----

----

| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|-----------------------------------------------------------------------------------|

| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
|---|-----------------------------------------------------------------|

| WISCONSIN                                                      |   | 39-1388360                        |
|----------------------------------------------------------------|--------|-----------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (IRS Employer Identification No.) |

| Large accelerated filer o | Accelerated filer o         |
|---------------------------|-----------------------------|
| Non-accelerated filer o   | Smaller reporting company x |

----

----

----

two

| PART I - FINANCIAL INFORMATION |
|--------------------------------|
|                           |   | Page |
| Item 1                         | Financial statements |   |
|                           |   |   |
|                           | Condensed consolidated balance sheets – October 31, 2008  (unaudited) and July 31, 2008 | 3 |
|                           | Condensed consolidated statements of income (unaudited) for the three months ended October 31, 2008 and 2007 | 4 |
|                           | Condensed consolidated statements of cash flows (unaudited) for the three months ended October 31, 2008 and 2007 | 5 |
|                           | Notes to unaudited condensed consolidated financial statements | 6-13 |
|                           |   |   |
| Item 2                         | Management's discussion and analysis of financial condition and results of operations | 14-22 |
|                           |   |   |
| Item 3                         | Quantitative and qualitative disclosures about market risk | 22 |
|                           |   |   |
| Item 4T                        | Controls and procedures | 22 |
|                           |   |
| PART II - OTHER INFORMATION    |   |
|                           |   |   |
| Item 1                         | Legal proceedings | 23 |
|                           |   |   |
| Item 2                         | Unregistered sales of equity securities and use of proceeds | 23 |
|                           |   |   |
| Item 3                         | Defaults upon senior securities | 23 |
|                           |   |   |
| Item 4                         | Submission of matters to a vote of security holders | 23 |
|                           |   |   |
| Item 5                         | Other information | 23 |
|                           |   |   |
| Item 6                         | Exhibits | 23 |
|                           |   |   |
| Signatures                     |   | 24 |

----

Index

| ARI Network Services, Inc.                                                                                                                                              |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets                                                                                                                                             |   |
| (Dollars in Thousands, Except Per Share Data)                                                                                                                           |   |
|                                                                                                                                                                    |   | (Unaudited) |   |   | (Audited) |   |
|                                                                                                                                                                    |   | October 31, |   |   | July 31, |   |
|                                                                                                                                                                    |   | 2008 |   |   | 2008 |   |
| ASSETS                                                                                                                                                                  |   |   |   |   |   |   |
| Current Assets:                                                                                                                                                         |   |   |   |   |   |   |
| Cash                                                                                                                                                                    |   | $ | 860 |   |   | $ | 1,086 |   |
| Trade receivables, less allowance for doubtful accounts of $178 and $175 at October 31, 2008 and July 31, 2008, respectively                                            |   |   | 1,104 |   |   |   | 1,304 |   |
| Work in Process                                                                                                                                                         |   |   | 215 |   |   |   | 264 |   |
| Prepaid expenses and other                                                                                                                                              |   |   | 267 |   |   |   | 392 |   |
| Deferred income taxes                                                                                                                                                   |   |   | 330 |   |   |   | 330 |   |
| Total Current Assets                                                                                                                                                    |   |   | 2,776 |   |   |   | 3,376 |   |
| Equipment and leasehold improvements:                                                                                                                                   |   |   |   |   |   |   |   |   |
| Computer equipment                                                                                                                                                      |   |   | 5,772 |   |   |   | 5,647 |   |
| Leasehold improvements                                                                                                                                                  |   |   | 305 |   |   |   | 198 |   |
| Furniture and equipment                                                                                                                                                 |   |   | 2,880 |   |   |   | 2,842 |   |
|                                                                                                                                                                    |   |   | 8,957 |   |   |   | 8,687 |   |
| Less accumulated depreciation and amortization                                                                                                                          |   |   | 7,626 |   |   |   | 7,523 |   |
| Net equipment and leasehold improvements                                                                                                                                |   |   | 1,331 |   |   |   | 1,164 |   |
|                                                                                                                                                                    |   |   |   |   |   |   |   |   |
| Deferred income taxes                                                                                                                                                   |   |   | 2,412 |   |   |   | 2,412 |   |
| Goodwill                                                                                                                                                                |   |   | 2,196 |   |   |   | 2,196 |   |
| Other intangible assets                                                                                                                                                 |   |   | 1,301 |   |   |   | 1,396 |   |
| Other long term assets                                                                                                                                                  |   |   | 53 |   |   |   | 53 |   |
|                                                                                                                                                                    |   |   |   |   |   |   |   |   |
| Capitalized software product costs:                                                                                                                                     |   |   |   |   |   |   |   |   |
| Amounts capitalized for software product costs                                                                                                                          |   |   | 13,435 |   |   |   | 13,209 |   |
| Less accumulated amortization                                                                                                                                           |   |   | 11,828 |   |   |   | 11,613 |   |
| Net capitalized software product costs                                                                                                                                  |   |   | 1,607 |   |   |   | 1,596 |   |
|                                                                                                                                                                    |   |   |   |   |   |   |   |   |
| Total Assets                                                                                                                                                            |   | $ | 11,676 |   |   | $ | 12,193 |   |
|                                                                                                                                                                    |   |   |   |   |   |   |   |   |
| LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                                                                                                    |   |   |   |   |   |   |   |   |
| Current borrowings on line of credit                                                                                                                                    |   | $ | 700 |   |   | $ | 700 |   |
| Current portion of notes payable                                                                                                                                        |   |   | 581 |   |   |   | 676 |   |
| Accounts payable                                                                                                                                                        |   |   | 175 |   |   |   | 408 |   |
| Deferred revenue                                                                                                                                                        |   |   | 4,631 |   |   |   | 5,071 |   |
| Accrued payroll and related liabilities                                                                                                                                 |   |   | 874 |   |   |   | 922 |   |
| Accrued sales, use and income taxes                                                                                                                                     |   |   | 45 |   |   |   | 80 |   |
| Accrued vendor specific liabilities                                                                                                                                     |   |   | 305 |   |   |   | 284 |   |
| Other accrued liabilities                                                                                                                                               |   |   | 640 |   |   |   | 615 |   |
| Current portion of capital lease obligations                                                                                                                            |   |   | 95 |   |   |   | 95 |   |
| Total Current Liabilities                                                                                                                                               |   |   | 8,046 |   |   |   | 8,851 |   |
|                                                                                                                                                                    |   |   |   |   |   |   |   |   |
| Non-current liabilities                                                                                                                                                 |   |   |   |   |   |   |   |   |
| Notes payable                                                                                                                                                           |   |   | 58 |   |   |   | 116 |   |
| Long-term portion of accrued compensation                                                                                                                               |   |   | 91 |   |   |   | 97 |   |
| Capital lease obligations                                                                                                                                               |   |   | 210 |   |   |   | 233 |   |
| Total Non-current Liabilities                                                                                                                                           |   |   | 359 |   |   |   | 446 |   |
|                                                                                                                                                                    |   |   |   |   |   |   |   |   |
| Shareholders' equity:                                                                                                                                                   |   |   |   |   |   |   |   |   |
| Cumulative preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0 shares issued and outstanding at October 31, 2008 and July 31, 2008, respectively |   |   | - |   |   |   | - |   |
| Junior preferred stock, par value $.001 per share, 100,000 shares authorized; 0 shares issued and outstanding at October 31, 2008 and July 31, 2008, respectively       |   |   | - |   |   |   | - |   |
| Common stock, par value $.001 per share, 25,000,000 shares authorized; 6,971,927 shares issued and outstanding at                                                       |   |   |   |   |   |   |   |   |
| October 31, 2008 and July 31, 2008                                                                                                                                      |   |   | 7 |   |   |   | 7 |   |
| Common stock warrants and options                                                                                                                                       |   |   | 577 |   |   |   | 501 |   |
| Additional paid-in-capital                                                                                                                                              |   |   | 95,148 |   |   |   | 95,148 |   |
| Accumulated deficit                                                                                                                                                     |   |   | (92,452 | ) |   |   | (92,708 | ) |
| Other accumulated comprehensive income                                                                                                                                  |   |   | (9 | ) |   |   | (52 | ) |
| Total Shareholders' Equity                                                                                                                                              |   |   | 3,271 |   |   |   | 2,896 |   |
|                                                                                                                                                                    |   |   |   |   |   |   |   |   |
| Total Liabilities and Shareholders' Equity                                                                                                                              |   | $ | 11,676 |   |   | $ | 12,193 |   |

----

Index

| ARI Network Services, Inc.                                                                                                                                            |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Statements of Income - Unaudited                                                                                                                         |   |
| (Amounts in Thousands, Except Per Share Data)                                                                                                                         |   |
|                                                                                                                                                                  |   | (Unaudited) |   |
|                                                                                                                                                                  |   | Three months ended |   |
|                                                                                                                                                                  |   | October 31, |   |
|                                                                                                                                                                  |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                  |   |   |   |   |   |   |
| Revenue                                                                                                                                                               |   | $ | 4,169 |   |   | $ | 4,224 |   |
| Cost of products and services sold*                                                                                                                                   |   |   | 729 |   |   |   | 747 |   |
|                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| Gross Margin                                                                                                                                                          |   |   | 3,440 |   |   |   | 3,477 |   |
|                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| Operating expenses:                                                                                                                                                   |   |   |   |   |   |   |   |   |
| Depreciation and amortization+                                                                                                                                        |   |   | 229 |   |   |   | 195 |   |
| Customer operations and support                                                                                                                                       |   |   | 305 |   |   |   | 280 |   |
| Selling, general and administrative                                                                                                                                   |   |   | 2,158 |   |   |   | 2,380 |   |
| Software development and technical support                                                                                                                            |   |   | 457 |   |   |   | 349 |   |
|                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| Net operating expenses                                                                                                                                                |   |   | 3,149 |   |   |   | 3,204 |   |
|                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| Operating income                                                                                                                                                      |   |   | 291 |   |   |   | 273 |   |
|                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| Other income (expense)                                                                                                                                                |   |   | (35 | ) |   |   | (24 | ) |
|                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| Income before provision for income taxes                                                                                                                              |   |   | 256 |   |   |   | 249 |   |
|                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| Income tax benefit (expense)                                                                                                                                          |   |   | - |   |   |   | (6 | ) |
|                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| Net income                                                                                                                                                            |   | $ | 256 |   |   | $ | 243 |   |
|                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| Average common shares outstanding:                                                                                                                                    |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                                                 |   |   | 6,972 |   |   |   | 6,634 |   |
| Diluted                                                                                                                                                               |   |   | 7,078 |   |   |   | 6,818 |   |
|                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| Net income per share:                                                                                                                                            |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                                                 |   | $ | 0.04 |   |   | $ | 0.04 |   |
| Diluted                                                                                                                                                               |   | $ | 0.04 |   |   | $ | 0.04 |   |
|                                                                                                                                                                  |   |   |   |   |   |   |   |   |
| * includes amortization of software products of $215 and $194, respectively and excludes other depreciation and amortization included in operating expenses |   |
| + exclusive of amortization of software products included in cost of sales                                                                                       |   |

----

Index

| ARI Network Services, Inc.                                                                                          |   |
|---------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Statements of Cash Flows                                                                               |   |
| (Dollars in Thousands)                                                                                              |   |
|                                                                                                                |   | (Unaudited) |   |
|                                                                                                                |   | Three months ended |   |
|                                                                                                                |   | October 31, |   |
|                                                                                                                |   | 2008 |   |   | 2007 |   |
|                                                                                                                |   |   |   |   |   |   |
| Operating activities                                                                                                |   |   |   |   |   |   |
| Net income                                                                                                          |   | $ | 256 |   |   | $ | 243 |   |
| Adjustments to reconcile net income to net cash provided by operating activities:                                   |   |   |   |   |   |   |   |   |
| Amortization of software products                                                                                   |   |   | 215 |   |   |   | 194 |   |
| Amortization of deferred financing costs, debt discount and excess carrying value over face amount of notes payable |   |   | 4 |   |   |   | 8 |   |
| Depreciation and other amortization                                                                                 |   |   | 229 |   |   |   | 195 |   |
| Stock based compensation related to stock options                                                                   |   |   | 76 |   |   |   | 9 |   |
| Stock issued as contribution to 401(k) plan                                                                         |   |   | - |   |   |   | 37 |   |
| Net change in assets and liabilities:                                                                               |   |   |   |   |   |   |   |   |
| Trade receivables, net                                                                                              |   |   | 215 |   |   |   | 522 |   |
| Work in process                                                                                                     |   |   | 49 |   |   |   | 118 |   |
| Prepaid expenses and other                                                                                          |   |   | 127 |   |   |   | 31 |   |
| Accounts payable                                                                                                    |   |   | (233 | ) |   |   | (585 | ) |
| Deferred revenue                                                                                                    |   |   | (440 | ) |   |   | (617 | ) |
| Accrued payroll related liabilities                                                                                 |   |   | (58 | ) |   |   | 137 |   |
| Accrued sales, use and income taxes                                                                                 |   |   | (35 | ) |   |   | (18 | ) |
| Accrued vendor specific liabilities                                                                                 |   |   | 21 |   |   |   | 15 |   |
| Other accrued liabilities                                                                                           |   |   | 24 |   |   |   | 271 |   |
| Net cash provided by operating activities                                                                           |   |   | 450 |   |   |   | 560 |   |
|                                                                                                                |   |   |   |   |   |   |   |   |
| Investing activities                                                                                                |   |   |   |   |   |   |   |   |
| Purchase of equipment, software and leasehold improvements                                                          |   |   | (259 | ) |   |   | (43 | ) |
| Software product costs capitalized                                                                                  |   |   | (226 | ) |   |   | (86 | ) |
| Net cash used in investing activities                                                                               |   |   | (485 | ) |   |   | (129 | ) |
|                                                                                                                |   |   |   |   |   |   |   |   |
| Financing activities                                                                                                |   |   |   |   |   |   |   |   |
| Payments under notes payable                                                                                        |   |   | (157 | ) |   |   | (409 | ) |
| Payments of capital lease obligations                                                                               |   |   | (23 | ) |   |   | (1 | ) |
| Net cash used in financing activities                                                                               |   |   | (180 | ) |   |   | (410 | ) |
|                                                                                                                |   |   |   |   |   |   |   |   |
| Effect of foreign currency exchange rate changes on cash                                                            |   |   | (11 | ) |   |   | 4 |   |
| Net change in cash                                                                                                  |   | $ | (226 | ) |   | $ | 25 |   |
| Cash at beginning of period                                                                                         |   | $ | 1,086 |   |   | $ | 1,050 |   |
| Cash at end of period                                                                                               |   | $ | 860 |   |   | $ | 1,075 |   |
|                                                                                                                |   |   |   |   |   |   |   |   |
| Cash paid for interest                                                                                              |   | $ | 26 |   |   | $ | 49 |   |
| Cash paid for income taxes                                                                                          |   | $ | 28 |   |   | $ | 10 |   |

----

Index

nde

| 1. | BASIS OF PRESENTATION |
|----|-----------------------|

|                                                                                                                                                                                |   |               |   |   |   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------|--------|--------|
|                                                                                                                                                                                |   | Three months ended |   |
|                                                                                                                                                                                |   | October 31,        |   |
|                                                                                                                                                                                |   | 2008               |   |   | 2007   |   |
| Net income                                                                                                                                                                          |   | $                  | 256    |   |   | $      | 243 |   |
| Weighted-average common shares outstanding                                                                                                                                          |   |               | 6,972  |   |   |   | 6,634 |   |
| Effect of dilutive stock options and warrants                                                                                                                                       |   |               | 106    |   |   |   | 184 |   |
| Diluted weighted-average common shares outstanding                                                                                                                                  |   |               | 7,078  |   |   |   | 6,818 |   |
| Net income per share:                                                                                                                                                               |   |               |   |   |   |   |   |   |
| Basic                                                                                                                                                                               |   | $                  | 0.04   |   |   | $      | 0.04 |   |
| Diluted                                                                                                                                                                             |   | $                  | 0.04   |   |   | $      | 0.04 |   |
|                                                                                                                                                                                |   |               |   |   |   |   |   |   |
| Options that could potentially dilute net income per share in the future that are not included in the computation of diluted net income per share, as their impact is anti-dilutive |   |               | 1,156  |   |   |   | 624 |   |

----

Index

| 3. | STOCK-BASED COMPENSATION |
|----|--------------------------|

|                     |   | 2008     |   |   | 2007     |   |
|--------------------------|--------|----------|--------|--------|----------|--------|
| Expected life (years)    |   | 10 years |   |   | 10 years |   |
| Risk-free interest rate  |   |     | 4.0    | %      |     |   | 4.9 | % |
| Expected volatility      |   |     | 68.0   | %      |     |   | 122.0 | % |
| Expected forfeiture rate |   |     | 12.0   | %      |     |   | 9.7 | % |
| Expected dividend yield  |   |     | 0.0    | %      |     |   | 0.0 | % |

----

Index

|                               |   | Options |    |   | Wt-Avg Exercise Price |   |   | Wt-Avg Remaining Contractual Period in Years |   |   | Aggregate Intrinsic Value |   |
|------------------------------------|--------|---------|---------|--------|-----------------------|--------|--------|---------------------------------------------------|--------|--------|---------------------------|--------|
| Outstanding at beginning of period |   |    | 93,186  |   |                  | $      | 2.27   |                                              |   |   | 1.23                      |   |   | $ | - |   |
| Granted                            |   |    | -       |   |                  |   | n/a    |                                              |   |   | n/a                       |   |   |   | n/a |   |
| Exercised                          |   |    | -       |   |                  |   | n/a    |                                              |   |   | n/a                       |   |   |   | n/a |   |
| Forfeited                          |   |    | (29,936 | )      |                  | $      | 2.18   |                                              |   |   | n/a                       |   |   |   | n/a |   |
| Outstanding at end of period       |   |    | 63,250  |   |                  | $      | 2.31   |                                              |   |   | 1.12                      |   |   | $ | - |   |
| Exercisable at end of period       |   |    | 63,250  |   |                  | $      | 2.31   |                                              |   |   | 1.12                      |   |   | $ | - |   |

| Three months ended October 31, 2007 |   |
|-------------------------------------|--------|
|                                |   | Options |   |   | Wt-Avg Exercise Price |   |   | Wt-Avg Remaining Contractual Period in Years |   |   | Aggregate Intrinsic Value |   |
| Outstanding at beginning of period  |   |   | 125,686 |   |   | $ | 2.31 |   |   |   | 1.89 |   |   |   | n/a |   |
| Granted                             |   |   | - |   |   |   | n/a |   |   |   | n/a |   |   |   | n/a |   |
| Exercised                           |   |   | - |   |   |   | n/a |   |   |   | n/a |   |   |   | n/a |   |
| Forfeited                           |   |   | (500 | ) |   | $ | 4.06 |   |   |   | n/a |   |   |   | n/a |   |
| Outstanding at end of period        |   |   | 125,186 |   |   | $ | 2.30 |   |   |   | 1.64 |   |   |   | n/a |   |
| Exercisable at end of period        |   |   | 125,186 |   |   | $ | 2.30 |   |   |   | 1.64 |   |   |   | n/a |   |

----

Index

| Three months ended October 31, 2008 |   |
|-------------------------------------|--------|
|                                |   | Options |   |   | Wt-Avg Exercise Price |   |   | Wt-Avg Remaining Contractual Period in Years |   |   | Aggregate Intrinsic Value |   |
| Outstanding at beginning of period  |   |   | 1,313 |   |   | $ | 2.65 |   |   |   | 1.97 |   |   |   | n/a |   |
| Granted                             |   |   | - |   |   |   | n/a |   |   |   | n/a |   |   |   | n/a |   |
| Exercised                           |   |   | - |   |   |   | n/a |   |   |   | n/a |   |   |   | n/a |   |
| Forfeited                           |   |   | - |   |   |   | n/a |   |   |   | n/a |   |   |   | n/a |   |
| Outstanding at end of period        |   |   | 1,313 |   |   | $ | 2.65 |   |   |   | 1.72 |   |   |   | n/a |   |
| Exercisable at end of period        |   |   | 1,313 |   |   | $ | 2.65 |   |   |   | 1.72 |   |   |   | n/a |   |

| Three months ended October 31, 2007 |   |
|-------------------------------------|--------|
|                                |   | Options |   |   | Wt-Avg Exercise Price |   |   | Wt-Avg Remaining Contractual Period in Years |   |   | Aggregate Intrinsic Value |   |
| Outstanding at beginning of period  |   |   | 1,313 |   |   | $ | 2.65 |   |   |   | 2.97 |   |   |   | n/a |   |
| Granted                             |   |   | - |   |   |   | n/a |   |   |   | n/a |   |   |   | n/a |   |
| Exercised                           |   |   | - |   |   |   | n/a |   |   |   | n/a |   |   |   | n/a |   |
| Forfeited                           |   |   | - |   |   |   | n/a |   |   |   | n/a |   |   |   | n/a |   |
| Outstanding at end of period        |   |   | 1,313 |   |   | $ | 2.65 |   |   |   | 2.72 |   |   |   | n/a |   |
| Exercisable at end of period        |   |   | 1,313 |   |   | $ | 2.65 |   |   |   | 2.72 |   |   |   | n/a |   |

----

Index

| Three months ended October 31, 2008 |   |
|-------------------------------------|--------|
|                                |   | Options |   |   | Wt-Avg Exercise Price |   |   | Wt-Avg Remaining Contractual Period in Years |   |   | Aggregate Intrinsic Value |   |
| Outstanding at beginning of period  |   |   | 1,380,538 |   |   | $ | 1.51 |   |   |   | 7.36 |   |   | $ | 150,967 |   |
| Granted                             |   |   | 58,000 |   |   | $ | 1.26 |   |   |   | n/a |   |   |   | n/a |   |
| Exercised                           |   |   | - |   |   |   | n/a |   |   |   | n/a |   |   |   | n/a |   |
| Forfeited                           |   |   | (128,438 | ) |   |   | 1.24 |   |   |   | n/a |   |   |   | n/a |   |
| Outstanding at end of period        |   |   | 1,310,100 |   |   | $ | 1.52 |   |   |   | 7.44 |   |   | $ | 70,344 |   |
| Exercisable at end of period        |   |   | 816,233 |   |   | $ | 1.52 |   |   |   | 6.22 |   |   | $ | 70,344 |   |

| Three months ended October 31, 2007 |   |
|-------------------------------------|--------|
|                                |   | Options |   |   | Wt-Avg Exercise Price |   |   | Wt-Avg Remaining Contractual Period in Years |   |   | Aggregate Intrinsic Value |   |
| Outstanding at beginning of period  |   |   | 1,013,100 |   |   | $ | 1.45 |   |   |   | 6.61 |   |   | $ | 320,062 |   |
| Granted                             |   |   | - |   |   | $ | - |   |   |   | n/a |   |   |   | n/a |   |
| Exercised                           |   |   | - |   |   | $ | - |   |   |   | n/a |   |   |   | n/a |   |
| Forfeited                           |   |   | (89,186 | ) |   | $ | 1.07 |   |   |   | n/a |   |   |   | n/a |   |
| Outstanding at end of period        |   |   | 923,914 |   |   | $ | 1.48 |   |   |   | 6.42 |   |   | $ | 275,417 |   |
| Exercisable at end of period        |   |   | 800,675 |   |   | $ | 1.43 |   |   |   | 6.11 |   |   | $ | 267,319 |   |

| Three months ended October 31, 2008 |   |
|-------------------------------------|--------|
|                                |   | Options |   |   | Wt-Avg Grant Date Fair Value |   |
| Non-vested at beginning of period   |   |   | 443,335 |   |   | $ | 1.76 |   |
| Granted                             |   |   | 58,000 |   |   | $ | 1.26 |   |
| Vested                              |   |   | - |   |   |   | n/a |   |
| Forfeited                           |   |   | (7,468 | ) |   | $ | 1.61 |   |
| Non-vested at end of period         |   |   | 493,867 |   |   | $ | 1.53 |   |

| Three months ended October 31, 2007 |   |
|-------------------------------------|--------|
|                                |   | Options |   |   | Wt-Avg Grant Date Fair Value |   |
| Non-vested at beginning of period   |   |   | 137,675 |   |   | $ | 1.79 |   |
| Granted                             |   |   | - |   |   |   | n/a |   |
| Vested                              |   |   | - |   |   |   | n/a |   |
| Forfeited                           |   |   | (14,436 | ) |   | $ | 1.28 |   |
| Non-vested at end of period         |   |   | 123,239 |   |   | $ | 1.85 |   |

----

Index

| 4. | ACQUISITIONS |
|----|--------------|

| 5. | NOTES PAYABLE |
|----|---------------|

| Debt Schedule                                              |   |
|------------------------------------------------------------|--------|
| (Dollars in thousands)                                     |   |
|                                                       |   |   |   |   |   |   |   |   |   |
|                                                       |   | October 31, |   |   | July 31, |   |   | Percent |   |
|                                                       |   | 2008 |   |   | 2008 |   |   | Change |   |
|                                                       |   |   |   |   |   |   |   |   |   |
| Debt related to acquisition of OC-Net, Inc.:               |   |   |   |   |   |   |   |   |   |
| Current portion of notes payable                           |   | $ | 233 |   |   | $ | 233 |   |   |   | - |  % |
| Long term portion of notes payable                         |   |   | 60 |   |   |   | 117 |   |   |   | (48.7 | ) |
| Total notes payable                                        |   |   | 293 |   |   |   | 350 |   |   |   | (16.3 | ) |
| Current cash earnout                                       |   |   | 150 |   |   |   | 150 |   |   |   | - |   |
| Imputed interest on cash earnout/holdback                  |   |   | (4 | ) |   |   | (8 | ) |   |   | (50.0 | ) |
| Total debt related to acquisition of OC-Net                |   |   | 439 |   |   |   | 492 |   |   |   | (10.8 | ) |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes payable to Eye Communication Systems, Inc. - current |   |   | 200 |   |   |   | 300 |   |   |   | (33.3 | ) |
| Current borrowings on line of credit                       |   |   | 700 |   |   |   | 700 |   |   |   | - |   |
| Total Debt                                                 |   | $ | 1,339 |   |   | $ | 1,492 |   |   |   | (10.3 | )% |

----

Index

|                                                         |   | Three months ended |   |
|--------------------------------------------------------------|--------|--------------------|--------|
|                                                         |   | October 31,        |   |
|                                                         |   | 2008               |   |   | 2007 |   |
| Current:                                                     |   |               |   |   |   |   |
| Federal - Effect                                             |   | $                  | -      |   |   | $ | 143 |   |
| State - Effect                                               |   |               | -      |   |   |   | 28 |   |
| Generation (utilization) of net operating loss carryforwards |   |               | 120    |   |   |   | (165 | ) |
| Deferred, net                                                |   |               | (120   | ) |   |   | - |   |
|                                                         |   | $                  | -      |   |   | $ | 6 |   |

| 9. | BUSINESS SEGMENTS |
|----|-------------------|

----

Index

|              |   | Three months ended |   |
|-------------------|--------|--------------------|--------|
|              |   | October 31,        |   |
| Revenue           |   | 2008               |   |   | 2007 |   |
| Netherlands       |   | $                  | 172    |   |   | $ | 161 |   |
| United States     |   |               | 3,997  |   |   |   | 4,063 |   |
| Consolidated      |   | $                  | 4,169  |   |   | $ | 4,224 |   |
| Net Income (Loss) |   |               |   |   |   |   |   |   |
| Netherlands       |   | $                  | (36    | ) |   | $ | (69 | ) |
| United States     |   |               | 292    |   |   |   | 312 |   |
| Consolidated      |   | $                  | 256    |   |   | $ | 243 |   |
|              |   |               |   |   |   |   |   |   |
|              |   | October 31,        |   |   | July 31, |   |
| Total Assets      |   | 2008               |   |   | 2008 |   |
| Netherlands       |   | $                  | 1,165  |   |   | $ | 1,306 |   |
| United States     |   |               | 10,511 |   |   |   | 10,887 |   |
| Consolidated      |   | $                  | 11,676 |   |   | $ | 12,193 |   |

| 10. | RESTRUCTURING |
|-----|---------------|

|                            |   | Balance July 31, |   |   | Payments August - October |   |   | Balance October 31, |   |
|---------------------------------|--------|-----------------------|--------|--------|---------------------------|--------|--------|--------------------------|--------|
|                            |   | 2008                  |   |   | 2008                      |   |   | 2008                     |   |
| Severance and related benefits  |   | $                     | 292    |   |                      | $      | (140   | )                        |   | $ | 152 |   |
| Net future lease costs          |   |                  | 204    |   |                      |   | (45    | )                        |   |   | 159 |   |
| Equipment disposition and other |   |                  | 33     |   |                      |   | (15    | )                        |   |   | 18 |   |
| Total restructuring costs       |   | $                     | 529    |   |                      | $      | (200   | )                        |   | $ | 329 |   |

----

Index

AGEM

----

Index

----

Index

| Electronic Catalog Products And Services                |
|---------------------------------------------------------|
| Product or Service                                      | Description | Primary Industry/Market |
| PartSmart® ClassicÔ                           | Electronic parts catalog for equipment dealers, formerly PartSmart Version 6 | Equipment- all sub-markets |
| PartSmart® 8Ô                                 | Electronic parts catalog for equipment dealers | Equipment- all sub-markets |
| PartSmart® WebÔ                               | Web based electronic parts catalog, formerly EMPARTweb | Equipment - all sub-markets |
| Lookupparts.com                                         | PartSmart Web-based lookup service offered to dealers on a subscription basis | Equipment - all sub-markets |
| PartSmart® WebÔ ASP                           | Electronic parts catalog viewing software offered as a hosted service for individual distributors and manufacturers, formerly EMPARTweb ASP | Equipment - all sub-markets |
| PartSmart® CartÔ                              | Add-on product to PartSmart Web that facilitates order taking from the catalog | Equipment - all sub-markets |
| PartSmart® Data ManagerTM                      | Electronic parts catalog creation software used to produce catalogs for viewing on PartSmart Classic, PartSmart 8, and PartSmart Web | Equipment - all sub-markets |
| PartSmart® Data PublisherTM               | Add-on product to PartSmart Data Manager that facilitates the creation of a file of parts and related information for use in PartSmart PDF Catalog Composer Module | Equipment – all sub-markets |
| PartSmart® PDF Catalog ComposerTM Module  | Add-on product to PartSmart Data Manager that facilitates the creation of a parts manual, price sheet or other parts-related publications in the Adobe Acrobat format for printing, electronic distribution or online display | Equipment – all sub-markets |
| PartSmart® IPLÔ                               | Electronic parts catalog for equipment dealers | Appliance |
| PartSmart® IPL WebÔ                           | Web based electronic parts catalog, formerly EMPARTweb | Appliance |
| Electronic publishing services                          | Project management, data conversion, editing, production, and distribution services for manufacturers who wish to outsource catalog production operations | Equipment - all sub-markets |
| EMPARTviewerTM                                      | Electronic parts catalog viewing software | Equipment - RV |
| Professional services                                   | Project management, software customization, back-end system integration, roll-out management, and help desk support services | Equipment - all sub-markets |

| MARKETING SERVICES          |
|-----------------------------|
| Product or Service          | Description | Primary Industry/Market |
| WebsiteSmart ProTM      | Software to create customized websites and conduct business electronically, including optional shopping cart, superseding WebsiteSmart | Equipment - outdoor power, power sports |
| WebsiteSmartTM          | Software to create customized websites and conduct business electronically, including optional shopping cart | Equipment - outdoor power, power sports |
| Professional Services       | Large-scale website creation, hosting  and maintenance services | Equipment – all sub-markets |
| ARI MailSmartTM    | Direct mail solution that enables users to cost-effectively and efficiently reach customers and prospects with customized messages | Equipment – all sub-markets |
| eMailSmartTM       | Email solution that enables users to stay in touch with customers through special offers and a quarterly newsletter | Equipment – all sub-markets |
| Content Management Services | Add-on solution to WebsiteSmart and Website Smart Pro that automatically updates a website with weather alerts, promotions based on customer seasonality and supplier promotions | Equipment – all sub-markets |

----

Index

| eCommerce Products and Services |
|---------------------------------|
| Product or Service              | Description | Primary Industry/Market |
| TradeRoute®                | Document handling and communications for product ordering, warranty claims and other business documents | Equipment - Outdoor power and RV |
| WarrantySmartTM        | Web-based end-to-end warranty claims processing system that enables dealers, distributors and manufacturers to streamline product registration and warranty claim submission and processing, as well as check claim status online | Equipment – all sub-markets |

| Revenue by Location and Service         |   |
|-----------------------------------------|--------|
| (Dollars in Thousands)                  |   |
|                                    |   | Three months ended |   |   |   |   |
|                                    |   | October 31, |   |   | Percent |   |
|                                    |   | 2008 |   |   | 2007 |   |   | Change |   |
| North America                           |   |   |   |   |   |   |   |   |   |
| Catalog subscriptions                   |   | $ | 2,546 |   |   | $ | 2,592 |   |   |   | (1.77 | ) % |
| Catalog professional services           |   |   | 255 |   |   |   | 289 |   |   |   | (11.76 | ) |
| Marketing services                      |   |   | 650 |   |   |   | 536 |   |   |   | 21.27 |   |
| Marketing professional services         |   |   | 325 |   |   |   | 409 |   |   |   | (20.54 | ) |
| Dealer & distributor communications |   |   | 165 |   |   |   | 163 |   |   |   | 1.23 |   |
| Subtotal North America                  |   |   | 3,941 |   |   |   | 3,989 |   |   |   | (1.20 | ) |
|                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Rest of the World                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Catalog subscriptions                   |   |   | 216 |   |   |   | 235 |   |   |   | (8.09 | ) |
| Catalog professional services           |   |   | 12 |   |   |   | - |   |   |   | N/A |   |
| Subtotal Rest of the World              |   |   | 228 |   |   |   | 235 |   |   |   | (2.98 | ) |
|                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Revenue                           |   |   |   |   |   |   |   |   |   |   |   |   |
| Catalog subscriptions                   |   |   | 2,762 |   |   |   | 2,827 |   |   |   | (2.30 | ) |
| Catalog professional services           |   |   | 267 |   |   |   | 289 |   |   |   | (7.61 | ) |
| Marketing services                      |   |   | 650 |   |   |   | 536 |   |   |   | 21.27 |   |
| Marketing professional services         |   |   | 325 |   |   |   | 409 |   |   |   | (20.54 | ) |
| Dealer & distributor communications |   |   | 165 |   |   |   | 163 |   |   |   | 1.23 |   |
| Total Revenue                           |   | $ | 4,169 |   |   | $ | 4,224 |   |   |   | (0.01 | ) % |

----

Index

----

Index

|      Gross Margin by Revenue Type |   |
|-------------------------------------------------------|--------|
|      (Dollars in thousands)       |   |
|                                                  |   | Three months ended |   |   |   |   |
|                                                  |   | October 31, |   |   | Percent |   |
|                                                  |   | 2008 |   |   | 2007 |   |   | Change |   |
| Catalog subscriptions                                 |   |   |   |   |   |   |   |   |   |
| Revenue                                               |   |   | 2,762 |   |   |   | 2,827 |   |   |   | (2.3 | ) % |
| Cost of revenue                                       |   |   | 415 |   |   |   | 342 |   |   |   | 21.3 |   |
| Gross margin - Catalog subscriptions                  |   |   | 2,347 |   |   |   | 2,485 |   |   |   | (5.6 | ) |
| Gross margin percentage                               |   |   | 85.0 | % |   |   | 87.9 | % |   |   |   |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Catalog professional services                         |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                               |   |   | 267 |   |   |   | 289 |   |   |   | (7.6 | ) |
| Cost of revenue                                       |   |   | 102 |   |   |   | 146 |   |   |   | (30.1 | ) |
| Gross margin - Catalog professional services          |   |   | 165 |   |   |   | 143 |   |   |   | 15.4 |   |
| Gross margin percentage                               |   |   | 61.8 | % |   |   | 49.5 | % |   |   |   |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Marketing services                                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                               |   |   | 650 |   |   |   | 536 |   |   |   | 21.3 |   |
| Cost of revenue                                       |   |   | 115 |   |   |   | 140 |   |   |   | (17.9 | ) |
| Gross margin - Marketing services                     |   |   | 535 |   |   |   | 396 |   |   |   | 35.1 |   |
| Gross margin percentage                               |   |   | 82.3 | % |   |   | 73.9 | % |   |   |   |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Marketing professional services                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                               |   |   | 325 |   |   |   | 409 |   |   |   | (20.5 | ) |
| Cost of revenue                                       |   |   | 92 |   |   |   | 115 |   |   |   | (20.0 | ) |
| Gross margin - Marketing professional services        |   |   | 233 |   |   |   | 294 |   |   |   | (20.7 | ) |
| Gross margin percentage                               |   |   | 71.7 | % |   |   | 71.9 | % |   |   |   |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Dealer and distributor communications                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                               |   |   | 165 |   |   |   | 163 |   |   |   | 1.2 |   |
| Cost of revenue                                       |   |   | 5 |   |   |   | 4 |   |   |   | 25.0 |   |
| Gross margin - Dealer and distributor communications  |   |   | 160 |   |   |   | 159 |   |   |   | 0.6 |   |
| Gross margin percentage                               |   |   | 97.0 | % |   |   | 97.5 | % |   |   |   |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                 |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                               |   |   | 4,169 |   |   |   | 4,224 |   |   |   | (1.3 | ) |
| Cost of revenue                                       |   |   | 729 |   |   |   | 747 |   |   |   | (2.4 | ) |
| Gross margin                                          |   |   | 3,440 |   |   |   | 3,477 |   |   |   | (1.1 | ) % |
| Gross margin percentage                               |   |   | 82.5 | % |   |   | 82.3 | % |   |   |   |   |

----

Index

|        Operating Expenses                                                                       |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|
|        (Dollars in thousands)                                                                   |   |
|                                                                                                                          |   | Three months ended |   |   |   |   |
|                                                                                                                          |   | October 31, |   |   | Percent |   |
|                                                                                                                          |   | 2008 |   |   | 2007 |   |   | Change |   |
| Customer operations and support                                                                                               |   | $ | 305 |   |   | $ | 280 |   |   |   | 8.9 | % |
| Selling, general and administrative                                                                                           |   |   | 2,158 |   |   |   | 2,380 |   |   |   | (9.3 | ) |
| Software development and technical support                                                                                    |   |   | 457 |   |   |   | 349 |   |   |   | 30.9 |   |
| Depreciation and amortization (exclusive of amortization of software products included in cost of products and services sold) |   |   | 229 |   |   |   | 195 |   |   |   | 17.4 |   |
|                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |
| Net operating expenses                                                                                                        |   | $ | 3,149 |   |   | $ | 3,204 |   |   |   | (1.7 | ) % |

----

Index

| Cash Flow Information                                                             |   |
|-----------------------------------------------------------------------------------|--------|
| (Dollars in thousands)                                                            |   |
|                                                                              |   | Three months ended |   |   |   |   |
|                                                                              |   | October 31, |   |   | Percent |   |
|                                                                              |   | 2008 |   |   | 2007 |   |   | Change |   |
| Net income                                                                        |   | $ | 256 |   |   | $ | 243 |   |   |   | 5.3 | % |
| Adjustments to reconcile net income to net cash provided by operating activities: |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization of software products                                                 |   |   | 215 |   |   |   | 194 |   |   |   | 10.8 |   |
| Amortization of debt discount and other                                           |   |   | 4 |   |   |   | 8 |   |   |   | (50.0 | ) |
| Depreciation and other amortization                                               |   |   | 229 |   |   |   | 195 |   |   |   | 17.4 |   |
| Stock based compensation                                                          |   |   | 76 |   |   |   | 9 |   |   |   | 744.4 |   |
| Stock issued to 401(k) plan                                                       |   |   | - |   |   |   | 37 |   |   |   | (100.0 | ) |
| Net change in working capital                                                     |   |   | (330 | ) |   |   | (126 | ) |   |   | (161.9 | ) |
|                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                                         |   |   | 450 |   |   |   | 560 |   |   |   | (19.6 | ) |
| Net cash used in investing activities                                             |   |   | (485 | ) |   |   | (129 | ) |   |   | (276.0 | ) |
| Net cash used in financing activities                                             |   |   | (180 | ) |   |   | (410 | ) |   |   | 56.1 |   |
| Effect of foreign currency exchange rate changes on cash                          |   |   | (11 | ) |   |   | 4 |   |   |   | (375.0 | ) |
|                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| Net change in cash                                                                |   | $ | (226 | ) |   | $ | 25 |   |   |   | (1004.0 | ) % |

----

Index

NTIT

NTR

----

Index

EE

GISTE

FAUL

BMISSI

HE

HIBIT

31.1

31.2

32.1

32.2

----

Index

NATU

| Date        December 15, 2008: |    /s/ Roy W. Olivier        |
|-------------------------------------------------------------------|---------------------------------------------|
|                                                              | Roy W. Olivier, Chief Executive Officer     |
|                                                              |                                        |
|                                                              |                                        |
|                                                              |                                        |
|                                                              | /s/ Kenneth S. Folberg                      |
|                                                              | Kenneth S. Folberg, Chief Financial Officer |

----