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, 1996

                         Commission File Number 0-18275

                                ITEX CORPORATION

             (Exact Name of Registrant as Specified in its Charter)

                                Nevada 93-0922994
    ------------------------------------------- ----------------------------
                  State (or other jurisdiction of (IRS Employer
               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  del0inquent
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 $28,345,000 based upon 6,129,000 shares held by such
persons and the close price of $4.63 on November 11, 1996.  The number of shares
outstanding  of the  Registrant's  $0.01 par value  common stock at November 11,
1996 was 6,853,000.  

                      DOCUMENTS INCORPORATED BY REFERENCE

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

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

                     (This Form 10-K includes 63 pages)
<PAGE>



                                ITEX CORPORATION
                                    FORM 10-K
                            For the Fiscal Year Ended
                                  July 31, 1996

                                      INDEX


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

ITEM 1.       DESCRIPTION OF BUSINESS                                  3

ITEM 2.       DESCRIPTION OF PROPERTIES                               13

ITEM 3.       LEGAL PROCEEDINGS                                       13

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY             14
              HOLDERS


                                     PART II

ITEM 5.       MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S       16
              COMMON EQUITY AND RELATED  STOCKHOLDER MATTERS

ITEM 6.1      SELECTED CONSOLIDATED DATA                              17

ITEM 7.1      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL       18
              CONDITION AND RESULTS OF OPERATIONS

ITEM 8.       FINANCIAL STATEMENTS                                    31


                                     PART IV

ITEM 14..      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND           58
               REPORTS ON FORM 8-K

               SIGNATURES                                             60


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

PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

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

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

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

Organized  commercial  barter plays an  increasingly  important  role in the way
American companies do business. Barter is becoming an integral part of strategic
planning  for  companies  from small  family-owned  and operated  businesses  to
Fortune 500 companies.  The International Reciprocal Trade Association (IRTA) is
the barter industry's leading trade association. According to IRTA, an estimated
300,000 U.S.  companies  participate in organized  commercial barter through the
services of a barter company. Currently, IRTA estimates that barter represents a
$7.5 billion a year industry which is growing at an annual rate of 8%. There are
over 600 barter  exchanges in the U.S.  Most are small  operations  limited to a
specific  city,  state,  or  region.  ITEX is one of only three  companies  with
national stature. Management believes that the Company is the largest of the six
hundred barter  exchanges in the United States,  Calculated  either by number of
offices, total customer count, client trade volume, or cash service fees billed.
Financial comparisons are not available.


                                       3
<PAGE>
BarterNews,  the barter industry's primary magazine, has referred to the Company
as the "World's Largest Exchange".

THE COMPANY

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

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

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

The Company owns and operates  retail barter  offices in Portland,  Oregon;  St.
Louis,  Missouri; and Orange County,  California.  All other ITEX broker offices
are  independently  owned  and  operated  by ITEX  Licensed  Brokers.  There are
presently  110 broker  offices  located in 36 states,  Guam,  Puerto  Rico,  and
Vancouver,  Canada.  The  Company  bears  no  financial  responsibility  for the
financing of an independent broker office.

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

                                       4
<PAGE>
each ITEX  corporate  barter  transaction.  The  second  profit  center is a 12%
transaction fee paid by the ITEX Corporate  Barter client on the Cash Equivalent
Credit portion of each purchase. This revenue is divided between the Company and
ITEX USA.

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

As a result of this utilization of trade dollars, the Company has accumulated an
investment  portfolio of equity securities totaling $3,877,000 at July 31, 1996,
stated at the lower of cost or market.  Also at July 31, 1996, the Company owned
inventories of goods and services  totaling  $7,577,000,  stated at the lower of
cost or market, which were available for corporate trading or trading to members
within the Exchange, which increases cash commissions earned by the Company, for
exchange for equity  securities of other  companies,  or for  consumption by the
Company in providing for its own operating needs.

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

During  the last  several  years,  the  Company  started  and  operated  a media
department,  which  exchanged  media products owned by the Company for due bills
for  prepaid  advertising  credits on radio  stations  across the U.S.  The four
Company-owned  included the Image Audio Music Production  Library,  , the Golden
Age of Radio Theatre, the New Rock Countdown, and Flashback ... Moments in Time.
During the fourth  quarter of the fiscal year ended July 31,  1996,  the Company
sold the assets  related to this  media-focused  business  operation in order to
improve  the  Company's  ongoing  cash flow.  The  Company  realized a profit of
$325,000 from the transaction.

TECHNOLOGY

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

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

                                       5
<PAGE>
Recent  technological  improvements  include a  software  update of the  Account
Information  Maintenance  program utilized by ITEX Brokers, a software update of
the  BarterWire  program  which is utilized by both ITEX Brokers and ITEX Retail
Trade Exchange  Members,  and developing  access on the Internet.  During Fiscal
Year 1995, the Company completed an agreement with International  Trade Exchange
(ITEX) Corp, a Vancouver  B.C.  based  company,  to operate the Canadian  barter
company. The International Trade Exchange Corp does business in Canada under the
names ITEX and Bartercard. In spite of the similarity of names, ITEX Corporation
(U.S.) and  ITEX/Bartercard  (Canada) have never had a business  relationship in
the past.  Under the terms of the agreement ITEX acquired the rights to the name
and  trademarks  of  International  Trade  Exchange  together  with the right to
acquire  its client  base and  assets.  The  addition  of the  affiliation  with
ITEX/Bartercard  and TROC/Canada  (described  below) will more fully enable ITEX
clients to do business coast-to-coast in both the U.S. and Canada.

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

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

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

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

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

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

                                       6
<PAGE>
Research  and  development  during the past two fiscal years has focused both on
technological  improvements and international expansion.  During the fiscal year
ended July 31,  1996,  the Company  spent a total of  $577,000  on research  and
development for its communication and information systems, of which $560,000 was
capitalized  and $17,000 was charged to expense.  During the fiscal  years ended
July 31, 1995 and 1994,  the Company  spent a total of  $169,000  and  $131,000,
respectively, all of which was charged to expense.

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

ACQUISITIONS

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

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

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

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

                                       7
<PAGE>
On April 30, 1996, defendants Yarmak, Friedland, Business Exchange International
Corp.,  and BX  International,  Inc.,  filed  an  answer  denying  the  material
allegations and asserting a counterclaim for attorney fees.


The  potential  outcome  of this  lawsuit is  uncertain.  However,  the  Company
believes that SLI has meritorious  arguments in favor of its contract positions.
The Company believes that a solution will be reached either through  negotiation
or  through  completion  of the  litigation  process.  Based  upon the docket in
Multnomah County,  Oregon, Circuit Court, the matter must go to trial within one
year of the  filing  of the  original  complaint.  Legal  counsel  is  unable to
evaluate the  probability of a favorable or  unfavorable  outcome or to estimate
the range of potential  recovery on the plaintiff's claims or any potential loss
on the defendant's counterclaim for attorney's fees.

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

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

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

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<PAGE>
for trade  dollars,  thus  providing a highly  desirable  business  and vacation
inventory for trade to Exchange members.

Strategy

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

SEASONALITY

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

EMPLOYEES

The  Company  employs  51  persons,   of  which  48  are  full  time  employees.
Additionally  each of the  Exchange's  110  broker  offices  mentioned  above is
managed by an ITEX Licensed Broker who is an independent contractor that employs
support staff of their own. This results in a total network of approximately 500
persons working as either consultants,  independent contractors, or employees of
the Company.



                                       9
<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          54   President and Chief Executive Officer, Director

Mary Scherr               59   Vice President of Broker Development, Director

Michael A. Neal           27   Vice President of Marketing

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

Cynthia Pfaltzgraff, CMA  42   Controller

Donovan Snyder, Esq.      46   Corporate Counsel, Corporate Secretary

Dr. Evan B. Ames          57   Director

Thomas G. Baer            63   Director

Dr. Sherry L. Meinberg    55   Director

Robert Nelson             48   Director

Dr. Charles Padbury       58   Chairman of the Board of Directors


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.  He has been a pilot for United Airlines since
1963.  He has been a director of the Company  since 1986.  In 1986,  Mr.  Norris
became an ITEX Broker, operating an independent barter office in Provo, Utah, in
which capacity he earned the credential of Certified Trade Broker.

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

     Mr. Neal has experience in many  operational  aspects of the Company,  with
primary focus on travel and media.  Previously,  Mr. Neal served as President of
TravelGuide,  Inc. and as a special  projects  coordinator for IBM  Corporation,
where he was responsible for

                                       10
<PAGE>
bidding contracts to the federal government.  Mr. Neal is the son of the founder
of the  Company,  Mr.  Terry Neal.  Dr.  Sherry L.  Meinberg,  a Director of the
Company, is his aunt.
 
    Mr. Morris became Vice President and Chief Financial Officer and a Director
in January 1996.  Previously,  he was a consultant to the Company and a Director
since  February  1995. He has over 15 years  experience in and around the barter
industry,  including  serving as  technical  liaison  between the  International
Reciprocal  Trading  Association (IRTA) and the Financial  Accounting  Standards
Board (FASB). He was Vice  President-Controller  of Software-Intercomp,  Inc., a
NASDAQ company, from 1984 through 1995, except for the period 1988 to 1990, when
he was a technical project manager with the FASB. He has authored numerous books
for practicing  accountants and financial  professionals,  several of which have
received recognition as Best Professional  Accounting Practice Book of the Year.
Earlier in his career, Mr. Morris was an audit manager with Coopers & Lybrand.

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

      Mr.  Snyder,  who joined ITEX as corporate  counsel in 1995,  has 17 years
experience as an attorney,  including 10 years as corporate  in-house counsel to
several  companies in Salt Lake City,  Utah. He is a member of both the Utah and
Oregon State Bar Associations.  He was elected corporate  secretary by the Board
of Directors in May 1996.

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

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

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

     Mr.  Nelson  is a  Certified  Public  Accountant  in  private  practice  in
Portland,  Oregon  specializing  in tax  accounting.  He has also been an active
member of the ITEX Retail Trade  Exchange,  and brings the advantages of both of
these areas of experience to the

                                       11
<PAGE>
Board.  Mr. Nelson  received an MBA from Brigham Young  University  and is still
active in the BYU Management  Society.  He is a member of the American Institute
of CPAs and the Oregon Society of CPAs.

     Dr. Padbury was elected  Chairman of the Board of Directors on September 6,
1996. Dr. Padbury is a leading  Beaverton,  Oregon dentist and has been a member
of the ITEX Retail Trade  Exchange  since 1985. Dr. Padbury has brought a wealth
of experience to the Board in terms of the interests,  perceptions,  and vantage
point of ITEX  clients.  Dr.  Padbury has been a director  of the Company  since
1992.

Committees

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

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

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

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

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

(a)     Mary Scheer: Exercise of stock options and sale of shares on January 30,
        1966 (30,000  shares) and March 12, 1996 (15,000 shares)

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

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



                                       12
<PAGE>
ITEM 2.  PROPERTIES

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

                                                 Approximate      Current
             Location       Lease Expiration       Sq. Ft.      Annual Rent
------------------------  --------------------  -------------  -------------
Portland, Oregon            December 31, 2001       7,400       $136,000


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


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


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


ITEM 3.  LEGAL PROCEEDINGS

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

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

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


                                       13
<PAGE>
Inc. The Amended Complaint  restates the claims against defendants for breach of
contract,  specific  performance,  declaratory judgment and fraud. By dismissing
ITEX  Corporation's   claims  without  prejudice,   ITEX  may,  if  it  chooses,
reinstitute  its claims for business  defamation,  unlawful trade  practices and
interference with economic relationships. Proceeding under the Amended Complaint
permits an expedited  determination of the core contract issues raised, that is,
whether BXI  breached  its  contract  with SLI by  asserting  that the BXI Trade
Exchange is not an asset of BXI.

The  potential  outcome  of this  lawsuit is  uncertain.  However,  the  Company
believes that SLI has meritorious  arguments in favor of its contract positions.
The Company believes that a solution will be reached either through  negotiation
or  through  completion  of the  litigation  process.  Based  upon the docket in
Multnomah County,  Oregon, Circuit Court, the matter must go to trial within one
year of the  filing  of the  original  complaint.  Legal  counsel  is  unable to
evaluate the  probability of a favorable or  unfavorable  outcome or to estimate
the range of potential  recovery on the plaintiff's claims or any potential loss
on the defendant's counterclaims.

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

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

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

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

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

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


                                       14
<PAGE>
(2) To  ratify  the  appointment  of  Andersen,  Andersen  &  Strong,  L.C.  as
independent auditors of the Company for the 1995-1996 fiscal year.

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

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

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

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

(1) The votes cast in person or by proxy on the  resolution  to elect a Board of
Directors was:
                                                    Abstain/
        Nominee              For      Against       Withhold 
------------------------- --------- ---------- ------------------

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

Mary Scherr               4,003,507      0          338,553

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

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

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

Robert Nelson             3,987,415      0          354,645

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

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

Joseph Morris             4,003,007      0          339,053

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

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

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

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


                                     PART II

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

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

         Quarter Ended                              Sale Prices
--------------------------------     -------------------------------------------
                                             High                  Low
                                     --------------------- ---------------------
Fiscal Quarters Ended:
     July 31, 1996.............            $12.50                  4.25
     April 9, 1996.............              9.00                  6.13
     January 15, 1996..........              8.13                  6.13
     October 23, 1995..........              6.75                  4.00
     July 31, 1995.............              6.78                  4.00
     April 9, 1995.............              4.63                  2.38
     January 15, 1995..........              2.63                  1.88
     October 23, 1994..........              3.88                  2.00


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

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


                                       16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED DATA (unaudited--see Note (a) following table.)

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

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

                                                          Fiscal Years Ended July 31,
                                         ---------------------------------------------------------------
                                             1996            1995         1994        1993         1992
                                         -------------   -----------   ----------   ----------   ----------
                                                       (In thousands, except per share data)
<S>                                      <C>             <C>           <C>          <C>          <C>   
Statement of Operations Data:             (unaudited)
Revenue:
   Cooporate trading revenue.........     $    16,327       $14,211      $  8,427     $  4,446     $    538
   Trade exchange revenue............           14,125         9,418        6,339        3,488        4,123
                                          --------------   -----------   ----------   ----------   -----------
     Total revenue...................           30,452       23,629        14,766        7,934        4,661
                                          --------------   -----------   ----------   ----------   -----------
Costs and expenses:
   Costs of corporate trading........           13,083        11,138        6,409        2,891            ---
   Costs of trade exchange revenue                7,192       4,361         2,806        2,125        1,409
   Selling, general and administrative            8,153       7,185         5,257        2,768        2,833
                                          --------------   -----------   ----------   ----------   -----------
     Total costs and expenses........           28,428       22,684        14,472        7,784        4,242
                                          --------------   -----------   ----------   ----------   -----------
Income (loss) from operations........            2,024           945          294          150          419
Other income (expense)...............               192          454           19           74             9
                                          --------------   -----------   ----------   ----------   -----------
Income (loss) before income taxes....            2,216        1,399           313          224          428
Provision for income taxes...........               806          521          101              (8)     ---
                                          --------------   -----------   ----------   ----------   -----------
Income before equity in net income
   of foreign affiliate..............            1,376           878           212          232         428
Equity in net income of foreign
   affiliate.........................            1,176           958           632         ---          ---
                                          ==============   ===========   ==========   ==========   ===========
Net income...........................     $     2,586      $  1,836      $    844     $    232      $   428
                                          ==============   ===========   ==========   ==========   ===========

Primary net income per share.........       $   0.35       $   0.41      $   0.26      $   0.08       $  0.21
                                            ============
Fully diluted income per share.......       $   0.34
                                            ============




Balance Sheet Data:
Working capital (deficit)............      $  2,683      $  1,508      $    503      $    452     $   1,428
Total assets.........................        23,912        15,578        10,051         6,157         4,346
Long-term debt, net of current portion          192           156           189            98            38
Stockholders' equity.................      $ 22,225      $ 13,783      $  7,432      $  5,046     $   3,576
</TABLE>
Note (a):

The financial data is derived from the audited Consolidated Financial Statements
of the Company and Notes  thereto  for all years  presented  except for the year
ended July 31, 1996. The  information for the year ended July 31, 1996, has been
derived from the
                                       17
<PAGE>
Company's unaudited  Consolidated Financial Statements included
in this Form 10-K. As of November 12, 1996, the Company's  independent  auditor,
Andersen,  Andersen  & Strong,  L.C.,  had not  completed  the audit  procedures
related to audit of the Company's July 31, 1996 financial statements.  Andersen,
Andersen  & Strong,  L.C.  is  continuing  its  audit.  When the  auditors  have
completed their audit,  the Company will file an amended Form 10-K that includes
the  auditors'  report and any changes to the financial  statements  and related
disclosures  that  are  determined  as a  result  of  completion  of  the  audit
procedures.


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

BUSINESS, LIQUIDITY, AND CAPITAL RESOURCES

Business and Plan of Operation

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

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

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

The Company owns and operates  retail barter  offices in Portland,  Oregon;  St.
Louis,  Missouri; and Orange County,  California.  All other ITEX broker offices
are  independently  owned  and  operated  by ITEX  Licensed  Brokers.  There are
presently  110 broker  offices  located in 36 states,  Guam,  Puerto  Rico,  and
Vancouver,  Canada.  The  Company  bears  no  financial  responsibility  for the
financing of an independent broker office.

                                       18
<PAGE>
The Company  acts as an  intermediary  for the  exchange  of goods and  services
between major  companies,  through the formation of ITEX USA,  Inc., a corporate
barter management company,  which is the Company's exclusive agent for marketing
the  Company's  corporate  and  industrial  trading  business  of the  Company's
corporate barter  division.  ITEX USA negotiates  corporate  barter  agreements,
services  these  agreements  and  sells  the  inventory  it  acquires  in  these
transactions.  In these  transactions,  ITEX USA  issues  ITEX  Cash  Equivalent
Credits,  which are separate and apart from the ITEX Retail  Trade  Dollar,  now
used in accounting for  transactions  in the ITEX Retail Trade Exchange  System.
The revenues generated from those inventories when sold for cash will be divided
between the Company and ITEX USA. This is the first and primary profit center in
each ITEX  corporate  barter  transaction.  The  second  profit  center is a 12%
transaction fee paid by the ITEX Corporate  Barter client on the Cash Equivalent
Credit portion of each purchase.  This revenue will also be divided  between the
Company and ITEX USA.

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

As a result of this utilization of trade dollars, the Company has accumulated an
investment portfolio of marketable equity securities totaling $3,877,000 at July
31,  1996,  stated at the lower of cost or market.  Also at July 31,  1996,  the
Company owned inventories of goods and services totaling  $7,577,000,  stated at
the lower of cost or  market,  which was  available  for  corporate  trading  or
trading to members within the Exchange,  which increases cash commissions earned
by the Company,  for exchange for equity  securities of other companies,  or for
consumption by the Company in providing for its own operating needs.

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

During  the last  several  years,  the  Company  started  and  operated  a media
department,  which  exchanged  media products owned by the Company for due bills
for  prepaid  advertising  credits on radio  stations  across the U.S.  The four
Company-owned  included the Image Audio Music Production  Library,  , the Golden
Age of Radio Theatre, the New Rock Countdown, and Flashback ... Moments in Time.
During the fourth  quarter of the fiscal year ended July 31,  1996,  the Company
sold the assets of this media-focused business operation in order to improve the
Company's  ongoing cash flow. The Company realized a profit of $325,000 from the
transaction.

Although  the  Statement  of  Cash  Flows  indicates  negative  cash  flow  from
operations,  the Company believes that cash fees and commissions,  cash that can
be  obtained  from  the  sale  of  inventories  and  available-for-sale   equity
securities at the  discretion  of the Company,  and cash that would be available
from the sale of equity and debt securities of the Company will be sufficient to
fund cash operating needs of the Company while continuing



                                       19
<PAGE>
to follow the  strategy  of mixing cash and trade  activities  so as to maximize
long-term  wealth building and shareholder  value.  Furthermore,  the Company is
presently incurring negative cash flow with respect to several areas of business
development  that would be expected to  contribute  in the future to  long-range
wealth  building.  At the  Company's  discretion,  it  could  conserve  cash  by
suspending or terminating these activities.  However,  there can be no assurance
that  operating  conditions  will  enable the  Company to continue to operate as
described  above or that  adequate  funds from any sources  will  continue to be
available on terms acceptable to the Company.

Development Activities

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

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

Recent  technological  improvements  include a  software  update of the  Account
Information  Maintenance  program utilized by ITEX Brokers, a software update of
the  BarterWire  program  which is utilized by both ITEX Brokers and ITEX Retail
Trade Exchange Members, and developing access on the Internet. During the fiscal
year of Fiscal Year 1995, the Company completed an agreement with  International
Trade Exchange  Corp, a Vancouver  B.C.  based company,  to operate the Canadian
barter company.  The  International  Trade Exchange Corp does business in Canada
under the names ITEX and Bartercard.  In spite of the similarity of names,  ITEX
Corporation  (U.S.)  and  ITEX/Bartercard  (Canada)  have  never had a  business
relationship  in the past.  Under the terms of the  agreement  ITEX acquired the
rights  to the  name and  trademarks  of the  International  Trade  Exchange  of
Vancouver,  B.C.  Canada  together with the right to acquire its client base and
assets.  The addition of the affiliation  with  ITEX/Bartercard  and TROC/Canada
will more fully  enable ITEX clients to do business  coast-to-coast  in both the
U.S. and Canada.

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

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

                                       20
<PAGE>
Another  electronic  trading  feature  introduced by the Company is a "fax-back"
system for  Exchange  clients,  which  enables  Exchange  members to request and
receive their account  records,  company data, ITEX business forms,  product and
service lists, and other information by fax.

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

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

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

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

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

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

Liquidity and Capital Resources

                                       21
<PAGE>
Overall  Financial  Position.  The information for the year ended July 31, 1996,
has been derived from the Company's unaudited  Consolidated Financial Statements
included in this Form 10-K. As of November 12, 1996,  the Company's  independent
auditor,  Andersen,  Andersen  &  Strong,  L.C.,  had not  completed  the  audit
procedures related to audit of the Company's July 31, 1996 financial statements.
Andersen,  Andersen & Strong,  L.C. is continuing  its audit.  When the auditors
have  completed  their  audit,  the Company  will file an amended Form 10-K that
includes the auditors'  report and any changes to the financial  statements  and
related  disclosures  that are determined as a result of completion of the audit
procedures.

At July 31, 1996,  the  Company's  working  capital ratio was 3.1 to 1, based on
current  assets  of  $3,941,000  and  current  liabilities  of  $1,258,000.  The
Company's working capital ratio at July 31, 1995, was 2.0 to 1, based on current
assets of $3,016,000 and current  liabilities of $1,509,000.  The improvement in
the  working  capital  ratio  resulted   primarily  from  continued   profitable
operations and private placements of stock

Total  stockholders'  equity  increased by $8,443,000 to $22,225,000 at July 31,
1996, from $13,783,000 at July 31, 1995. The primary  increases in stockholders'
equity were from continued  profitable  operations and private placements of the
Company's equity securities.

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

Private  Placements.  During the fiscal  year ended July 31,  1996,  the Company
completed a private  placement with  Newcastle  Services Ltd.  ("Newcastle"),  a
foreign corporation, 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 

                                       22
<PAGE>
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 purchase price that would
have been due for the calendar  quarter ended  September 30, 1996, and therefore
the Company has canceled the remaining portion of the private placement.

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

Stock  Option  Plan.  During the fiscal  year ended July 31,  1996,  the Company
received  proceeds  totaling  $875,000  from the  exercise  of stock  options to
purchase  475,000 shares of common stock  pursuant to previously  existing stock
option plans.  Effective December 15, 1995, the Board of Directors adopted a new
stock option plan pursuant to which  options to purchase up to 1,300,000  shares
of the Company's common stock may be granted to employees,  officers, directors,
and  consultants of the Company  Exercise  prices for options  granted under the
plans  are  equal  to  market  value on the date of  grant  and  options  may be
exercisable  for up to ten years from the date of grant at the discretion of the
Board of Directors.  During the fiscal year ended July 31, 1996, pursuant to the
new stock option plan,  options to purchase  1,295,000 shares were granted at an
exercise  price of $6.13  per  share.  The plan was  approved  by the  Company's
shareholders at the annual meeting of the Company's  shareholders held on May 3,
1996.  It is the intention of the Company to file a Form S-8  registration  with
the  Securities  and  Exchange  Commission  with respect to the shares of common
stock underlying options to be issued pursuant to the plan.

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.

                                       23
<PAGE>
Stock Split. At the annual meeting of the Company's shareholders on May 3, 1996,
the  Company's  shareholders  approved a  two-for-one  forward  stock split with
respect  to the  Company's  common  stock.  The  stock  split  has not yet  been
implemented by the Company.  Upon  implementation  of the stock split, all share
and per share data  included  in the  Company's  financial  statements  would be
restated to give effect to the stock split.

Bank Line of Credit.  The Company had a line of credit facility with a bank that
expired on May 31, 1996. Pursuant to the line of credit, the Company was able to
borrow up to $200,000 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 2%. The maximum  amount of cash  borrowings
that may be  outstanding  at any time is determined by a borrowing  base formula
related to available collateral.  Borrowings are collateralized by the Company's
accounts  receivable,  fixed  assets and  inventory.  As of July 31,  1996,  the
Company  had no  borrowings  outstanding  under the bank  credit  facility.  The
Company is presently discussing the terms of a new line of credit with the bank.

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

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

Subsequent  to the  transactions  described  above,  the  owner of the other 50%
interest in BXI issued a series of press releases and widespread  communications
throughout the commercial barter industry stating,  among other things, that BXI
was not the owner of the assets of the BXI barter  exchange,  which assertion is
in direct  contradiction to explicit  contractual  representations  made by that
party.  Despite  having made such  assertion  and  despite  having made what the
Company considers to be unjustified  negative statements about the Company,  the
owner of the other 50% and the Company  engaged in extensive  negotiations  with
regard  to one  party  purchasing  a 1%  interest  from  the  other  and  future
management and operation of the BXI barter exchange.  On several occasions,  the
Company  believed  that  resolution  was  imminent.   However,  each  time,  the
subsequent  actions of the owner of the other 50%  interest in BXI  demonstrated
unwillingness  to abide by the  contractual  terms of the applicable  agreement,
accompanied  by the  contradictory  action  of  unwillingness  to  refund to the
Company the funds that had been paid for the

                                       24
<PAGE>
50%  interest in BXI and the loan that was made to BXI.  Also,  the owner of the
other 50% interest in BXI continued to publicly make what the Company  considers
to be hostile and unjustified allegations about the Company and its actions.

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

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

As with all  litigation,  the  potential  outcome of this lawsuit is  uncertain.
However, the Company believes that SLI has meritorious arguments in favor of its
contract positions.  The Company believes that a solution will be reached either
through negotiation or through completion of the litigation process.  Based upon
the docket in Multnomah  County,  Oregon,  Circuit Court,  the matter must go to
trial  within one year of the filing of the  original  complaint.  In any event,
this litigation does not present  scenarios which would be expected to result in
a materially  adverse effect on the Company's  financial  position or results of
operations.

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

Acquisition of Name and Trademarks of International Trade Exchange of Vancouver,
B.C.  In March,  1995 ITEX  acquired  the rights to the name and  trademarks  of
International Trade Exchange (ITEX) Corp., of Vancouver,  B.C. Canada,  together
with the right to acquire its client base and assets.  The  purchase did not add
to the Company's  assets,  but the acquisition had strategic  importance for the
Company's  future plans.  During fiscal 1994,  TROC Canada,  the largest  barter
exchange in Canada,  took steps to join the ITEX barter system as an independent
licensee. TROC is located in Montreal, Quebec with most
                                       25
<PAGE>
of its operations in eastern Canada.  Subsequently,  the Company entered into an
International  License Agreement with 3264076 Canada, Inc., governing the use of
the ITEX System in Canada.  These two actions thus gave ITEX coast-to-coast name
recognition in Canada as well as in the U.S.

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.

RESULTS OF OPERATIONS
The  information  for the year ended July 31,  1996,  has been  derived from the
Company's  unaudited  Consolidated  Financial  Statements  included in this Form
10-K. As of November 12, 1996,  the  Company's  independent  auditor,  Andersen,
Andersen & Strong, L.C., had not completed the audit procedures related to audit
of the  Company's  July 31,  1996  financial  statements.  Andersen,  Andersen &
Strong,  L.C. is continuing its audit.  When the auditors have  completed  their
audit,  the Company will file an amended Form 10-K that  includes the  auditors'
report and any changes to the financial  statements and related disclosures that
are determined as a result of completion of the audit procedures.


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

Overall Operating Results

Total  revenue  increased 29% to  $30,452,000  in the fiscal year ended July 31,
1996  ("fiscal  1996") from  $23,629,000  in the fiscal year ended July 31, 1995
("fiscal 1995").  Income from operations  increased to $2,024,000 in fiscal 1996
from  $945,000 in fiscal 1995.  Equity in net income from foreign  affiliate was
$1,176,000 in fiscal 1996 as compared to $958,000 in fiscal 1995.

Net income  increased 41% to $2,586,000,  or $0.35 per share in fiscal 1996 from
$1,836,000,  or $0.41 per share,  in fiscal 1995. Net income per share was lower
in fiscal 1996, despite the increase in net income,  because of a greater number
of shares outstanding in the current year and because of more incremental shares
from options and  warrants in computing  income per share caused by increases in
the market price of the Company's stock during part of fiscal 1996.

Revenue

Total  Revenue.  Total revenue  increased 29% to $30,452,000 in fiscal 1996 from
$23,629,000  in  fiscal  1995.   Corporate  trading  revenue  increased  15%  to
$16,327,000  in fiscal 1996 from  $14,211,000  in fiscal  1995.  Trade  exchange
revenue  increased 50% to $14,125,000  in fiscal 1996 from  $9,418,000 in fiscal
1995.

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:

                                       26
<PAGE>

                                               Fiscal Years Ended July 31,
                                            ------------------------------------
                                                 1996                   1995
                                            -------------         --------------
                                                      (in thousands)
           Corporate Trading Revenue
               Trade                        $   11,643              $  12,403
               Cash                              4,684                  1,808
                                           --------------         --------------
                                                16,327                 14,211
                                           --------------         --------------
           Trade Exchange Revenue
               Trade                              5,532                 4,204
               Cash                               8,593                 5,214
                                           --------------         --------------
                                                14,125                  9,418
                                           --------------         --------------
           Total Revenue
               Trade                            17,175                 16,607
               Cash                             13,277                  7,022
                                           --------------         --------------
                                            $   30,452              $  23,629
                                           ==============         ==============

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

Trade Exchange Revenue.  The increase in trade exchange revenue was attributable
to an array of factors.  During  fiscal 1996,  the Company  recognized  one-time
retail exchange license revenue from a foreign licensee and 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 $13,083,000
in fiscal 1996 from  $11,138,000  in fiscal 1995  because of the higher  revenue
level.  Costs of  corporate  trading  revenue were 80% in fiscal 1996 and 78% in
fiscal 1995.

Costs of Trade Exchange  Revenue.  Costs of trade exchange revenue  increased to
$7,192,000  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 $8,153,000 in fiscal 1996 from $7,185,000
in fiscal  1995.  The  increase  resulted  from the  Company's  higher  scope of
operations,  including  expansion  of  Company-owned  and  operated  local trade
exchanges.

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

                                       27
<PAGE>
Comparison of Fiscal Years Ended July 31, 1995 and July 31, 1994

Overall Operating Results

Total  revenue  increased 60% to  $23,629,000  in the fiscal year ended July 31,
1995  ("fiscal  1995") from  $14,766,000  in the fiscal year ended July 31, 1994
("fiscal  1994").  Income from  operations  increased to $945,000 in fiscal 1995
from  $294,000 in fiscal 1994.  Equity in net income from foreign  affiliate was
$958,000 in fiscal 1995 as compared to $632,000 in fiscal 1994.

Net income more than  doubled to  $1,836,000,  or $0.41 per share in fiscal 1995
from  $844,000,  or $0.26 per share,  in fiscal  1995.  The rate of  increase in
income per share was less than the rate of increase  in net income  because of a
greater number of shares outstanding in fiscal 1995.

Revenue

Total  Revenue.  Total revenue  increased 60% to $23,629,000 in fiscal 1995 from
$14,766,000  in  fiscal  1994.   Corporate  trading  revenue  increased  69%  to
$14,211,000  in fiscal  1995 from  $8,427,000  in fiscal  1994.  Trade  exchange
revenue  increased 49% to  $9,418,000  in fiscal 1995 from  $6,339,000 in fiscal
1994.

                                       28
<PAGE>
The following  table  summarizes  the cash and trade  (consisting  of ITEX trade
dollars and other noncash consideration)  components of revenue for fiscal years
1995 and 1994:

                                           Fiscal Years Ended July 31,
                                       -------------------------------------
                                             1995                   1994
                                       --------------         --------------
                                                 (in thousands)
            Corporate Trading Revenue
               Trade                     $  12,403             $     8,266
               Cash                          1,808                     161
                                       -------------          ---------------
                                           14,211                    8,427
                                       -------------          ---------------
            Trade Exchange Revenue
               Trade                        4,204                    1,941
               Cash                         5,214                    4,398
                                       -------------          ---------------
                                            9,418                    6,339
                                       -------------          ---------------
            Total Revenue
               Trade                       16,607                   10,207
               Cash                         7,022                    4,559
                                       -------------          ---------------
                                        $  23,629               $   14,766
                                       =============          ===============

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

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

Costs and Expenses

Costs of Corporate Trading.  Costs of corporate trading increased to $11,138,000
in fiscal  1995 from  $6,409,000  in fiscal  1994  because  of the  increase  in
corporate trading revenue. Costs of corporate trading revenue were 78% in fiscal
1995 and 76% in fiscal 1994.

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

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses  increased by  $1,928,000  to $7,185,000 in fiscal 1995
from $5,257,000 in fiscal 1994. The increase  resulted from the Company's higher
scope of operations,  including  expansion of  Company-owned  and operated local
trade exchanges.

Total  advertising  and promotion  was  $2,985,000 in fiscal 1995 as compared to
$1,591,000 in fiscal 1994. One of the advantages  available to barter businesses
is the ability to fund a significant  portion of  advertising  costs using trade

                                       29
<PAGE>
dollars or by other trade  consideration.  During fiscal 1995,  the Company paid
$2,746,000  of its  advertising  costs by ITEX  trade  dollars  or  other  trade
consideration, representing 92% of total advertising costs for the period.

INFLATION

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

FORWARD-LOOKING INFORMATION

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

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

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

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

                                       30
<PAGE>
                                ITEX CORPORATION
                                    FORM 10-K
                            For the Fiscal Year Ended
                                  July 31, 1996

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                          Page
                                                                        --------

  REPORT OF INDEPENDENT AUDITORS                                           32

  CONSOLIDATED BALANCE SHEETS AT JULY 31, 1996 AND 1995                    33

  CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE YEARS ENDED 
    JULY 31, 1996, 1995, AND 1994                                          34

  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE 
    YEARS ENDED JULY 31, 1996, 1995, AND 1994                              35

  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE YEARS ENDED
    JULY 31, 1996, 1995, AND 1994                                          36

  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                               37


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

Note:
The  information  for the year ended July 31,  1996,  has been  derived from the
Company's  unaudited  Consolidated  Financial  Statements  included in this Form
10-K. As of November 12, 1996,  the  Company's  independent  auditor,  Andersen,
Andersen & Strong, L.C., had not completed the audit procedures related to audit
of the  Company's  July 31,  1996  financial  statements.  Andersen,  Andersen &
Strong,  L.C. is continuing its audit.  When the auditors have  completed  their
audit,  the Company will file an amended Form 10-K that  includes the  auditors'
report and any changes to the financial  statements and related disclosures that
are determined as a result of completion of the audit procedures.

                                       31
<PAGE>


                         REPORT OF INDEPENDENT AUDITORS



The  information  for the year ended July 31,  1996,  has been  derived from the
Company's  unaudited  Consolidated  Financial  Statements  included in this Form
10-K. As of November 12, 1996,  the  Company's  independent  auditor,  Andersen,
Andersen & Strong, L.C., had not completed the audit procedures related to audit
of the  Company's  July 31,  1996  financial  statements.  Andersen,  Andersen &
Strong,  L.C. is continuing its audit.  When the auditors have  completed  their
audit,  the Company will file an amended Form 10-K that  includes the  auditors'
report and any changes to the financial  statements and related disclosures that
are determined as a result of completion of the audit procedures.

                                       32
<PAGE>
                                ITEX CORPORATION
                           CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share amounts )

                                                                  July 31,
                                                           ---------------------
                                                               1996        1995
                                                           ---------------------
                                   ASSETS                  (unaudited)
Current Assets
     Cash ...............................................   $ 1,301     $ 1,524
     Accounts receivable, net of allowance for doubtful
         accounts of $105 and $132.......................     1,071       1,117
     Notes receivable....................................       611        ---  
     Deferred tax asset..................................         3          51
     Prepaids and other current assets...................       955         324
                                                            --------    --------
         Total current assets............................     3,941       3,016

Inventory for Principal Party Trading....................     7,577       5,696

Available for Sale Equity Securities.....................     3,877       3,332

Investment in Foreign Equity Affiliate...................     3,216       2,040

Investment in SLI, Inc...................................     2,843        ---

Goodwill and Purchased Member Lists, net.................     1,299       1,067

Deferred Tax Asset.......................................      ---           26

Other Assets.............................................     1,159         401
                                                            --------    --------

                                                            $23,912     $15,578
                                                            ========    ========
              LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
     Accounts payable....................................   $   183     $   133
     Portion of receivables due to brokers ..............       547         580
     Trade credits issued in excess of earned............        41           4
     Income taxes payable................................      ---          474
     Deferred tax liability..............................      ---           43
     Current portion of long-term indebtedness...........       138          61
     Other current liabilities...........................       349         214
                                                            --------    --------
         Total current liabilities.......................     1,258       1,509
 
Deferred Income Taxes....................................       237         130

Long-term Indebtedness...................................       192         156

Stockholders' Equity
     Common stock, $.01 par value; 20,000,000 shares
        authorized; 6,804,000 and 5,212,000 shares
        issued and outstanding...........................        68          52
     Paid-in capital.....................................    16,386      10,624
     Common stock subscribed.............................                     1
     Net unrealized gain on marketable equity
         securities......................................       132          92
     Treasury stock, at cost (10,000 and 20,000 shares)..       (29)        (68)
     Retained earnings...................................     5,668       3,082
                                                            --------    --------
         Total stockholders' equity......................    22,225      13,783
                                                            $23,912     $15,578
                                                            ========    ========

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


                                       33
<PAGE>
<TABLE>
<CAPTION>
                                ITEX CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

                                                                     For the Fiscal Years Ended July 31,
                                                       ----------------------------------------------------------------
                                                               1996                    1995                    1994
                                                       -------------------      -----------------       -----------------
<S>                                                    <C>                      <C>                     <C>               
Revenue                                                      (unaudited)
    Corporate trading revenue.........................  $        16,327          $        14,211         $         8,427
    Trade exchange revenue............................           14,125                    9,418                   6,339
                                                       -------------------      -----------------       -----------------
                                                                 30,452                   23,629                  14,766
                                                       -------------------      -----------------       -----------------
Costs and Expenses
    Costs of corporate trading........................           13,083                   11,138                   6,409
    Costs of trade exchange revenue...................            7,192                    4,361                   2,806
    Selling, general, and administrative..............            8,153                    7,185                   5,257
                                                       -------------------      -----------------       -----------------
                                                                 28,428                   22,684                  14,472
                                                       -------------------      -----------------       -----------------

Income (Loss) from Operations.........................            2,024                      945                     294

Other Income (Expense)
  Interest income (expense), net......................               64                        3                     (16)
  Dividends and subordination fees....................              204                      229                     ---
  Gain (loss) on sale of securities...................              (76)                     222                      12
  Miscellaneous, net................................                ---                      ---                       7
                                                       -------------------      -----------------       -----------------
                                                                    192                      454                      19
                                                       -------------------      -----------------       -----------------
Income Before Taxes and Equity in Net
  Income (Loss) of Foreign Affiliate..................            2,216                    1,399                     313

Provision (Credit) for Income Taxes...................              806                      522                     101
                                                       -------------------      -----------------       -----------------

Income Before Equity in Net  Income
  (Loss) of Foreign Affiliate.........................            1,410                      877                     212

Equity in Net Income (Loss) of Foreign
  Affiliate...........................................            1,176                      958                     632
                                                       -------------------      -----------------       -----------------

Net Income (Loss).....................................  $         2,586          $         1,835         $           844
                                                       ===================      =================       =================

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

Net Income Per Common and Equivalent
  Share:
   Primary............................................  $          0.35          $          0.41         $          0.26
                                                       ===================      =================       =================
   Fully diluted......................................  $          0.34

                                                       ===================

</TABLE>

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


                                       34
<PAGE>
<TABLE>
<CAPTION>
                                ITEX CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
      For the Fiscal Years Ended July 31, 1996 (unaudited), 1995, and 1994


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

Stock sold for cash        130             1           129                                                         130
Stock issued in
 exchange 
 for member lists            5                          42                                                          42
Stock exchanged for
  interest in                                                                                                         
  equity affiliate         150             2           448                                                         450
Stock exchanged for
  goods, services           96             1           462                                            81           544
Unrealized Gain 
 (Loss)                                                             376                              376
Net income, fiscal
  1994                                                 844                                           844
                    ------------  ------------ -------------  ------------- --------------  -------------  ---------------

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 services       300             3         1,076                                                       1,079
Unrealized Gain
 (Loss)                                                              96                               96
Net income, fiscal
 1995                                                1,835                                          1,835
                    ------------  ------------ -------------  ------------- --------------  -------------  ---------------

Balance, July 31,
 1995                    5,213            52        10,626        3,082            92                 (69)      13,783

Stock sold for cash      1,294            13         3,678                                                       3,691
Stock issued for
  acquisitions              60             1           644                                                         645
Stock exchanged for
  goods and services       237             2         1,438                                            401        1,480
Unrealized Gain 
(Loss)                                                               40                                40
Net income, fiscal
 1996                                                2,586                                          2,586
                    ------------  ------------ -------------  ------------- --------------  -------------  ---------------

Balance, July 31,
1996                     6,804    $      68     $   16,386     $  5,668      $    132           $   (29)    $   22,225
                    ============  ============ =============  ============= ==============  =============  ===============
</TABLE>

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

                                       35
<PAGE>
<TABLE>
<CAPTION>
                                ITEX CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                                                For the Fiscal Years Ended July 31,
                                                              --------------------------------------
                                                                1996            1995         1994
                                                              ---------       ---------    --------- 
<S>                                                           <C>             <C>          <C>     
Cash Flows from Operating Activities                         (unaudited)

    Net income............................................    $  2,586        $  1,835        $ 844
                                                              ---------       ---------    ---------
    Adjustments:
       Equity in net income of foreign affiliate..........      (1,176)           (958)        (632)
       Depreciation and amortization......................         290             215          142
       Services paid for in stock.........................         740             660          451
       Net (gain) on sale of investments..................                        (452)         (12)
       Net (loss) on sale of investments..................                          (2)         (13)
       Net trade revenue earned over trade costs  ........      (2,585)         (1,683)        (936)
    Changes in operating assets and liabilities:
       Accounts and notes receivable......................        (766)            288         (351)
       Deferred taxes.....................................         138             (48)          94
       Prepaids and other assets..........................        (147)            189           46
       Accounts payable and other current liabilities.....         239              13           69
       Portion of receivables due to brokers..............         (33)            (32)         226
       Income taxes payable...............................        (475)            388           82
       Deferred revenue...................................                      (1,000)
                                                              ---------       ---------    ---------
        Net cash (used in) operating activities..........      (1,189)            (587)          10
                                                              ---------       ---------    ---------
Cash Flows From Investing Activities
    Acquisitions of SLI, Inc. and Global Exchange
        Network, Inc......................................      (2,583)
    Additions to equipment and information systems........        (254)           (227)         (68)
    Other.................................................                                      (25)
                                                              ---------       ---------    ---------                          
          Net cash (utilized in) investing activities.....      (2,837)           (227)         (93)
                                                              ---------       ---------    ---------
Cash Flows From Financing Activities
    Proceeds from sales of common stock...................       3,691           2,010          130
    Proceeds from notes payable...........................         237             814          224
    Repayments of notes payable...........................        (125)           (937)         (99)
                                                              ---------       ---------    ---------
       Net cash provided by financing activities.......          3,803           1,887          255
                                                              ---------       ---------    ---------
Net increase (decrease) in cash and equivalents...........       ( 223)          1,073          172
Cash and cash equivalents at beginning of period..........       1,524             451          279
                                                              ---------       ---------    ---------
Cash and Cash Equivalents at End of Period................    $  1,301        $  1,524     $    451
                                                              =========       =========    =========
Supplemental Cash Flow Information
Cash paid for interest....................................    $     29        $     30     $     20
Cash paid for income taxes................................         610             180            5
Equipment, inventory, information systems
  development services, prepaids, customer lists,
  marketable securities and goodwill acquired for
  common stock and ITEX trade dollars.....................       3,951           3,770        1,831   
Stock issued in acquisition of SLI, Inc...................         645
Available-for-sale securities purchased with ITEX trade
  dollars................................................          250             500        500

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

                                       36
<PAGE>
                                ITEX CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of November 12, 1996, the Company's independent auditor, Andersen, Andersen &
Strong,  L.C.,  had not completed the audit  procedures  related to audit of the
Company's July 31, 1996 financial statements.  Andersen, Andersen & Strong, L.C.
is continuing  its audit.  When the auditors  have  completed  their audit,  the
Company will file an amended Form 10-K that  includes the  auditors'  report and
any  changes  to the  financial  statements  and  related  disclosures  that are
determined as a result of completion of the audit procedures.

NOTE 1 -  DESCRIPTION OF BUSINESS

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

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

ITEX trade dollars are not legal tender, securities, or commodities.

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

The Company owns and operates  retail barter  offices in Portland,  Oregon;  St.
Louis,  Missouri; and Orange County,  California.  All other ITEX broker offices
are  independently  owned  and  operated  by ITEX  Licensed  Brokers.  There are
presently  110 broker  offices  located in 36 states,  Guam,  Puerto  Rico,  and
Vancouver,  Canada.  The  Company  bears  no  financial  responsibility  for the
financing of an independent broker office.

                                       37
<PAGE>
The Company  acts as an  intermediary  for the  exchange  of goods and  services
between major  companies,  through the formation of ITEX USA,  Inc., a corporate
barter management company,  which is the Company's exclusive agent for marketing
the  Company's  corporate  and  industrial  trading  business  of the  Company's
corporate barter  division.  ITEX USA negotiates  corporate  barter  agreements,
services  these  agreements  and  sells  the  inventory  it  acquires  in  these
transactions.  In these  transactions,  ITEX USA  issues  ITEX  Cash  Equivalent
Credits,  which are separate and apart from the ITEX Retail  Trade  Dollar,  now
used in accounting for  transactions  in the ITEX Retail Trade Exchange  System.
The revenues generated from those inventories when sold for cash will be divided
between the Company and ITEX USA. This is the first and primary profit center in
each ITEX  corporate  barter  transaction.  The  second  profit  center is a 12%
transaction fee paid by the ITEX Corporate  Barter client on the Cash Equivalent
Credit portion of each purchase.  This revenue will also be divided  between the
Company and ITEX USA.

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

As a result of this utilization of trade dollars, the Company has accumulated an
investment portfolio of marketable equity securities totaling $3,877,000 at July
31,  1996,  stated at the lower of cost or market.  Also at July 31,  1996,  the
Company owned inventories of goods and services totaling  $7,577,000,  stated at
the lower of cost or  market,  which was  available  for  corporate  trading  or
trading to members within the Exchange,  which increases cash commissions earned
by the Company,  for exchange for equity  securities of other companies,  or for
consumption by the Company in providing for its own operating needs.

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

During  the last  several  years,  the  Company  started  and  operated  a media
department,  which  exchanged  media products owned by the Company for due bills
for  prepaid  advertising  credits on radio  stations  across the U.S.  The four
Company-owned  included the Image Audio Music Production  Library,  , the Golden
Age of Radio Theatre, the New Rock Countdown, and Flashback ... Moments in Time.
During the fourth  quarter of the fiscal year ended July 31,  1996,  the Company
sold the this media-focused business operation in order to improve the Company's
ongoing  cash  flow.  The  Company  realized  a  profit  of  $325,000  from  the
transaction.

Although  the  Statement  of  Cash  Flows  indicates  negative  cash  flow  from
operations,  the Company believes that cash fees and commissions,  cash that can
be  obtained  from  the  sale  of  inventories  and  available-for-sale   equity
securities at the  discretion  of the Company,  and cash that would be available
from the sale of equity and debt securities of the Company will be sufficient to
fund cash operating needs of the Company while continuing to follow the strategy
of mixing cash and trade activities so as to maximize  

                                       38
<PAGE>
long-term  wealth building and shareholder  value.  Furthermore,  the Company is
presently incurring negative cash flow with respect to several areas of business
development  that would be expected to  contribute  in the future to  long-range
wealth  building.  At the  Company's  discretion,  it  could  conserve  cash  by
suspending or terminating these activities.  However,  there can be no assurance
that  operating  conditions  will  enable the  Company to continue to operate as
described  above or that  adequate  funds from any sources  will  continue to be
available on terms acceptable to the Company.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
The consolidated  financial  statements  include the accounts of the Company and
Barter Exchange, Inc., a wholly owned subsidiary. Intercompany transactions have
been eliminated.


Trade Dollar Transactions

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

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

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

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

Any negative  trade dollar balance of the Company is shown as a liability in the
balance sheet. The contractual  relationship  between the Company and members of
the ITEX Retail Barter Exchange permit the Company to essentially "borrow" trade
dollars  through  the  

                                       39
<PAGE>
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 fair value of the trade  dollars is less than the carrying
value or it is probable that not all trade dollars will be used.

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

Inventory for Principal Party Trading

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

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

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

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

Trading With Cash Equivalent Credits

Nature of Transactions. In addition to and separate from principal party trading
transactions  in which the Company  purchases  and sells  inventories  for trade
dollars,  the  Company  enters into  transactions  in which it  exchanges  "Cash
Equivalent Credits" for bulk inventory of corporations. These transactions occur
completely  outside the ITEX Retail  Barter  Exchange  and do not involve  trade
dollars,  which are  completely  different  from Cash  Equivalent  Credits.  The
Company  arranges the sale of the inventory  for cash,  which is retained by the
Company subject to no future contingencies.

                                       40
<PAGE>
Holders of Cash  Equivalent  Credits may only use them in purchases of goods and
services  from specific  vendors  identified by the Company in a blend of mostly
cash and a  smaller  proportion  of Cash  Equivalent  Credits.  Because  of bulk
purchasing  arrangements the Company has with these vendors,  the vendors accept
the cash portion of the price and  essentially  grant a special  discount to the
client equal to the number of Cash Equivalent Credits utilized in the cash-trade
blended  purchases.  ITEX will assist the client in  executing  transactions  in
which the client utilizes its Cash Equivalent Credits,  but the Company does not
guarantee the utilization of the Cash Equivalent  Credits and it is the client's
responsibility  to  utilize  its Cash  Equivalent  Credits.  The  Company  earns
transaction  fees equal to a percentage of the Cash Equivalent  Credits utilized
by the client.

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

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

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

Available for Sale Securities

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

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

Determination  of Fair Market Value. In accordance with advice received from the
SEC Office of the Chief Accountant (see Attachment A), investments in restricted
stock of publicly-traded companies are stated at the current quoted market price
of  freely-trading  stock of the  investee.  Also  consistent  with such advice,
convertible  preferred  stocks are 

                                       41
<PAGE>
stated at the current  quoted  market price of common  shares that the preferred
stock is convertible into.

Income Taxes

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

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

The provision for income taxes includes federal, foreign, state and local income
taxes  currently  payable and those  deferred  because of temporary  differences
between the financial statements and tax bases of assets and liabilities. All of
the undistributed earnings of the foreign affiliate have been reinvested and are
not  expected  to be  remitted to the parent  company.  Accordingly,  no federal
income taxes have been provided on such earnings, and at July 31, 1996 and 1995,
the cumulative  amounts of reinvested  income was  approximately  $2,766,000 and
$1,590,000, respectively.

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  expenses as incurred as
research and development  expenditures.  Capitalized  costs of communication and
information systems are amortized over a 4 year period.

Depreciation and Amortization

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

Capitalized Equipment Leases

                                       42
<PAGE>
Vehicle and equipment  leases have been recorded at the present value of the net
minimum  lease  payments.   These  assets  are  being   depreciated   using  the
straight-line method over lease terms of 3 to 5 years.

Allowance for Uncollectible Accounts

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

Estimates and Assumptions

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

NOTE 3 - REVENUE

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

                                      Fiscal Years Ended July 31,
                               -----------------------------------------
                                  1996           1995            1994
                               ----------     ----------      ----------
                                            (in thousands)
     Corporate Trading Revenue
         Trade                  $ 11,643       $ 12,403        $  8,266
         Cash                      4,684          1,808             161
                               ----------     ----------      ----------
                                  16,327         14,211           8,427
                               ----------     ----------      ----------
     Trade Exchange Revenue
         Trade                     5,532          4,204           1,942
         Cash                      8,593          5,214           4,398
                               ----------     ----------      ----------
                                  14,125          9,418           6,340
                               ----------     ----------      ----------
     Total Revenue
         Trade                    17,175         16,607          10,208
         Cash                     13,277          7,022           4,559
                               ----------     ----------      ----------

                                $ 30,452       $ 23,629        $ 14,767
                               ==========     ==========      ==========


                                       43
<PAGE>
NOTE 5 - PREPAIDS AND OTHER CURRENT ASSETS

At July 31, 1995 and 1994, prepaid expenses consisted of the following:

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

  Prepaid printing                   $            640       $            270
  Prepaid rent                                    ---                     14
  Prepaid services and other                      315                     40
                                   ===================     ==================
                                   $              955      $             324
                                   ===================     ==================

NOTE 6 -  INVENTORY FOR PRINCIPAL PARTY TRADING

Following are the components of inventory for principal party trading:

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

   Prepaid media advertising duebills  $          2,977       $          3,402
   Image production inventory                       ---                    292
   Art work                                       2,963                    245
   Foreign hotel roomnights                         ---                    226
   Domestic hotel roomnights                      1,447                  1,531
   Miscellaneous inventory                          190                    ---
                                     -------------------     ------------------
                                     $            7,577      $           5,696
                                     ===================     ==================

NOTE 7 - AVAILABLE-FOR-SALE SECURITIES

Following is  information  about the value of  available-for-sale  securities at
July 31, 1996 and 1995:
<TABLE>
<CAPTION>
                                                       Gross                Gross           Market
                                  Carrying          Unrealized           Unrealized         Value
                                   Value               Gains               Losses       (Discounted)
<S>                             <C>              <C>               <C>                <C>               
  July 31, 1996:
  Convertible preferred stock   $      3,163     $         138      $                 $       3,301
  Stock dividends receivable             327                                                    327
  Common stock (restricted)              255                                   (6)              249
                               ==============   ===============    ===============   ===============
                                $      3,745     $         138      $          (6)    $       3,877
                               ==============   ===============    ===============   ===============

  July 31, 1995:
  Convertible preferred stock   $      3,011     $          92      $                 $        3,103
  Stock dividends receivable             123                                                     123
  Subordination fee receivable           107                                                     107
                               ==============   ===============    ===============    ===============
                                $      3,241     $          92      $                 $        3,332
                               ==============   ===============    ===============    ===============
</TABLE>

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.

                                       44
<PAGE>
The  Company  recognizes  realized  gains and  losses  from the  disposition  of
available-for-sale  securities in results of operations.  The Company recognized
gains of $470,000  and losses of $248,000 in the year ended July 31,  1995.  The
Company  recognized  gains of $231,000  and losses of $219,000 in the year ended
July 31, 1994.

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

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

In August 1994,  the Company  acquired  $500,000 face value of Class B Preferred
Stock of  Softpoint,  Inc.  Such  shares  accrue  interest at the rate of 9% per
annum, payable in cash or common shares at Softpoint's discretion. The preferred
shares are  convertible  any time,  after one year until ten years for shares of
restricted  common  stock of  Softpoint,  Inc.  at the  average  bid price.  The
preferred stock is valued at the face value,  discounted by the present value of
shares convertible into common in the future.

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

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

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

                                       45
<PAGE>
NOTE 8 - INVESTMENT IN FOREIGN EQUITY AFFILIATE

The Company owns a 49% interest in Associated  Reciprocal Traders, Inc. ("ART"),
a foreign corporation based in Switzerland with international  commercial barter
operations.  ART engages in commercial barter transactions as a buyer and seller
of goods and services with companies and businesses  that are based in countries
outside the United States, as well as U.S.  companies.  The Company accounts for
its  investment in and share of net income or loss of ART by the equity  method.
The  Company's  equity  share of ART's net  income,  after  amortization  of the
difference  between  investment  cost and the Company's  proportionate  share of
underlying  assets,  was  $1,176,000  for the fiscal  year ended July 31,  1996,
$958,000  for the fiscal year ended July 31,  1995,  and $632,000 for the fiscal
year ended July 31, 1994.

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

                                                      July 31,
                               ------------------------------------------------
                                       1996                         1995
                               --------------------        --------------------
                                                  (in thousands)
 Total assets                   $         6,510             $         4,543
                               =====================       ====================
 Current liabilities            $           568             $           469
 Stockholders' equity                     5,942                       4,074
                               ---------------------       --------------------
 Total liabilities and equity   $         6,510             $         4,543
                               =====================       ====================

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

NOTE 9 - INVESTMENT IN SLI, INC. AND RELATED LITIGATION

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

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

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

                                       46
<PAGE>
On  October  11,  1996,  ITEX  Corporation  moved for  dismissal  of its  claims
(business  defamation,  unlawful trade practices and interference  with economic
relationships),  without prejudice,  against  defendants.  On that same date the
motion  was  granted  and  leave  granted  to file an  Amended  Complaint.  That
complaint  is styled  SLI,  Inc. v. Saul  Yarmak,  Stephen  Friedland,  Business
Exchange  International  Corp. and BX International,  Inc. The Amended Complaint
restates  the  claims  against  defendants  for  breach  of  contract,  specific
performance,  declaratory  judgment and fraud. By dismissing ITEX  Corporation's
claims without  prejudice,  ITEX may, if it chooses,  reinstitute its claims for
business  defamation,  unlawful trade practices and  interference  with economic
relationships.  Proceeding  under the  Amended  Complaint  permits an  expedited
determination of the core contract issues raised,  that is, whether BXI breached
its contract with SLI by asserting  that the BXI Trade  Exchange is not an asset
of BXI.

The  potential  outcome  of this  lawsuit is  uncertain.  However,  the  Company
believes that SLI has meritorious  arguments in favor of its contract positions.
The Company believes that a solution will be reached either through  negotiation
or  through  completion  of the  litigation  process.  Based  upon the docket in
Multnomah County,  Oregon, Circuit Court, the matter must go to trial within one
year of the  filing  of the  original  complaint.  Legal  counsel  is  unable to
evaluate the  probability of a favorable or  unfavorable  outcome or to estimate
the range of potential  recovery on the plaintiff's claims or any potential loss
on the defendant's counterclaims.

NOTE 10 - GOODWILL AND PURCHASED MEMBER LISTS

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

At July 31, 1996 and 1995, the unamortized  balance of member lists consisted of
the following:
                                                July 31,
                               ------------------------------------------
                                      1996                     1995
                               -----------------        -----------------
                                             (in thousands)
   Cost                         $           142          $           142
   Accumulated amortization                 (60)                     (32)
                               -----------------        -----------------
                                $            82          $           110
                               =================        =================

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

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

                                       47
<PAGE>
At July 31, 1996 and 1995, the unamortized balance consisted of the following:

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

Amortization  expense was  $75,000,  $35,000  and  $10,000 for the fiscal years
ended July 31, 1996, 1995, and 1994, respectively.

On March 1,  1995,  the  Company  acquired  100% of the  common  stock of Barter
Exchange,  Inc. (BEI) for $900,000,  of which $657,825 represented the excess of
cost over the fair value of net  assets  acquired  (see Note 22).  The excess of
cost over net assets of the Company  acquired is  amortized  on a  straight-line
basis over 20 years.

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

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

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

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


                                 (in thousands)

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

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

                                       48
<PAGE>
NOTE 11 - OTHER ASSETS

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

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

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

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

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

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

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

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

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

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

                                       49
<PAGE>
Company spent a total of $169,000 and $131,000,  respectively,  all of which was
charged to expense.

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

NOTE 12 - BROKER PORTION OF ACCOUNTS RECEIVABLE

The  Company  maintains  brokers in offices  around the  country to service  its
customers.  The broker is  entitled  to a split of any  collections  the Company
makes on that  broker's  customers,  which is then payable  within 35 days.  The
liability for amounts  estimated to be collected in the future was  $547,000,000
and $580,000 at July 31, 1996 and 1995.

NOTE 13 - EXCESS OF TRADE DOLLARS ISSUED OVER TRADE CREDITS
                   EARNED

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

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

NOTE 14 - BANK LINE OF CREDIT

Bank Line of Credit.  The Company had a line of credit facility with a bank that
expired on May 31, 1996. Pursuant to the line of credit, the Company was able to
borrow up to $200,000 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 2%. The maximum  amount of cash  borrowings
that may be  outstanding  at any time is determined by a borrowing  base formula
related to available collateral.  Borrowings are collateralized by the Company's
accounts  receivable,  fixed  assets and  inventory.  As of July 31,  1996,  the
Company  had no  borrowings  outstanding  under the bank  credit  facility.  The
Company is presently discussing the terms of a new line of credit with the bank.

                                       50
<PAGE>
NOTE 15 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Notes Payable

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

                                                                          July 31,
                                                          ------------------------------------------
                                                                  1996                  1995
                                                          -------------------     ------------------
                                                                       (in thousands)
<S>                                                       <C>                     <C>    

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

   Note payable at $8,300 per month,  including interest
   at 6% per annum                                                        18

   Note  payable at $600 per month,  including  interest
   at 8% per annum, collateralized by a vehicle
                                                                          26
                                                          -------------------     ------------------
                                                                         222                     21
   Less, current maturities                                              (96)                   (11)
                                                          ===================     ==================
                                                          $              126      $              10
                                                          ===================     ==================
</TABLE>
The annual maturities of long-term debt for the next five years are as follows:

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


Capital Leases

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

                                       51
<PAGE>
Minimum  future lease  payments under capital leases for the next five years are
as follows:

                                               (in thousands)

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

NOTE 16 - CAPITAL STOCK

Private  Placements.  During the fiscal  year ended July 31,  1996,  the Company
completed a private  placement with  Newcastle  Services Ltd.  ("Newcastle"),  a
foreign corporation, 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

                                       52
<PAGE>
required to issue to Wycliff  warrants to purchase an additional  250,000 shares
of common stock at an exercise price of $4.89 per share.  The private  placement
terms also  provided that Wycliff  would pay to the Company  additional  amounts
equal to 8% per annum for any portion of the purchase price that was not paid on
or before December 31, 1996.  Further,  the private  placement  provided that if
Wycliff  failed to pay at least  $625,000 in any calendar  quarter,  the Company
could,  at its  sole  option,  decline  to  thereafter  sell  any  of  the  then
unpurchased units to Wycliff.  Wycliff did not pay the purchase price that would
have been due for the calendar  quarter ended  September 30, 1996, and therefore
the Company has canceled the remaining portion of the private placement.

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

Stock  Option  Plan.  Effective  April  19,  1993,  the  Company  adopted  a Key
Employee's  Incentive  Stock  Option Plan (the 1993 Plan) that  provides for the
grant of options  intended to meet the  requirements  of Internal  Revenue  Code
Section 422, to purchase shares of the Company's  common stock.  Under the Plan,
the Company  may grant to the  Optionee  during the period  ending on a date not
more than ten  years  from the date of the grant of the  option,  the  option to
purchase common stock of the Company at a price per share equal to the bid price
of the Company's traded common stock on the date of the grant of the option. The
Company  filed  a  Form  S-8  registration  with  the  Securities  and  Exchange
Commission with respect to the shares of common stock underlying  options issued
or to be issued pursuant to the 1993 Plan. During the fiscal year ended July 31,
1996, the Company received proceeds totaling $875,000 from the exercise of stock
options to purchase 475,000 shares of common stock pursuant to 1993 Plan.

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

                                       53
<PAGE>
Following  is a summary of activity  under both stock option plans for the three
year period ended July 31, 1996:

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

Number of shares exercisable:
    July 31, 1996...............       1,923,000
                                   ================
    July 31, 1995...............          928,000
                                   ================

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

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

NOTE 17 - INCOME TAXES

Comparative analysis of the provisions for income taxes follows:

                                 Fiscal Years Ended July 31,
                  ----------------------------------------------------
                        1996               1995              1994
                  --------------      -------------      -------------
                                        (in thousands)
   Current:
     Federal     $       556        $       475         $         76
     State               113                 94                   16
                  --------------      -------------      -------------

                         669                569                   92
                  --------------      -------------      -------------
   Deferred
     Federal             114                (40)                   8 
     State                23                 (7)                   1
                  --------------      -------------      -------------
                          137               (47)                   9
                  --------------      -------------      -------------
                   $      806         $       522       $         101
                  ==============      =============      =============

                                       54
<PAGE>
A reconciliation  of the consolidated  income tax expense on income per the U.S.
Federal Statutory rate to the reported income tax follows:

                                          Fiscal Years Ended July 31,
                           ----------------------------------------------------
                                 1996               1995              1994
                           --------------      -------------      -------------
                                                 (in thousands)
Taxes at U.S. Federal
  statutory rate            $    1,111         $       746         $      307
Nondeductible items                (47)                (45)               (25)
Share of net income of
  foreign equity affiliate        (470)               (316)              (209)
State income taxes                 212                 137                 28
                           --------------      -------------       ============
                            $      806         $      522          $      101
                           ==============      =============       ============

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

                                                       July 31,
                                       ----------------------------------------
                                                1996                  1995
                                       ------------------     -----------------
                                                   (in thousands)
 Current deferred tax liabilities       $          ---       $             43
 Noncurrent deferred tax liabilities               237                    130
 Current deferred tax assets                        (3)                   (51)
 Noncurrent deferred tax assets                    ---                    (26)
 Valuation allowance                               ---                   ---
                                       ==================     =================
                                        $          234        $            96
                                       ==================     =================


NOTE 18 - ACQUISITIONS

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

                                                 (in thousands)


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

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

Acquisition of Barter  Exchange,  Inc. (BEI) Trade Exchange.  Effective March 1,
1995,  ITEX  entered  into  an  Agreement  to  acquire  all  of the  issued  and
outstanding  capital  stock of  Barter  Exchange,  Inc.  (BEI)  (a newly  formed
corporation), from Inventory Merchandising Services, Inc. (IMS). Pursuant to the
Agreement,  ITEX  agreed  to  transfer  and  deliver  to 

                                       55
<PAGE>
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.  The
purchase price was allocated as follows:

                                         (in thousands)

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

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

NOTE 19 - 401(k) SAVINGS PLAN

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

NOTE 20 - BUSINESS CONCENTRATIONS

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

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

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

                                       56
<PAGE>
N0TE 21 - COMMITMENTS AND CONTINGENCIES

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

                                                  (in thousands)

          Fiscal Year Ending July 31,
               1997                               4     170
               1998                                     151
               1999                                     140
               2000                                     140
               2001                                     140

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

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

                                       57
<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 off 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. Barter Exchange, Inc. contract dated March 1, 1995)


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

  23. Consent of Independent Auditors

                                       58
<PAGE>

                                                                   EXHIBIT 23.1


                         CONSENT OF INDEPENDENT AUDITORS








As of November 12, 1996, the Company's independent auditor, Andersen, Andersen &
Strong,  L.C.,  had not completed the audit  procedures  related to audit of the
Company's July 31, 1996 financial statements.  Andersen, Andersen & Strong, L.C.
is continuing  its audit.  When the auditors  have  completed  their audit,  the
Company will file an amended Form 10-K that  includes the  auditors'  report and
any  changes  to the  financial  statements  and  related  disclosures  that are
determined as a result of completion of the audit procedures.

                                       59
<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:    November  12, 1996

                                                   ITEX CORPORATION


      November 12, 1996                    /s/  Graham H. Norris, Sr.
------------------------------             ------------------------------------
                                           Graham H. Norris, 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.                                     November 12, 1996
----------------------------------------------
Graham H. Norris, President and Chief Executive Officer
(principal executive officer and director)

/s/  Joseph M. Morris                                         November 12, 1996
----------------------------------------------
Joseph M. Morris, Vice President and Chief Financial Officer
(principal accounting officer and director)

/s/ Mary Sherr                                                November 12, 1996
----------------------------------------------
Vice President of Broker Development, Director

/s/ Dr. Evan B. Ames                                          November 12, 1996
----------------------------------------------
Director

/s/ Thomas G. Baer                                            November 12, 1996
----------------------------------------------
Director

/s/ Dr. Sherry L. Meinberg                                    November 12, 1996
----------------------------------------------
Director

/s/ Robert Nelson                                             November 12, 1996
----------------------------------------------
/s/ Director

/s/ Dr. Charles Padbury                                       November 12, 1996
----------------------------------------------
Chairman of the Board of Directors


                                       60
<PAGE>