##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-QSB
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended January 31, 2008
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period from  to
 Commission file number 000-19608
 ARI Network Services, Inc.
  WISCONSIN
    
    39-1388360(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer Identification No.)
 11425 W. Lake Park Drive, Milwaukee, Wisconsin 53224
   þ o
  o þ
   o þ




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##### 



ARI Network Services, Inc.
    PART I  FINANCIAL INFORMATION
 PageItem 1 Financial statementsCondensed consolidated balance sheets  January 31, 2008 (unaudited) and
July 31, 2007.
    
    3-4Condensed consolidated statements of operations (unaudited) for the three
and six months ended January 31, 2008 and 2007
    
    5Condensed consolidated statements of cash flows (unaudited) for the six
months ended January 31, 2008 and 2007
    
    6Notes to unaudited condensed consolidated financial statements
    
    7-15Item 2 Managements discussion and analysis or plan of operation
    
    15-24Item 3 Controls and procedures
    
    24PART II  OTHER INFORMATIONItem 1 Legal proceedings
    
    25Item 1A Risk factors
    
    25Item 2 Unregistered sales of equity securities and use of proceeds
    
    25Item 3 Defaults upon senior securities
    
    25Item 4 Submission of matters to a vote of security holders
    
    25Item 5 Other information
    
    25-26Item 6 Exhibits
    
    26Signatures
    
    27Employment Agreement - Brian E. DearingSection 302 Certification of Chief Executive OfficerSection 906 Certification of Chief Executive Officer
  2




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS
 ARI Network Services, Inc.
 
 Consolidated Balance Sheets
 (In thousands, except share and per share data)
 (Unaudited)January 31
    
    
    July 312008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    761
    
    
    $
    1,050Trade receivables, less allowance for doubtful accounts of $162 and
$148 at January 31, 2008 and July 31, 2007, respectively
    
    
    989
    
    
    
    1,302Work in Process
    
    
    238
    
    
    
    223Prepaid expenses and other
    
    
    253
    
    
    
    291Current portion of deferred income taxes
    
    
    555
    
    
    
    555Total Current Assets
    
    
    2,796
    
    
    
    3,421Equipment and leasehold improvements:Computer equipment
    
    
    5,356
    
    
    
    5,324Leasehold improvements
    
    
    128
    
    
    
    128Furniture and equipment
    
    
    2,790
    
    
    
    2,7498,274
    
    
    
    8,201Less accumulated depreciation and amortization
    
    
    7,267
    
    
    
    6,991Net equipment and leasehold improvements
    
    
    1,007
    
    
    
    1,210Long term portion of deferred income taxes
    
    
    1,539
    
    
    
    1,539Goodwill
    
    
    1,079
    
    
    
    1,079Other assets
    
    
    952
    
    
    
    1,072Capitalized software product costs
    
    
    12,649
    
    
    
    12,455Less accumulated amortization
    
    
    11,230
    
    
    
    10,849Net capitalized software product costs
    
    
    1,419
    
    
    
    1,606Total Assets
    
    $
    8,792
    
    
    $
    9,927
 3




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ARI Network Services, Inc.
Consolidated Balance Sheets  (In thousands, except share and per share data)
 (Unaudited)January 31
    
    
    July 312008
    
    
    2007LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of notes payable
    
    $
    483
    
    
    $
    1,023Accounts payable
    
    
    208
    
    
    
    703Deferred revenue
    
    
    4,834
    
    
    
    5,619Accrued payroll and related liabilities
    
    
    910
    
    
    
    962Accrued sales, use and income taxes
    
    
    44
    
    
    
    28Accrued vendor specific liabilities
    
    
    190
    
    
    
    175Other accrued liabilities
    
    
    283
    
    
    
    124Current portion of capital lease obligations
    
    
    8
    
    
    
    8Total Current Liabilities
    
    
    6,960
    
    
    
    8,642Long term liabilities:Notes payable (net of discount)
    
    
    369
    
    
    
    479Long term payroll related
    
    
    77
    
    
    
    55Other long term liabilities
    
    
    17
    
    
    
    28Capital lease obligations
    
    
    3
    
    
    
    5Total Long Term Liabilities
    
    
    466
    
    
    
    567Shareholders equity:Cumulative preferred stock, par value $.001 per share,
1,000,000 shares authorized; 0 shares issued and
outstanding at January 31, 2008 and July 31, 2007
    
    
    
    
    
    
    Common stock, par value $.001 per share, 25,000,000 shares
authorized; 6,659,427 and 6,623,605 shares issued and outstanding
at January 31, 2008 and July 31, 2007, respectively
    
    
    7
    
    
    
    7Common stock warrants and options
    
    
    241
    
    
    
    195Additional paid-in-capital
    
    
    94,679
    
    
    
    94,627Accumulated deficit
    
    
    (93,513
    )
    
    
    (94,091
    )Other accumulated comprehensive income
    
    
    (48
    )
    
    
    (20
    )Total Shareholders Equity
    
    
    1,366
    
    
    
    718Total Liabilities and Shareholders Equity
    
    $
    8,792
    
    
    $
    9,927
 See notes to unaudited condensed consolidated financial statements.
 
 Note:
    
    The balance sheet at July 31, 2007 has been derived from the audited balance sheet at that
date but does not include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. 4




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ARI Network Services, Inc.
 
 Consolidated Statements of Operations
 (In thousands, except per share data)
 (Unaudited)
 Three months ended
    
    
    Six months endedJanuary 31
    
    
    January 312008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues:Subscriptions, support and other services fees
    
    $
    2,977
    
    
    $
    2,754
    
    
    $
    5,957
    
    
    $
    5,417Software licenses and renewals
    
    
    508
    
    
    
    575
    
    
    
    1,049
    
    
    
    1,118Professional services
    
    
    737
    
    
    
    362
    
    
    
    1,440
    
    
    
    6594,222
    
    
    
    3,691
    
    
    
    8,446
    
    
    
    7,194Cost of products and services sold:Subscriptions, support and other services fees
    
    
    310
    
    
    
    334
    
    
    
    594
    
    
    
    606Software licenses and renewals *
    
    
    196
    
    
    
    206
    
    
    
    398
    
    
    
    402Professional services
    
    
    274
    
    
    
    44
    
    
    
    535
    
    
    
    122780
    
    
    
    584
    
    
    
    1,527
    
    
    
    1,130Gross Margin
    
    
    3,442
    
    
    
    3,107
    
    
    
    6,919
    
    
    
    6,064Operating expenses:Depreciation and amortization (exclusive of
amortization of software
products included in cost
of products and services sold)
    
    
    186
    
    
    
    110
    
    
    
    381
    
    
    
    216Customer operations and support
    
    
    256
    
    
    
    276
    
    
    
    536
    
    
    
    544Selling, general and administrative
    
    
    2,304
    
    
    
    2,101
    
    
    
    4,684
    
    
    
    4,086Software development and technical support
    
    
    339
    
    
    
    359
    
    
    
    688
    
    
    
    728Net operating expenses
    
    
    3,085
    
    
    
    2,846
    
    
    
    6,289
    
    
    
    5,574Operating income
    
    
    357
    
    
    
    261
    
    
    
    630
    
    
    
    490Other income (expense):Interest expense
    
    
    (26
    )
    
    
    (32
    )
    
    
    (61
    )
    
    
    (70
    )Other, net
    
    
    (1
    )
    
    
    27
    
    
    
    10
    
    
    
    61Total other expense
    
    
    (27
    )
    
    
    (5
    )
    
    
    (51
    )
    
    
    (9
    )Income before provision for income taxes
    
    
    330
    
    
    
    256
    
    
    
    579
    
    
    
    481Income tax benefit (provision)
    
    
    5
    
    
    
    (8
    )
    
    
    (1
    )
    
    
    (8
    )Net income
    
    $
    335
    
    
    $
    248
    
    
    $
    578
    
    
    $
    473Average common shares outstanding:Basic
    
    
    6,656
    
    
    
    6,304
    
    
    
    6,645
    
    
    
    6,257Diluted
    
    
    7,000
    
    
    
    6,707
    
    
    
    6,989
    
    
    
    6,660Basic and diluted net income per share:Basic
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.08Diluted
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.08
    
    
    $
    0.07
 See notes to unaudited condensed consolidated financial statements.
 
 *
    
    Includes amortization of software products of $187, $198, $381 and $385 respectively and
excludes other depreciation and amortization, which is shown separately 5




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ARI Network Services, Inc.
 
 Consolidated Statements of Cash Flows
 (In thousands)
 (Unaudited)
 Six months endedJanuary 312008
    
    
    2007Operating activitiesNet income
    
    $
    578
    
    
    $
    473Adjustments to reconcile net income to net cash provided
by operating activities:Amortization of software products
    
    
    381
    
    
    
    385Amortization of deferred financing costs, debt discount and
excess carrying value over face amount of notes payable
    
    
    18
    
    
    
    (33
    )Depreciation and other amortization
    
    
    402
    
    
    
    216Stock based compensation related to stock options
    
    
    46
    
    
    
    68Deferred income taxes
    
    
    
    
    
    
    Stock issued as contribution to 401(k) plan
    
    
    37
    
    
    
    42Net change in receivables, prepaid expenses and other
current assets
    
    
    293
    
    
    
    (485
    )Net change in accounts payable, deferred revenue,
Accrued liabilities and long term liabilities
    
    
    (1,141
    )
    
    
    (388
    )Net cash provided by operating activities
    
    
    614
    
    
    
    278Investing activitiesPurchase of equipment and leasehold improvements
    
    
    (61
    )
    
    
    (292
    )Purchase of assets related to acquisition
    
    
    
    
    
    
    (1,081
    )Software product costs capitalized
    
    
    (194
    )
    
    
    (181
    )Net cash used in investing activities
    
    
    (255
    )
    
    
    (1,554
    )Financing activitiesPayments under notes payable
    
    
    (668
    )
    
    
    (700
    )Payments of capital lease obligations
    
    
    (2
    )
    
    
    Proceeds from issuance of common stock
    
    
    15
    
    
    
    31Net cash used in financing activities
    
    
    (655
    )
    
    
    (669
    )Effect of foreign currency exchange rate changes
    
    
    7
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (289
    )
    
    
    (1,945
    )Balance at beginning of period
    
    
    1,050
    
    
    
    3,584Balance at end of period
    
    $
    761
    
    
    $
    1,639Cash paid for interest
    
    $
    74
    
    
    $
    92Cash paid for income taxes
    
    $
    10
    
    
    $
    14Noncash investing and financing activitiesIssuance of common stock in connection with acquisition
    
    $
    
    
    
    $
    707Debt issued in connection with acquisitions
    
    
    
    
    
    
    700Debt assumed in connection with acquisition
    
    
    
    
    
    
    37Accrued liabilities related to acquisition
    
    
    
    
    
    
    200Stock based compensation related to stock options
    
    
    46
    
    
    
    68
 See notes to unaudited condensed consolidated financial statements.
 6




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Notes to Condensed Consolidated Financial Statements
(Unaudited)
January 31, 2008
 1. BASIS OF PRESENTATION
     2. BASIC AND DILUTED NET INCOME PER SHARE
  Three months ended
    
    Six months endedJanuary 31
    
    January 312008
    
    2007
    
    2008
    
    2007Weighted average common shares outstanding
    
    
    6,656
    
    
    
    6,304
    
    
    
    6,645
    
    
    
    6,257Dilutive effect of stock options and warrants
    
    
    344
    
    
    
    403
    
    
    
    344
    
    
    
    403Diluted weighted average common shares outstanding
    
    
    7,000
    
    
    
    6,707
    
    
    
    6,989
    
    
    
    6,660
 3. STOCK-BASED COMPENSATION
   7




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Three months ended
    
    Six months endedJanuary 31,
    
    January 31,2008
    
    2007
    
    2008
    
    2007Expected life (years)
    
    10 years
    
    10 years
    
    10 years
    
    10 yearsRisk-free interest rate
    
    
    4.88
    %
    
    
    4.88
    %
    
    
    4.88
    %
    
    
    4.88
    %Expected volatility
    
    
    120
    %
    
    
    124
    %
    
    
    120
    %
    
    
    124
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 Employee Stock Purchase Plans
  1991 Stock Option Plan
     8




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##### Table of Contents



Three months ended
    
    Three months endedJanuary 31, 2008
    
    January 31, 2007Wt-Avg
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wt-AvgWt-Avg
    
    Remaining
    
    Aggregate
    
    
    
    
    
    Wt-Avg
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    Contractual
    
    IntrinsicOptions
    
    Price
    
    Period
    
    Value
    
    Options
    
    Price
    
    Period
    
    ValueOutstanding at
beginning of
period
    
    
    125,186
    
    
    $
    2.30
    
    
    
    1.64
    
    
    
    
    
    
    
    146,686
    
    
    $
    2.28
    
    
    
    2.60
    
    
    $
    13,125Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    $
    3.25
    
    
    
    
    
    
    
    Outstanding at end
of period
    
    
    125,186
    
    
    $
    2.30
    
    
    
    1.39
    
    
    
    
    
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.34
    
    
    $
    13,125Exercisable at end
of period
    
    
    125,186
    
    
    $
    2.30
    
    
    
    1.39
    
    
    
    
    
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.34
    
    
    $
    13,125
 Six months ended
    
    Six months endedJanuary 31, 2008
    
    January 31, 2007Wt-Avg
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wt-AvgWt-Avg
    
    Remaining
    
    Aggregate
    
    
    
    
    
    Wt-Avg
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    Contractual
    
    IntrinsicOptions
    
    Price
    
    Period
    
    Value
    
    Options
    
    Price
    
    Period
    
    ValueOutstanding at
beginning of
period
    
    
    125,686
    
    
    $
    2.30
    
    
    
    1.89
    
    
    
    
    
    
    
    146,686
    
    
    $
    2.28
    
    
    
    2.85
    
    
    $
    13,125Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (500
    )
    
    $
    4.06
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    $
    3.25
    
    
    
    
    
    
    
    Outstanding at end
of period
    
    
    125,186
    
    
    $
    2.30
    
    
    
    1.39
    
    
    
    
    
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.34
    
    
    $
    13,125Exercisable at end
of period
    
    
    125,186
    
    
    $
    2.30
    
    
    
    1.39
    
    
    
    
    
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.34
    
    
    $
    13,125
  1993 Director Stock Option Plan
   9




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##### Table of Contents



Three months ended
    
    Three months endedJanuary 31, 2008
    
    January 31, 2007Wt-Avg
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wt-AvgWt-Avg
    
    Remaining
    
    Aggregate
    
    
    
    
    
    Wt-Avg
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    Contractual
    
    IntrinsicOptions
    
    Price
    
    Period
    
    Value
    
    Options
    
    Price
    
    Period
    
    ValueOutstanding at
beginning of
period
    
    
    1,313
    
    
    $
    2.65
    
    
    
    2.72
    
    
    
    
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.72
    
    
    $
    152Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end
of period
    
    
    1,313
    
    
    $
    2.65
    
    
    
    2.47
    
    
    
    
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.72
    
    
    
    Exercisable at end
of period
    
    
    1,313
    
    
    $
    2.65
    
    
    
    2.47
    
    
    
    
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.72
    
    
    $
    152
 Six months ended
    
    Six months endedJanuary 31, 2008
    
    January 31, 2007Wt-Avg
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wt-AvgWt-Avg
    
    Remaining
    
    Aggregate
    
    
    
    
    
    Wt-Avg
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    Contractual
    
    IntrinsicOptions
    
    Price
    
    Period
    
    Value
    
    Options
    
    Price
    
    Period
    
    ValueOutstanding at
beginning of
period
    
    
    1,313
    
    
    $
    2.65
    
    
    
    2.97
    
    
    
    
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.97
    
    
    $
    152Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end
of period
    
    
    1,313
    
    
    $
    2.65
    
    
    
    2.47
    
    
    
    
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.47Exercisable at end
of period
    
    
    1,313
    
    
    $
    2.65
    
    
    
    2.47
    
    
    
    
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.47
    
    
    $
    152
  2000 Stock Option Plan
     10




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##### Table of Contents



Three months ended
    
    Three months endedJanuary 31, 2008
    
    January 31, 2007Wt-Avg
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wt-AvgWt-Avg
    
    Remaining
    
    Aggregate
    
    
    
    
    
    Wt-Avg
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    Contractual
    
    IntrinsicOptions
    
    Price
    
    Period
    
    Value
    
    Options
    
    Price
    
    Period
    
    ValueOutstanding at
beginning of period
    
    
    923,789
    
    
    $
    1.48
    
    
    
    6.42
    
    
    $
    275,417
    
    
    
    1,044,374
    
    
    $
    1.39
    
    
    
    7.18
    
    
    $
    710,480Granted
    
    
    35,500
    
    
    $
    1.63
    
    
    
    
    
    
    
    
    
    
    
    60,250
    
    
    $
    1.95
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,500
    )
    
    $
    .31
    
    
    
    
    
    
    
    Forfeited
    
    
    (68,314
    )
    
    $
    1.14
    
    
    
    
    
    
    
    
    
    
    
    (7,500
    )
    
    $
    2.00
    
    
    
    
    
    
    
    Outstanding at end
of period
    
    
    890,975
    
    
    $
    1.52
    
    
    
    6.43
    
    
    $
    289,823
    
    
    
    1,082,850
    
    
    $
    1.43
    
    
    
    7.10
    
    
    $
    688,028Exercisable at end
of period
    
    
    732,611
    
    
    $
    1.46
    
    
    
    5.96
    
    
    $
    276,774
    
    
    
    817,612
    
    
    $
    1.33
    
    
    
    6.57
    
    
    $
    605,278
 Six months ended
    
    Six months endedJanuary 31, 2008
    
    January 31, 2007Wt-Avg
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wt-AvgWt-Avg
    
    Remaining
    
    Aggregate
    
    
    
    
    
    Wt-Avg
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    Contractual
    
    IntrinsicOptions
    
    Price
    
    Period
    
    Value
    
    Options
    
    Price
    
    Period
    
    ValueOutstanding at
beginning of period
    
    
    1,013,100
    
    
    $
    1.45
    
    
    
    6.61
    
    
    $
    320,062
    
    
    
    1,054,350
    
    
    $
    1.35
    
    
    
    7.27
    
    
    $
    814,975Granted
    
    
    35,500
    
    
    $
    1.63
    
    
    
    
    
    
    
    
    
    
    
    110,250
    
    
    $
    2.02
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,376
    )
    
    $
    .30
    
    
    
    
    
    
    
    Forfeited
    
    
    (157,625
    )
    
    $
    1.10
    
    
    
    
    
    
    
    
    
    
    
    (61,374
    )
    
    $
    1.45
    
    
    
    
    
    
    
    Outstanding at end
of period
    
    
    890,975
    
    
    $
    1.52
    
    
    
    6.43
    
    
    $
    289,823
    
    
    
    1,082,850
    
    
    $
    1.43
    
    
    
    7.10
    
    
    $
    688,028Exercisable at end
of period
    
    
    732,611
    
    
    $
    1.46
    
    
    
    5.96
    
    
    $
    276,774
    
    
    
    817,612
    
    
    $
    1.33
    
    
    
    6.57
    
    
    $
    605,278
  Three months ended
    
    Three months endedJanuary 31, 2008
    
    January 31, 2007Wt-Avg Grant Date
    
    
    
    
    
    Wt-Avg GrantOptions
    
    Fair Value
    
    Options
    
    Date Fair ValueNon-vested at beginning of
period
    
    
    123,239
    
    
    $
    1.85
    
    
    
    226,549
    
    
    $
    1.72Granted
    
    
    35,500
    
    
    $
    1.63
    
    
    
    60,250
    
    
    $
    1.95Vested
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (375
    )
    
    $
    1.80
    
    
    
    (21,561
    )
    
    $
    2.12Non-vested at end of period
    
    
    158,364
    
    
    $
    1.80
    
    
    
    265,238
    
    
    $
    1.74
 Six months ended
    
    Six months endedJanuary 31, 2008
    
    January 31, 2007Wt-Avg Grant Date
    
    
    
    
    
    Wt-Avg GrantOptions
    
    Fair Value
    
    Options
    
    Date Fair ValueNon-vested at beginning of
period
    
    
    137,675
    
    
    $
    1.79
    
    
    
    188,799
    
    
    $
    1.59Granted
    
    
    35,500
    
    
    $
    1.63
    
    
    
    110,250
    
    
    $
    2.02Vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (14,811
    )
    
    $
    1.29
    
    
    
    (33,811
    )
    
    $
    1.82Non-vested at end of period
    
    
    158,364
    
    
    $
    1.80
    
    
    
    265,238
    
    
    $
    1.74
  11




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##### Table of Contents



4. ACQUISITIONS
      Pro Forma Results
(in thousands, except per share data)
 Three months ended
    
    Six months endedJanuary 31
    
    January 312008
    
    2007
    
    2008
    
    2007Actual
    
    Pro Forma
    
    Actual
    
    Pro FormaRevenues
    
    $
    4,222
    
    
    $
    4,024
    
    
    $
    8,446
    
    
    $
    7,853Net income
    
    $
    335
    
    
    $
    138
    
    
    $
    578
    
    
    $
    225Earnings per share
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.09
    
    
    $
    0.03Earnings per diluted share
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    0.03
  12




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##### Table of Contents



5. NOTES PAYABLE
  Debt Schedule  (In thousands)
 January 31
    
    July 312008
    
    2007
    
    Net(Unaudited)
    
    (Audited)
    
    ChangeNote payable to WITECH:Current portion of note payable
    
    $
    
    
    
    $
    50
    
    
    $
    (50
    )Long term portion of note payable
    
    
    
    
    
    
    
    
    
    
    Total note payable to WITECH
    
    
    
    
    
    
    50
    
    
    
    (50
    )Notes payable to New Holders:Current portion of notes payable
    
    
    
    
    
    
    500
    
    
    
    (500
    )Long term portion of notes payable
    
    
    
    
    
    
    
    
    
    
    Total face value of notes payable to New Holders
    
    
    
    
    
    
    500
    
    
    
    (500
    )Carrying value in excess of face value of notes payable
    
    
    
    
    
    
    4
    
    
    
    (4
    )Debt discount (common stock warrants and options)
    
    
    
    
    
    
    (3
    )
    
    
    3Total carrying value of notes payable to New Holders
    
    
    
    
    
    
    501
    
    
    
    (501
    )Debt related to acquisition of OC-Net:Current portion of notes payable
    
    
    233
    
    
    
    233
    
    
    
    Long term portion of notes payable
    
    
    232
    
    
    
    350
    
    
    
    (118
    )Total notes payable
    
    
    465
    
    
    
    583
    
    
    
    (118
    )Current cash earn out
    
    
    250
    
    
    
    250
    
    
    
    Long term cash holdback
    
    
    150
    
    
    
    150
    
    
    
    Imputed interest on cash earn out/holdback
    
    
    (13
    )
    
    
    (32
    )
    
    
    19Total debt related to acquisition of OC-Net
    
    
    852
    
    
    
    951
    
    
    
    (99
    )Total debt
    
    $
    852
    
    
    $
    1,502
    
    
    $
    (650
    )
     13




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##### Table of Contents



6. SHAREHOLDER RIGHTS PLAN
  7. INCOME TAXES
  Three months ended
    
    Six months endedJanuary 31
    
    January 312008
    
    2007
    
    2008
    
    2007Current:Federal
    
    $
    (113
    )
    
    $
    103
    
    
    $
    30
    
    
    $
    183State
    
    
    (20
    )
    
    
    31
    
    
    
    8
    
    
    
    51Deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Generation / (utilization) of net operating loss carry-
forwards, net of change in valuation allowance
    
    
    128
    
    
    
    (126
    )
    
    
    (37
    )
    
    
    (226
    )Income tax (benefit) provision
    
    $
    (5
    )
    
    $
    8
    
    
    $
    1
    
    
    $
    8
   8. BUSINESS SEGMENTS
  14




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##### Table of Contents



Business Segment Information
(In Thousands)
 Three months ended
    
    
    
    
    
    
    Six months endedJanuary 31
    
    
    Percent
    
    
    January 31
    
    
    Percent2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    ChangeRevenueNetherlands
    
    $
    177
    
    
    $
    160
    
    
    
    11
    %
    
    $
    338
    
    
    $
    329
    
    
    
    3
    %United States
    
    
    4,045
    
    
    
    3,531
    
    
    
    15
    %
    
    
    8,108
    
    
    
    6,865
    
    
    
    18
    %Consolidated
    
    
    4,222
    
    
    
    3,691
    
    
    
    14
    %
    
    
    8,446
    
    
    
    7,194
    
    
    
    17
    %Earnings (loss)Netherlands
    
    $
    (108
    )
    
    $
    (155
    )
    
    
    30
    %
    
    $
    (177
    )
    
    $
    (312
    )
    
    
    43
    %United States
    
    
    443
    
    
    
    403
    
    
    
    10
    %
    
    
    755
    
    
    
    785
    
    
    
    (4
    %)Consolidated
    
    
    335
    
    
    
    248
    
    
    
    35
    %
    
    
    578
    
    
    
    473
    
    
    
    23
    %
 January 31
    
    
    July 31
    
    
    Percent2008
    
    
    2007
    
    
    ChangeTotal AssetsNetherlands
    
    $
    239
    
    
    $
    309
    
    
    
    (23
    %)United States
    
    
    8,553
    
    
    
    9,618
    
    
    
    (11
    %)Consolidated
    
    
    8,792
    
    
    
    9,927
    
    
    
    (11
    %)
 15




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Results of Operations
  Critical Accounting Policies and Estimates
 General
   Revenue Recognition
  Bad Debts
  Use of Estimates
  Legal Provisions
  16




---



##### Table of Contents



Impairment of Long-Lived Assets
  Cash and Cash Equivalents
  Debt Instruments
  Deferred Tax Asset
  Stock-Based Compensation
 
 Revenues
   Electronic Catalog Products And Services
 Product or Service
    
    Description
    
    Primary Industry/MarketPartSmart® ClassicÔ
    
    Electronic parts catalog for equipment dealers, formerly PartSmart Version 6
    
    Equipment- all sub-markets except RVPartSmart® 8Ô
    
    Electronic parts catalog for equipment dealers
    
    Equipment- all sub-markets except RVPartSmart® WebÔ
    
    Web based electronic parts catalog, formerly
EMPARTweb
    
    Equipment  all sub-marketsLookupparts.com
    
    PartSmart Web-based lookup service offered to
dealers on a subscription basis
    
    Equipment  all sub-markets except RV
 17




---



##### Table of Contents



Product or Service
    
    Description
    
    Primary Industry/MarketPartSmart® WebÔ ASP
    
    Electronic parts catalog viewing software
offered as a hosted service for individual
distributors and manufacturers, formerly
EMPARTweb ASP
    
    Equipment  all sub-marketsPartSmart® CartÔ
    
    Add-on product to PartSmart Web that
facilitates order taking from the catalog
    
    Equipment  all sub-marketsPartSmart® Data Manager
    
    Electronic parts catalog creation software
used to produce catalogs for viewing on
PartSmart Classic, PartSmart 8, and PartSmart
Web
    
    Equipment  all sub-marketsPartSmart® Data
Publisher
    
    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-marketsPartSmart® PDF Catalog
Composer 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-marketsElectronic publishing
services
    
    Project management, data conversion, editing,
production, and distribution services for
manufacturers who wish to outsource catalog
production operations
    
    Equipment  all sub-marketsEMPARTviewer
    
    Electronic parts catalog viewing software
    
    Equipment  RVProfessional services
    
    Project management, software customization,
data conversion, back-end system integration,
roll-out management, and help desk support
services
    
    Equipment  all sub-markets
 MARKETING SERVICES
 Product or Service
    
    Description
    
    Primary Industry/MarketWebsiteSmart Pro
    
    Software to create
customized websites
and conduct
business
electronically,
including optional
shopping cart,
superseding
WebsiteSmart.
    
    Equipment  primarily
outdoor power, power
sportsWebsiteSmart
    
    Software to create
customized websites
and conduct
business
electronically,
including optional
shopping cart
    
    Equipment  primarily
outdoor power, power
sportsProfessional Services
    
    Large-scale website
creation, hosting
and maintenance
services
    
    Equipment  all sub-marketsARI MailSmart
    
    Direct mail
solution that
enables users to
cost-effectively
and efficiently
reach customers and
prospects with
customized messages
    
    Equipment  all sub-marketseMailSmart
    
    Email solution that
enables users to
stay in touch with
customers through
special offers and
a quarterly
newsletter
    
    Equipment  all sub-marketsContent 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
 e CommERCE Products and Services
 Product or Service
    
    Description
    
    Primary Industry/MarketTradeRoute®
    
    Document handling
and communications
for product
ordering, warranty
claims and other
business documents
    
    Equipment  Outdoor power and RVWarrantySmart
    
    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
  18




---



##### Table of Contents



Revenue by Location and Service
(In Thousands)
 Three months ended
    
    
    
    
    
    
    Six months endedJanuary 31
    
    
    Percent
    
    
    January 31
    
    
    Percent2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    ChangeNorth AmericanCatalog subscriptions
    
    $
    2,527
    
    
    $
    2,625
    
    
    
    (4
    %)
    
    $
    5,119
    
    
    $
    5,208
    
    
    
    (2
    %)Catalog professional services
    
    
    320
    
    
    
    312
    
    
    
    3
    %
    
    
    609
    
    
    
    594
    
    
    
    3
    %Marketing services
    
    
    581
    
    
    
    294
    
    
    
    98
    %
    
    
    1,117
    
    
    
    511
    
    
    
    119
    %Marketing professional services
    
    
    419
    
    
    
    
    
    
    
    100
    %
    
    
    828
    
    
    
    
    
    
    
    100
    %Dealer & distributor communications
    
    
    152
    
    
    
    149
    
    
    
    2
    %
    
    
    315
    
    
    
    347
    
    
    
    (9
    %)Subtotal
    
    
    3,999
    
    
    
    3,380
    
    
    
    18
    %
    
    
    7,988
    
    
    
    6,660
    
    
    
    20
    %Rest of the WorldCatalog subscriptions
    
    
    220
    
    
    
    267
    
    
    
    (18
    %)
    
    
    455
    
    
    
    470
    
    
    
    (3
    %)Catalog professional services
    
    
    3
    
    
    
    44
    
    
    
    (93
    %)
    
    
    3
    
    
    
    64
    
    
    
    (95
    %)Subtotal
    
    
    223
    
    
    
    311
    
    
    
    (28
    %)
    
    
    458
    
    
    
    534
    
    
    
    (14
    %)Total RevenueCatalog subscriptions
    
    
    2,747
    
    
    
    2,892
    
    
    
    (5
    %)
    
    
    5,574
    
    
    
    5,678
    
    
    
    (2
    %)Catalog professional services
    
    
    323
    
    
    
    356
    
    
    
    (9
    %)
    
    
    612
    
    
    
    658
    
    
    
    (7
    %)Marketing services
    
    
    581
    
    
    
    294
    
    
    
    98
    %
    
    
    1,117
    
    
    
    511
    
    
    
    119
    %Marketing professional services
    
    
    419
    
    
    
    419
    
    
    
    100
    %
    
    
    828
    
    
    
    
    
    
    
    100
    %Dealer & distributor communications
    
    
    152
    
    
    
    149
    
    
    
    2
    %
    
    
    315
    
    
    
    347
    
    
    
    (9
    %)Total
    
    $
    4,222
    
    
    $
    3,691
    
    
    
    14
    %
    
    $
    8,446
    
    
    $
    7,194
    
    
    
    17
    %
 North America
 Catalog Subscriptions
  Catalog Professional Services
  19




---



##### Table of Contents



Marketing Services
  Marketing Professional Services
  Dealer and Distributor Communications
  Rest of the World
 Catalog Subscriptions
  Catalog Professional Services
  20




---



##### Table of Contents



Cost of Products and Services Sold
  Cost of Products and Services Sold as a Percent of Revenue by Revenue Type  (In thousands)
 Three months ended
    
    
    
    
    
    Six months endedJanuary 31
    
    
    
    
    
    January 312008
    
    2007
    
    % Chg
    
    2008
    
    2007
    
    % ChgCatalog subscriptionsRevenue
    
    $
    2,747
    
    
    $
    2,892
    
    
    
    (5
    %)
    
    $
    5,574
    
    
    $
    5,678
    
    
    
    (2
    %)Cost of revenue
    
    
    250
    
    
    
    278
    
    
    
    (10
    %)
    
    
    574
    
    
    
    573
    
    
    
    0
    %Cost of revenue as
a percent of
revenue
    
    
    9
    %
    
    
    10
    %
    
    
    
    
    
    
    10
    %
    
    
    10
    %Catalog professional servicesRevenue
    
    
    323
    
    
    
    356
    
    
    
    (9
    %)
    
    
    612
    
    
    
    658
    
    
    
    (7
    %)Cost of revenue
    
    
    172
    
    
    
    112
    
    
    
    54
    %
    
    
    337
    
    
    
    237
    
    
    
    42
    %Cost of revenue as
a percent of
revenue
    
    
    53
    %
    
    
    31
    %
    
    
    
    
    
    
    55
    %
    
    
    36
    %Marketing services subscriptionsRevenue
    
    
    581
    
    
    
    294
    
    
    
    97
    %
    
    
    1,117
    
    
    
    511
    
    
    
    118
    %Cost of revenue
    
    
    208
    
    
    
    174
    
    
    
    20
    %
    
    
    348
    
    
    
    268
    
    
    
    30
    %Cost of revenue as
a percent of
revenue
    
    
    36
    %
    
    
    59
    %
    
    
    
    
    
    
    31
    %
    
    
    52
    %Marketing professional servicesRevenue
    
    
    419
    
    
    
    
    
    
    
    100
    %
    
    
    828
    
    
    
    
    
    
    
    100
    %Cost of revenue
    
    
    147
    
    
    
    
    
    
    
    100
    %
    
    
    262
    
    
    
    
    
    
    
    100
    %Cost of revenue as
a percent of
revenue
    
    
    35
    %
    
    
    0
    %
    
    
    
    
    
    
    32
    %
    
    
    0
    %Dealer and distributor communicationsRevenue
    
    
    152
    
    
    
    149
    
    
    
    2
    %
    
    
    315
    
    
    
    347
    
    
    
    (9
    %)Cost of revenue
    
    
    3
    
    
    
    20
    
    
    
    (85
    %)
    
    
    6
    
    
    
    52
    
    
    
    (88
    %)Cost of revenue as
a percent of
revenue
    
    
    2
    %
    
    
    13
    %
    
    
    
    
    
    
    2
    %
    
    
    15
    %TotalRevenue
    
    $
    4,222
    
    
    $
    3,691
    
    
    
    14
    %
    
    $
    8,446
    
    
    $
    7,194
    
    
    
    17
    %Cost of revenue
    
    $
    780
    
    
    
    584
    
    
    
    34
    %
    
    
    1,527
    
    
    
    1,130
    
    
    
    35
    %Cost of revenue as
a percent of
revenue
    
    
    18
    %
    
    
    16
    %
    
    
    
    
    
    
    18
    %
    
    
    16
    %
    21




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##### Table of Contents



Operating Expenses
  Operating Expenses  (In thousands)
 Three months ended
    
    
    
    
    
    
    Six months endedJanuary 31
    
    
    
    
    
    
    January 312008
    
    
    2007
    
    
    % Chg
    
    
    2008
    
    
    2007
    
    
    % ChgCustomer operations and support
    
    $
    256
    
    
    $
    276
    
    
    
    (7
    %)
    
    $
    536
    
    
    $
    544
    
    
    
    (1
    %)Selling, general and administrative
    
    
    2,304
    
    
    
    2,101
    
    
    
    10
    %
    
    
    4,684
    
    
    
    4,086
    
    
    
    15
    %Software development and technical support
    
    
    339
    
    
    
    359
    
    
    
    (6
    %)
    
    
    688
    
    
    
    728
    
    
    
    (5
    %)Depreciation and amortization
    
    
    186
    
    
    
    110
    
    
    
    70
    %
    
    
    381
    
    
    
    216
    
    
    
    76
    %Net operating expenses
    
    $
    3,085
    
    
    $
    2,846
    
    
    
    8
    %
    
    $
    6,289
    
    
    $
    5,574
    
    
    
    13
    %
     22




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##### Table of Contents



Other Items
   Liquidity and Capital Resources
  Cash Flow Information  (In thousands)
 Three months ended
    
    
    
    
    
    
    Six months endedJanuary 31
    
    
    
    
    
    
    January 312008
    
    
    2007
    
    
    % Chg
    
    
    2008
    
    
    2007
    
    
    % ChgNet income
    
    $
    335
    
    
    $
    248
    
    
    
    35
    %
    
    $
    578
    
    
    $
    473
    
    
    
    22
    %Amortization of software products
    
    
    187
    
    
    
    198
    
    
    
    (6
    %)
    
    
    381
    
    
    
    385
    
    
    
    (1
    %)Amortization of deferred finance costs
and
debt discount
    
    
    10
    
    
    
    (22
    )
    
    
    145
    %
    
    
    18
    
    
    
    (33
    )
    
    
    155
    %Depreciation and other amortization
    
    
    207
    
    
    
    110
    
    
    
    88
    %
    
    
    402
    
    
    
    216
    
    
    
    86
    %Stock based compensation related to
stock
options
    
    
    37
    
    
    
    42
    
    
    
    (12
    %)
    
    
    46
    
    
    
    68
    
    
    
    (32
    %)Stock issued as contribution to 401(k)
plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    42
    
    
    
    (12
    %)Net change in working capital
    
    
    (722
    )
    
    
    (464
    )
    
    
    (56
    %)
    
    
    (848
    )
    
    
    (873
    )
    
    
    3
    %Net cash provided by operating activities
    
    
    54
    
    
    
    112
    
    
    
    (52
    %)
    
    
    614
    
    
    
    278
    
    
    
    121
    %Net cash used in investing activities
    
    
    (126
    )
    
    
    (1,342
    )
    
    
    91
    %
    
    
    (255
    )
    
    
    (1,554
    )
    
    
    84
    %Net cash used in financing activities
    
    
    (245
    )
    
    
    (322
    )
    
    
    24
    %
    
    
    (655
    )
    
    
    (669
    )
    
    
    2
    %Effect of foreign currency exchange rate
change on cash
    
    
    3
    
    
    
    
    
    
    
    100
    %
    
    
    7
    
    
    
    
    
    
    
    100
    %Net change in cash
    
    $
    (314
    )
    
    $
    (1,552
    )
    
    
    80
    %
    
    $
    (289
    )
    
    $
    (1,945
    )
    
    
    85
    %
     23




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##### Table of Contents



Acquisitions
   Off-Balance Sheet Arrangements
  Forward Looking Statements
  
 ITEM 3. CONTROLS AND PROCEDURES
   24




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES  None.
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    The Company held its 2007 Annual Meeting of Shareholders on December 20, 2007.(b)
    
    Votes cast for the election of William C. Mortimore to serve as director until the 2010
Annual Shareholders Meeting were as follows:
 For
    
    
    5,012,705Withheld authority to vote for
    
    
    643,369
  For
    
    
    4,888,430Withheld authority to vote for
    
    
    767,644
 (c)
    
    Votes cast to amend the Corporations 2000 Stock Option Plan were as follows:
 For
    
    
    2,394,576Against
    
    
    908,816Abstained
    
    
    10,680
  For
    
    
    5,586,196Against
    
    
    28,625Abstained
    
    
    41,252
 
 ITEM 5. OTHER INFORMATION
 
     ITEM 6. EXHIBITS
 10.1
    
    Employment Agreement between the Company and Brian E. Dearing, dated as of March 13, 2008.31.1
    
    Section 302 Certification of Chief Executive Officer.32.1
    
    Section 906 Certification of Chief Executive Officer.
 25




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##### Table of Contents



SIGNATURES
  ARI Network Services, Inc.
(Registrant)Date:
    
    March 17, 2008
    
    /s/ Brian E. DearingBrian E. Dearing, Chief Executive Officer and Acting Chief Financial Officer
 26