                                              October 28, 1997
--------------------------------------------------------------------------------
Robert Nelson,  Director

/s/  Dr. Charles Padbury                                        October 28, 1997
--------------------------------------------------------------------------------
Dr. Charles Padbury, Director




                                       61