ITEX CORPORATION, 10-Q, 1997-01-06

ITEX CORPORATION
10-Q, 1997-01-06
BUSINESS SERVICES, NEC

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

FORM 10-Q

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

For the Quarterly Period Ended

November 20, 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
past 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
------ ------

Number of Shares of Common Stock, $0.01 Par Value Outstanding
at December 31, 1996:

6,849,000

(This Form 10-Q includes 27 pages)

<PAGE>
ITEX CORPORATION

FORM 10-Q
For the Quarterly Period Ended
November 20, 1996

INDEX

Page
--------

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS AT NOVEMBER 20, 1996 AND 3
JULY 31, 1996

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIXTEEN 4
WEEK PERIOD ENDED NOVEMBER 20, 1996 AND TWELVE WEEK
PERIOD ENDED OCTOBER 23, 1995

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIXTEEN 5
WEEK PERIOD ENDED NOVEMBER 20, 1996 AND TWELVE WEEK
PERIOD ENDED OCTOBER 23, 1995

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 13
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PART II. OTHER INFORMATION 24

2
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts )

November 20, July 31,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash ..................................................... $ 1,121 $ 1,301
Accounts receivable, net of allowance for doubtful
accounts of $115 and $96.............................. 1,052 847
Notes receivable.......................................... 263 360
Prepaids and other current assets......................... 385 319
------------ ------------
Total current assets.................................. 2,821
2,827

Inventory for Principal Party Trading.......................... 8,699 7,844

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

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

Investment in Business Exchange International Corp............. 2,534 2,418

Goodwill and Purchased Member Lists, net....................... 1,229 1,299

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

Other Assets................................................... 931 947
------------ ------------
$ 24,285 $ 23,406
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 156 $ 183
Portion of receivables due to brokers .................... 567 508
Trade credits issued in excess of earned.................. 154 41
Income taxes payable...................................... 327 94
Deferred tax liability.................................... 1,253 1,253
Current portion of long-term indebtedness................. 94 138
Other current liabilities................................. 294 349
------------ ------------
Total current liabilities............................. 2,845 2,566
------------ ------------

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

Long-term Indebtedness......................................... 190 192
------------ ------------

Stockholders' Equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 6,853,000 and 6,804,000 shares
issued and outstanding................................. 69 68
Paid-in capital........................................... 16,562 16,386
Net unrealized gain on marketable securities.............. 132 132
Treasury stock, at cost (3,900 and 10,000 shares)......... (14) (29)
Retained earnings......................................... 4,876 4,466
Prepaid Printing.......................................... (640) (640)
------------ ------------
Total stockholders' equity............................ 20,985 20,383
------------ ------------
$ 24,285 $ 23,406
============ ============

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

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

Sixteen Weeks Ended Twelve Weeks Ended
November 20, 1996 October 23, 1995
------------------- ------------------
<S> <C> <C>
Revenue
Sales arranged...................................... $ 768 $ 903
=================== ==================

Corporate trading revenue........................... $ 786 $ 4,292
Commissions on sales arranged....................... 110 222
Trade exchange revenue.............................. 4,761 2,164
------------------- ------------------
5,657 6,678
------------------- ------------------
Costs and Expenses
Costs of corporate trading.......................... 531 3,319
Costs of trade exchange revenue..................... 2,346 989
Selling, general, and administrative................ 2,131 1,968
------------------- ------------------
5,008 6,276
------------------- ------------------

Income from Operations.................................. 649 402

Other Income (Expense)
Interest income (expense), net........................ 11 22
Miscellaneous, net.................................. -- 6
------------------- ------------------
11 28
------------------- ------------------
Income Before Taxes and Equity in Net
Income of Foreign Affiliate........................... 660 430

Provision for Income Taxes.............................. 250 181
------------------- ------------------

Income Before Equity in Net Income
of Foreign Affiliate.................................. 410 249

Equity in Net Income of Foreign Affiliate............... -- 543
------------------- ------------------
Net Income ............................................. $ 410 $ 792
=================== ==================

Average Common and Equivalent Shares:
Primary.............................................. 7,394 6,857
=================== ==================
Fully diluted........................................ 6,970
==================

Net Income Per Common Share:
Primary.............................................. $ 0.06 $ 0.12
=================== ==================
Fully diluted........................................ $ 0.11
==================

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

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

Sixteen Weeks Ended Twelve Weeks Ended
November 20, 1996 October 23, 1995
------------------- ------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income............................................$ 410 $ 792
Adjustments:
Equity in net income of foreign affiliate.......... -- (543)
Depreciation and amortization...................... 166 43
Services paid for in stock......................... 170 224
Net trade revenue earned over trade costs ........ (834) (1,054)
Changes in operating assets and liabilities:
Accounts and notes receivable...................... (205) 201
Deferred taxes..................................... (39)
Prepaids and other assets.......................... (13) 114
Accounts payable and other current liabilities..... (10) (22)
Portion of receivables due to brokers.............. 60 (46)
Income taxes payable............................... 232 (204)
------------------- ------------------
Net cash (used in) operating activities.......... (24) (534)
------------------- ------------------

Cash Flows From Investing Activities
Acquisitions of SLI, Inc.............................. (77)
Additions to equipment and information systems........ (35) (14)
------------------- ------------------
Net cash (utilized in) investing activities..... (112) (14)
------------------- ------------------
Cash Flows From Financing Activities
Proceeds from sales of common stock................... 1 1,130
Repayments of notes payable........................... (44) (13)
------------------- ------------------
Net cash provided by financing activities....... (43) 1,117
------------------- ------------------
Net increase (decrease) in cash and equivalents........... (179) 569

Cash and cash equivalents at beginning of period.......... 1,300 1,524
------------------- ------------------
Cash and Cash Equivalents at End of Period................$ 1,121 $ 2,093
=================== ==================
Supplemental Cash Flow Information
- ----------------------------------
Cash paid for interest....................................$ 6 $ 2
Cash paid for income taxes................................ -- 425

Non-Cash Investing and Financing Activities
- -------------------------------------------
Equipment, inventory, information systems
development services, prepaids, customer lists,
marketable securities and goodwill acquired for
common stock and ITEX trade dollars..................... 68 962

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

5
<PAGE>
ITEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - UNAUDITED INTERIM INFORMATION

ITEX Corporation (the "Company") and its wholly-owned subsidiaries prepare and
report financial results using a fiscal year ending July 31. The Company closes
its books at the end of 13 "accounting cycles," which consist of four weeks
each. The Company reports quarterly results using three quarters consisting of
three of the four-week accounting cycles each and one quarter consisting of four
of the four-week accounting cycles. In prior years, the Company had reported the
four cycle, or 16-week quarter as the fourth quarter of each fiscal year.
Commencing with the first quarter of the fiscal year ending July 31, 1997, the
Company will report the four cycle, or 16-week quarter as the first quarter of
each fiscal year. This practice is being implemented to provide better
management of Company operations and to more evenly space the periodic reporting
of financial information to the public. Accordingly, the new dates for the
fiscal ends of the Company's quarters for public reporting will be as follows:
first quarter, November 20; second quarter, February 12; third quarter, May 7;
fourth quarter, July 31.

This Form 10-Q includes the consolidated financial statements of the Company and
its wholly-owned subsidiaries. The consolidated balance sheet as of July 31,
1996 is excerpted from the Company's audited financial statements for the fiscal
year then ended. The Company's consolidated financial statements included in
this Form 10-Q for the interim periods ended November 20, 1996 and October 23
1995 include all normal recurring adjustments which, in the opinion of the
Company, are necessary for a fair statement of the results of operations,
financial position, and cash flows as of the dates and for the periods
presented. The Company's operating results for the sixteen-week period ended
November 20, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ending July 31, 1997.

The Notes to Consolidated Financial Statements included in the Company's July
31, 1996 Annual Report on Form 10-K/A should be read in conjunction with these
consolidated financial statements.

NOTE 2 - 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)

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

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

The Company acts as an intermediary for the exchange of goods and services
between major companies, through 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 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 also divided between the Company and ITEX USA.

7
<PAGE>
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
November 20, 1996, stated at the lower of cost or market. Also at November 20,
1996, the Company owned inventories of goods and services totaling $8,699,000,
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 attained a presence in the
international corporate barter marketplace. The Company's share of ART's net
assets and results of operations were included in the Company's financial
statements using the equity method of accounting through July 31, 1996. On
November 27, 1996, the majority owner of ART informed the Company of its intent
to take immediate steps to distribute all the assets of ART and to end the
relationship with the Company. The Company had previously intended to reinvest
its share of the earnings of this venture indefinitely and, accordingly, had not
provided income taxes on its share of ART's undistributed earnings. As a result
of the inability to continue to reinvest its share of ART's earnings, the
Company recognized a deferred provision for income taxes of $1,247,000 during
the fourth quarter of the fiscal year ended July 31, 1996.

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 quarters ended November 20, 1996 and October 23, 1995:

Sixteen Weeks Ended Twelve Weeks Ended
November 20, 1996 October 23, 1995

------------------- ------------------
(in thousands)
Corporate Trading Revenue
Trade $ 776 $ 4,263
Cash 10 29
------------ ------------
786 4,292
------------ ------------
Commissions on Sales Arranged
Trade --
Cash 110 222
------------ ------------
110 222
------------ ------------
Trade Exchange Revenue
Trade 1,615 808
Cash 3,146 1,356
------------ ------------
4,761 2,164
------------ ------------
Total Revenue
Trade 2,391 5,071

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Cash 3,266 1,607
------------ ------------
$ 5,657 $ 6,678
============ ============

The above reported revenue amounts include only the portions considered as
commissions earned with respect to sales by ITEX USA, in accordance with Section
1200.01 of the AICPA Technical Practice Aids. Total sales arranged by the
Company in connection with ITEX USA were $768,000 and $903,000 in the quarters
ended November 20, 1996 and October 23, 1995, respectively.

NOTE 4 - INVENTORY FOR PRINCIPAL PARTY TRADING

Following are the components of inventory for principal party trading:

November 20, July 31,
1996 1996
------------ ------------
(in thousands)

Prepaid media advertising duebills $ 4,229 $ 3,530
Art work 2,642 2,642
Hotel roomnights 1,540 1,482
Miscellaneous 288 190
------------ ------------
$ 8,699 $ 7,844
============ ============

NOTE 5 - 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. Through July 31, 1996, the
Company accounted for its investment in and share of net income or loss of ART
by the equity method. The Company's equity share of ART's net income (loss),
after amortization of the difference between investment cost and the Company's
proportionate share of underlying assets, was ($90,000) for the fiscal year
ended July 31, 1996, $958,000 for the fiscal year ended July 31, 1995, and
$632,000 for the fiscal year ended July 31, 1994.

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

The assets of ART as of November 20, 1996 consist primarily of
available-for-sale securities, none of which are securities of ITEX Corporation.
The majority owner

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of ART has agreed to distribute the assets on a basis expected to result in the
Company realizing an amount not less than the carrying value of the Company's
investment. The Company expects to be able to meet any requirements to pay the
current deferred tax liability by selling a portion of the available-for-sale
securities to be received. Commencing August 1, 1996, the Company is accounting
for its investment in ART by the cost method.

NOTE 6 - BANK LINE OF CREDIT

On December 4, 1996, the Company's primary bank agreed to a new line of credit
arrangement with a term through December 31, 1997. Pursuant to the line of
credit, the Company may borrow up to $250,000 on a short-term basis for working
capital purposes. The interest rate applicable to borrowings pursuant to the
facility is equal to the bank's prime rate of interest plus 1.5%. The maximum
amount of cash borrowings that may be outstanding at any time is determined by a
borrowing base formula related to available collateral. Borrowings are
collateralized by the Company's accounts receivable, fixed assets and inventory.
As of November 20, 1996, the Company had no borrowings outstanding under the
bank credit facility. Based on available collateral, the entire facility amount
of credit of $250,000 was available to the Company as of November 20, 1996.

NOTE 7 - TRADE DOLLARS ISSUED IN EXCESS OF EARNED

At November 20, 1996, the Company had expended 154,000 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 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 8 - CAPITAL STOCK

Private Placement. 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

10
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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.

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.

Stock Option Plan. The Board of Directors adopted a new stock option plan
applicable to directors, officers, employees, and consultants of the Company
effective December 27, 1996, pursuant to which 995,000 shares of common stock
were reserved for issuance, all of which were granted to optionees at an
exercise price of $3.75 per share. Exercise prices for the options granted under
the new plan are equal to market value on the date of grant and may be
exercisable for up to five years. The Company intends to present the new plan
for approval by the Company's shareholders at the annual meeting. 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.

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 9 - ACQUISITION OF 50% INTEREST IN BUSINESS EXCHANGE
INTERNATIONAL CORPORATION AND RELATED LITIGATION

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

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$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.

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 defendants have asserted counterclaims for attorney's fees and fraud
against SLI in defendants' amended answer and counterclaims.

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

NOTE 10 - SUBSEQUENT EVENT

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with ITEX members in other countries. Ihlas Holdings is one of Turkey's largest
corporations, has 57 subsidiaries, which include interests in chemicals,
textiles, food, electronics, health care, construction, media, banking,
insurance, and international trade. Ihlas has already taken steps to expand the
Ihlas ITEX barter network into the nearby states of Kazakhstan, Turkistan, and
Azerbijan.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS, LIQUIDITY, AND CAPITAL RESOURCES

Business and Plan of Operation

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.

13
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retail trade network. The Company bears no financial responsibility for the
financing of an independent broker office.

The Company acts as an intermediary for the exchange of goods and services
between major companies through 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 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 also divided between the Company and ITEX USA.

The Company operates with the objectives of long-term equity-building while also
ensuring availability of sufficient cash for current operating requirements.
Accordingly, the Company may in any period report significant revenue, profits,
and increases in net assets from transactions denominated in ITEX trade dollars
or other noncash consideration. Sometimes, the Company invests in equity
securities with ITEX trade dollars that have been earned by the Company in trade
transactions. The 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.

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 attained a presence in the
international corporate barter marketplace. The Company's share of ART's net
assets and results of operations were included in the Company's financial
statements using the equity method of accounting through July 31, 1996. The
Company's equity share of ART's net income (loss), after amortization of the
difference between investment cost and the Company's proportionate share of
underlying assets, was ($90,000) for the fiscal year ended July 31, 1996,
$958,000 for the fiscal year ended July 31, 1995, and $632,000 for the fiscal
year ended July 31, 1994.

On November 27, 1996, the majority owner of ART informed the Company of its
intent to take immediate steps to distribute all the assets of ART and to end
the

14
<PAGE>
relationship with the Company. The Company had previously intended to reinvest
its share of the earnings of this venture indefinitely and, accordingly, had not
provided income taxes on its share of ART's undistributed earnings. As a result
of the inability to continue to reinvest its share of ART's earnings, the
Company recognized a deferred provision for income taxes of $1,247,000 during
the fiscal quarter ended July 31, 1996.

The assets of ART as of November 20, 1996 consist primarily of
available-for-sale securities, none of which are securities of ITEX Corporation.
The majority owner of ART has agreed to distribute the assets on a basis
expected to result in the Company realizing an amount not less than the carrying
value of the Company's investment. The Company expects to be able to meet any
requirements to pay the current deferred tax liability by selling a portion of
the available-for-sale securities to be received. Commencing August 1, 1996, the
Company is accounting for its investment in ART by the cost method.

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

Development Activities

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

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."

15
<PAGE>
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 1995, the Company completed an agreement with
International Trade Exchange (ITEX) Corp., a Vancouver B.C. based company, to
operate the Canadian barter company. International Trade Exchange Corp. does
business in Canada under the names ITEX and Bartercard. In spite of the
similarity of names, ITEX Corporation (U.S.) and ITEX/Bartercard (Canada) have
never had a business relationship in the past. Under the terms of the agreement
ITEX acquired the rights to the name and trademarks of International Trade
Exchange 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.

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

16
<PAGE>
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.

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
quarter ended November 20, 1996, the Company spent a total of $57,000 on
research and development for its communication and information systems, of which
$24,000 was capitalized and $33,000 was charged to expense.

The ITEX symbol and name have, in the past, been registered trademarks of the
Company. A new application for the ITEX symbol and name has been filed with the
Patent and Trademark Office.

Liquidity and Capital Resources

Overall Financial Position. At November 20, 1996, the Company's working capital
ratio was 1.0 to 1, based on current assets of $2,821,000 and current
liabilities of $2,845,000. The Company's working capital ratio at July 31, 1996,
was 1.1 to 1, based on current assets of $2,827,000 and current liabilities of
$2,566,000. Current liabilities includes $1,247,000 in current deferred taxes
related to earnings to be remitted as a result of the termination of the ART
foreign venture. The net assets to be received, consisting primarily of
available-for-sale securities, are included in the long-term classification of
investment in foreign equity affiliate of $3,197,000. The Company expects to be
able to meet any requirements to pay the current deferred tax liability by
selling a portion of the available-for-sale securities to be received.

Total stockholders' equity increased to $20,985,000 at November 20, 1996, from
$20,383,000 at July 31, 1996. The primary increase in stockholders' equity was
from the Company's continued profitable operations.

17
<PAGE>
The Statement of Cash Flows indicates negative cash flow from operations of
$24,000 for the first quarter of fiscal 1997, which is a significant improvement
from negative cash flow from operations of $534,000 for the first quarter of
fiscal 1996. The Company believes that cash fees and commissions, cash that can
be obtained from the sale of inventories and available-for-sale equity
securities at the discretion of the Company, and cash that would be available
from the sale of equity and debt securities of the Company will be sufficient to
fund cash operating needs of the Company while continuing to follow the strategy
of mixing cash and trade activities so as to maximize long-term equity building
and shareholder value. Furthermore, the Company is presently incurring negative
cash flow with respect to several development projects. At the Company's
discretion, it could conserve cash by suspending or terminating these
activities. 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.

18
<PAGE>
Company's shareholders at the annual meeting. 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.

Bank Line of Credit. On December 4, 1996, the Company's primary bank agreed to a
new line of credit arrangement with a term through December 31, 1997. Pursuant
to the line of credit, the Company may borrow up to $250,000 on a short-term
basis for working capital purposes. The interest rate applicable to borrowings
pursuant to the facility is equal to the bank's prime rate of interest plus
1.5%. The maximum amount of cash borrowings that may be outstanding at any time
is determined by a borrowing base formula related to available collateral.
Borrowings are collateralized by the Company's accounts receivable, fixed assets
and inventory. As of November 20, 1996, the Company had no borrowings
outstanding under the bank credit facility. Based on available collateral, the
entire facility amount of credit of $250,000 was available to the Company as of
November 20, 1996.

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

19
<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.

20
<PAGE>
RESULTS OF OPERATIONS

Comparison of Sixteen-Week Period ended November 30, 1996 (First Quarter of
- --------------------------------------------------------------------------------
Fiscal 1997) and Twelve-Week Period ended October 23, 1995 (First Quarter of
- --------------------------------------------------------------------------------
Fiscal 1996)
- ------------

Overall Operating Results

Total revenue decreased to $5,657,000 in the first quarter of fiscal 1997 from
$6,678,000 in the first quarter of fiscal 1996. Income from operations increased
to $649,000 in the first quarter of fiscal 1997 from $402,000 in the first
quarter of fiscal 1996. In the first quarter of fiscal 1997, the Company's
revenue and profit from its core retail trade exchange business increased
significantly. This higher-margin revenue more than offset the effects of lower
revenue from decreased activity in corporate trading in the current quarter.

Equity in net income from foreign affiliate was $543,000 in the first quarter of
fiscal 1996. On November 27, 1996, the majority owner of ART informed the
Company of its intent to take immediate steps to distribute all the assets of
ART and to end the relationship with the Company. Accordingly, effective August
1, 1996, the Company commenced accounting for its investment in ART by the cost
method, and has not recognized any earnings with respect to ART in the current
quarter. This fluctuation regarding the earnings of ART is the primary reason
for the decrease in net income to $410,000, or $0.06 per share in the first
quarter of fiscal 1997 from $792,000, or $0.12 per share, in the first quarter
of fiscal 1996.

Revenue

Total Revenue. Total revenue decreased to $5,657,000 in the first quarter of
fiscal 1997 from $6,678,000 in the first quarter of fiscal 1996. Following is a
summary of the components of revenue for the first quarters of fiscal 1997 and
1996:
<TABLE>
<CAPTION>

Sixteen Weeks Ended Twelve Weeks Ended
November 20, 1996, 1996 October 23, 1995
----------------------- -----------------------
(in thousands)
<S> <C> <C>
Corporate Trading Revenue
Trade $ 776 $ 4,263
Cash 10 29
---------- ----------
786 4,292
---------- ----------
Commissions on Sales Arranged
Trade --
Cash 110 222
---------- ----------
110 222
---------- ----------
Trade Exchange Revenue
Trade 1,615 808
Cash 3,146 1,356
---------- ----------
4,761 2,164
---------- ----------
Total Revenue
Trade 2,391 5,071
Cash 3,266 1,607
---------- ----------
$ 5,657 $ 6,678
========== ==========
</TABLE>
The above reported revenue amounts include only the portions considered as
commissions earned with respect to sales by ITEX USA, in accordance with

21
<PAGE>
Section 1200.01 of the AICPA Technical Practice Aids. Total sales arranged by
the Company in connection with ITEX USA were $768,000 and $903,000 in the
quarters ended November 20, 1996 and October 23, 1995, respectively.

Trade Exchange Revenue. In the first quarter of fiscal 1997, the Company's
revenue from its core retail trade exchange business increased to $4,761,000
from $2,164,000 in the first quarter of fiscal 1996. The increase in trade
exchange revenue was attributable to an array of factors. The first quarter of
fiscal 1997 was comprised of a 16-week period, whereas the first quarter of
fiscal 1996 was comprised of a 12-week period. 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 and higher
performance levels by brokers. The Company has also continued its internal
expansion and its ongoing broad-based marketing and advertising program targeted
at recruitment of additional brokers and members of the Exchange.

Corporate Trading Revenue. The decreased level of corporate trading revenue was
attributable to the Company devoting less of its resources to corporate trading
activities during the current year. Significant management and staff time was
spent on litigation and other regulatory matters. Management expects increases
in operating results from corporate trading activities in future periods.

Costs and Expenses

Costs of Trade Exchange Revenue. Costs of trade exchange revenue increased to
$2,346,000 in the first quarter of fiscal 1997 from $989,000 in the first
quarter of fiscal 1996. Costs of trade exchange revenue, which consists of
brokers' fees and commissions, were 49% of trade exchange revenue in the first
quarter of fiscal 1997 and 46% in the first quarter of fiscal 1996.

Costs of Corporate Trading. Costs of corporate trading decreased to $531,000 in
the first quarter of fiscal 1997 from $3,319,000 in the first quarter of fiscal
1996 because of the lower revenue level. Costs of corporate trading revenue were
68% in the first quarter of fiscal 1997 and 77% in the first quarter of fiscal
1996.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $2,131,000 in the first quarter of fiscal
1997 from $1,968,000 in the first quarter of fiscal 1996. Part of the increase
was attributable to amortization expense related to acquisitions and higher
professional fees connected with various litigation and regulatory matters.

Total advertising and promotion was $644,000 in the first quarter of fiscal 1997
as compared to $805,000 in the first quarter of fiscal 1996. 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 the first quarter of fiscal 1997, the Company paid
$630,000 of its advertising costs by ITEX trade dollars or other trade
consideration, representing 98% of total advertising costs for the period.

22
<PAGE>
Inflation

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

Forward-Looking Information

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

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

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

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

23
<PAGE>
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

24
<PAGE>
reached either through negotiation or through completion of the litigation
process. The trial date has been set for February 24, 1997. Legal counsel is
unable to evaluate the probability of a favorable or unfavorable outcome or to
estimate the range of potential recovery on the plaintiff's claims or any
potential loss on the defendant's counterclaims.

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

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

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

On November 21, 1996, the Company was served with a complaint filed in the
Circuit Court for Washington County, Oregon, by William Bradford Financial
Services, Inc. against the Company; Michael Baer; Graham Norris; Oxford
Transfer, Inc.; David Christensen, C.P.A.; Andersen, Andersen & Strong, L.C.,
Donovan Snyder, and John Does I-III. William Bradford Services is controlled by
Leslie French, plaintiff in the litigation described above. The complaint
alleges breach of fiduciary duty, breach of contract, interference with
contract, and fraud and seeks compensatory and punitive damages.

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

25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

The Exhibits hereto are listed in the accompanying Exhibit Index.

b. Reports on Form 8-K

(1) Dated December 9, 1996, regarding change in quarterly reporting dates.

SIGNATURES

Pursuant to the requirements 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.

ITEX CORPORATION

January 6, 1997 /s/ Graham H. Norris
- ------------------------- -------------------------------------
Date Graham H. Norris, Chairman of the Board
of Directors, President and
Chief Executive Officer
(principal executive officer and director)

January 6, 1997 /s/ Joseph M. Morris
- ------------------------- -------------------------------------
Date Joseph M. Morris, Vice President and
Chief Financial Officer
(principal accounting officer and director)

26
<PAGE>
EXHIBIT INDEX

EXHIBIT DESCRIPTION
--------------- -----------------------------------------------

27 Financial Data Schedule for the Sixteen Weeks
Ended November 20, 1996

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jul-31-1997
<PERIOD-START> Aug-01-1996
<PERIOD-END> Nov-20-1996
<CASH> 1,121
<SECURITIES> 3,877
<RECEIVABLES> 1,052
<ALLOWANCES> 0
<INVENTORY> 8,699
<CURRENT-ASSETS> 2,821
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,285
<CURRENT-LIABILITIES> 2,845
<BONDS> 0
0
0
<COMMON> 20,985
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 24,285
<SALES> 0
<TOTAL-REVENUES> 5,657
<CGS> 2,877
<TOTAL-COSTS> 5,008
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 660
<INCOME-TAX> 250
<INCOME-CONTINUING> 410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 410
<EPS-PRIMARY> .06
<EPS-DILUTED> .06

</TABLE>