##### 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, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period fromto
 Commission file number 000-19608
 ARI Network Services, Inc.
  WISCONSIN
    
    39-1388360(State or other jurisdiction of
    
    (IRS Employer Identification No.)incorporation or organization)
 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, 2006 and July 31, 2005
    
    
    3-4Condensed consolidated statements of operations for the three and six months ended January 31, 2006 and 2005
    
    
    5Condensed consolidated statements of cash flows for the six months ended January 31, 2006 and 2005
    
    
    6Notes to unaudited condensed consolidated financial statements
    
    
    7-9Item 2
    
    Managements discussion and analysis or plan of operation
    
    
    9-17Item 3
    
    Controls and procedures
    
    
    19PART II  OTHER INFORMATIONItem 2
    
    Unregistered sales of equity securities and use of proceeds
    
    
    19Item 6
    
    Exhibits
    
    
    19Signatures
    
    
    
    
    20CertificationCertificationCertificationCertification
  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 312006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,584
    
    
    $
    3,651Trade receivables, less allowance for doubtful accounts of $106 and
$71 at January 31, 2006 and July 31, 2005, respectively
    
    
    1,552
    
    
    
    1,023Prepaid expenses and other
    
    
    186
    
    
    
    203Deferred income taxes
    
    
    160
    
    
    
    160Total current assets
    
    
    5,482
    
    
    
    5,037Equipment and leasehold improvements:Computer equipment
    
    
    4,823
    
    
    
    4,813Leasehold improvements
    
    
    73
    
    
    
    73Furniture and equipment
    
    
    1,892
    
    
    
    1,7026,788
    
    
    
    6,588Less accumulated depreciation and amortization
    
    
    6,067
    
    
    
    5,893Net equipment and leasehold improvements
    
    
    721
    
    
    
    695Deferred income taxes
    
    
    705
    
    
    
    705Other assets
    
    
    8
    
    
    
    10Capitalized software product costs
    
    
    11,237
    
    
    
    10,927Less accumulated amortization
    
    
    9,738
    
    
    
    9,441Net capitalized software product costs
    
    
    1,499
    
    
    
    1,486Total Assets
    
    $
    8,415
    
    
    $
    7,933
 3




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##### Table of Contents



ARI Network Services, Inc.
Consolidated Balance Sheets  (In thousands, except share and per share data)  (Unaudited)
 January 31
    
    
    July 312006
    
    
    2005LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Current portion of notes payable
    
    $
    1,400
    
    
    $
    1,200Accounts payable
    
    
    435
    
    
    
    323Deferred revenue
    
    
    5,504
    
    
    
    5,441Accrued payroll and related liabilities
    
    
    796
    
    
    
    1,134Accrued sales, use and income taxes
    
    
    30
    
    
    
    74Accrued vendor specific liabilities
    
    
    607
    
    
    
    530Other accrued liabilities
    
    
    274
    
    
    
    242Current portion of capital lease obligations
    
    
    4
    
    
    
    4Total current liabilities
    
    
    9,050
    
    
    
    8,948Long term liabilities:Notes payable (net of discount)
    
    
    1,304
    
    
    
    2,037Long term payroll related
    
    
    480
    
    
    
    461Other long term liabilities
    
    
    87
    
    
    
    96Capital lease obligations
    
    
    
    
    
    
    Total long term liabilities
    
    
    1,871
    
    
    
    2,594Shareholders equity (deficit):Cumulative preferred stock, par value $.001 per share,
1,000,000 shares authorized; 0 shares issued and
outstanding at January 31, 2006 and July 31, 2005, respectively
    
    
    
    
    
    
    Common stock, par value $.001 per share, 25,000,000 shares
authorized; 6,166 465 and 6,064,534 shares issued and outstanding
at January 31, 2006 and July 31, 2005, respectively
    
    
    6
    
    
    
    6Common stock warrants and options
    
    
    36
    
    
    
    36Additional paid-in-capital
    
    
    93,832
    
    
    
    93,751Accumulated deficit
    
    
    (96,380
    )
    
    
    (97,402
    )Total shareholders equity (deficit)
    
    
    (2,506
    )
    
    
    (3,609
    )Total Liabilities and Shareholders Equity (Deficit)
    
    $
    8,415
    
    
    $
    7,933
 See notes to unaudited condensed consolidated 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 312006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues:Subscriptions, support and other services fees
    
    $
    2,548
    
    
    $
    2,422
    
    
    $
    5,112
    
    
    $
    4,824Software licenses and renewals
    
    
    515
    
    
    
    558
    
    
    
    1,033
    
    
    
    1,134Professional services
    
    
    459
    
    
    
    324
    
    
    
    868
    
    
    
    6213,522
    
    
    
    3,304
    
    
    
    7,013
    
    
    
    6,579Cost of products and services sold:Subscriptions, support and other services fees
    
    
    207
    
    
    
    233
    
    
    
    388
    
    
    
    426Software licenses and renewals *
    
    
    164
    
    
    
    145
    
    
    
    322
    
    
    
    299Professional services
    
    
    84
    
    
    
    48
    
    
    
    195
    
    
    
    130455
    
    
    
    426
    
    
    
    905
    
    
    
    855Gross margin
    
    
    3,067
    
    
    
    2,878
    
    
    
    6,108
    
    
    
    5,724Operating expenses:Depreciation and amortization (exclusive of
amortization of software
products included in cost
of products and services sold)
    
    
    94
    
    
    
    69
    
    
    
    174
    
    
    
    123Customer operations and support
    
    
    279
    
    
    
    257
    
    
    
    582
    
    
    
    519Selling, general and administrative
    
    
    1,840
    
    
    
    1,745
    
    
    
    3,699
    
    
    
    3,454Software development and technical support
    
    
    305
    
    
    
    301
    
    
    
    580
    
    
    
    560Net operating expenses
    
    
    2,518
    
    
    
    2,372
    
    
    
    5,035
    
    
    
    4,656Operating income
    
    
    549
    
    
    
    506
    
    
    
    1,073
    
    
    
    1,068Other income (expense):Interest expense
    
    
    (50
    )
    
    
    (47
    )
    
    
    (99
    )
    
    
    (91
    )Other, net
    
    
    25
    
    
    
    10
    
    
    
    48
    
    
    
    22Total other income (expense)
    
    
    (25
    )
    
    
    (37
    )
    
    
    (51
    )
    
    
    (69
    )Income before provision for income taxes
    
    
    524
    
    
    
    469
    
    
    
    1,022
    
    
    
    999Income tax benefit (provision)
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (50
    )Net income
    
    $
    524
    
    
    $
    455
    
    
    $
    1,022
    
    
    $
    949Average common shares outstanding:Basic
    
    
    6,154
    
    
    
    5,974
    
    
    
    6,140
    
    
    
    5,958Diluted
    
    
    6,631
    
    
    
    6,445
    
    
    
    6,617
    
    
    
    6,429Basic and diluted net income (loss) per share:Basic
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    0.17
    
    
    $
    0.16Diluted
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.15
 See notes to unaudited condensed consolidated financial statements.
 
 *
    
    Includes amortization of software products of $152, $133, $297 and $274 respectively and
excluding other depreciation and amortization shown separately
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ARI Network Services, Inc.
 
 Consolidated Statements of Cash Flows  (In thousands)
(Unaudited)
 Six months endedJanuary 312006
    
    
    2005Operating activitiesNet income
    
    $
    1,022
    
    
    $
    949Adjustments to reconcile net income to net cash provided
by operating activities:Amortization of software products
    
    
    297
    
    
    
    274Amortization of deferred financing costs, debt discount and
excess carrying value over face amount of notes payable
    
    
    (31
    )
    
    
    (42
    )Depreciation and other amortization
    
    
    174
    
    
    
    123Stock issued as contribution to 401(k) plan
    
    
    21
    
    
    
    37Net change in receivables, prepaid expenses and other
current assets
    
    
    (512
    )
    
    
    453Net change in accounts payable, deferred revenue,
accrued liabilities and other long term liabilities
    
    
    (88
    )
    
    
    (480
    )Net cash provided by operating activities
    
    
    883
    
    
    
    1,314Investing activitiesPurchase of equipment and leasehold improvements
    
    
    (200
    )
    
    
    (153
    )Software product costs capitalized
    
    
    (310
    )
    
    
    (746
    )Net cash used in investing activities
    
    
    (510
    )
    
    
    (899
    )Financing activitiesPayments under notes payable
    
    
    (500
    )
    
    
    (500
    )Payments of capital lease obligations
    
    
    
    
    
    
    (6
    )Proceeds from issuance of common stock
    
    
    60
    
    
    
    60Net cash used in financing activities
    
    
    (440
    )
    
    
    (446
    )Net decrease in cash
    
    
    (67
    )
    
    
    (31
    )Cash at beginning of period
    
    
    3,651
    
    
    
    3,357Cash at end of period
    
    $
    3,584
    
    
    $
    3,326Cash paid for interest
    
    $
    128
    
    
    $
    131Cash paid for income taxes
    
    $
    
    
    
    $
    55
 See notes to unaudited condensed consolidated financial statements.
 6




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Notes to Condensed Consolidated Financial Statements
(Unaudited)
January 31, 2006
 1. BASIS OF PRESENTATION
    2. BASIC AND DILUTED NET INCOME PER SHARE
  Three months ended
    
    
    Six months endedJanuary 31
    
    
    January 312006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average common shares outstanding
    
    
    6,154
    
    
    
    5,974
    
    
    
    6,140
    
    
    
    5,958Dilutive effect of stock options and warrants
    
    
    477
    
    
    
    471
    
    
    
    477
    
    
    
    471Diluted weighted average common shares outstanding
    
    
    6,631
    
    
    
    6,445
    
    
    
    6,617
    
    
    
    6,429
 3. STOCK-BASED COMPENSATION
  Three months ended
    
    
    Six months endedJanuary 31
    
    
    January 312006
    
    
    2005
    
    
    2006
    
    
    2005Net income, as reported
    
    $
    524
    
    
    $
    455
    
    
    $
    1,022
    
    
    $
    949Stock-based compensation using the
fair value method
    
    
    (82
    )
    
    
    (89
    )
    
    
    (162
    )
    
    
    (136
    )Pro forma net income
    
    $
    442
    
    
    $
    366
    
    
    $
    860
    
    
    $
    813Net income per shareBasic  as reported
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    0.17
    
    
    $
    0.16Basic  pro forma
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.14
    
    
    $
    0.14Diluted  as reported
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.15Diluted  pro forma
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.13
    
    
    $
    0.13
 7




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4. NOTES PAYABLE
    5. SHAREHOLDER RIGHTS PLAN
  6. INCOME TAXES
  Three months ended
    
    
    Six months endedJanuary 31
    
    
    January 312006
    
    
    2005
    
    
    2006
    
    
    2005Current:Federal
    
    $
    179
    
    
    $
    12
    
    
    $
    348
    
    
    $
    43State
    
    
    32
    
    
    
    2
    
    
    
    62
    
    
    
    7Deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Utilization of net operating loss carryforwards
    
    
    (211
    )
    
    
    
    
    
    
    (410
    )
    
    
    Income tax (benefit)provision
    
    $
    
    
    
    $
    14
    
    
    $
    
    
    
    $
    50
  8




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##### Table of Contents



7. CLAIM FOR INDEMNIFICATION
  MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Results of Operations
   Critical Accounting Policies and Estimates
 General
   Revenue Recognition
 
 9




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Bad Debts
  Use of Estimates
  Impairment of Long-Lived Assets
  Cash and Cash Equivalents
  Debt Instruments
  Deferred Tax Asset
  Stock-Based Compensation
   10




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Revenues
   Catalog, Customer and Subscription Information by Region
(As of January 31, 2006)
 Distinct
    
    
    
    
    
    
    Distinct
    
    
    DistinctCatalogs
    
    
    Manufacturers
    
    
    Subscriptions
    
    
    Distributors
    
    
    Dealers(Estimated)
    
    
    (Estimated)North America
    
    
    82
    
    
    
    63
    
    
    
    72,326
    
    
    
    104
    
    
    
    22,985Rest of World
    
    
    55
    
    
    
    9
    
    
    
    9,099
    
    
    
    36
    
    
    
    6,168Included in both Regions
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    89
    
    
    
    72
    
    
    
    81,425
    
    
    
    140
    
    
    
    29,153
 Catalog
    
    =
    
    A separately sold and/or distributed parts catalog. A manufacturer may have more than
one catalog. More than one brand or distinct product line may be included in a
catalog.Distinct Manufacturer
    
    =
    
    A single independent manufacturer, not owned by another manufacturer, served by ARI. Distinct manufacturers are included in the region they most serve even if they
have catalogs in both regions.Subscription
    
    =
    
    A single catalogs subscribed to by a single dealer or distributor. A dealer
or distributor may subscribe to more than one catalog.Distinct Distributor
    
    =
    
    A single independent distributor, not owned by another distributor,
served by ARI. A distributor generally buys from manufacturers and sells to dealers.Distinct Dealer
    
    =
    
    A single independent servicing dealer, not owned by another dealer,
served by ARI
   11




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Revenue by Location and Service
(In Thousands)
 Three months ended
    
    
    
    
    
    
    Six months endedJanuary 31
    
    
    Percent
    
    
    January 31
    
    
    Percent2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeNorth AmericanCatalog subscriptions
    
    $
    2,581
    
    
    $
    2,465
    
    
    
    5
    %
    
    $
    5,159
    
    
    $
    4,890
    
    
    
    6
    %Catalog professional services
    
    
    439
    
    
    
    318
    
    
    
    38
    %
    
    
    794
    
    
    
    613
    
    
    
    30
    %Dealer marketing services
    
    
    107
    
    
    
    89
    
    
    
    20
    %
    
    
    175
    
    
    
    137
    
    
    
    28
    %Dealer & distributor communications
    
    
    188
    
    
    
    231
    
    
    
    (19
    %)
    
    
    415
    
    
    
    512
    
    
    
    (19
    %)Subtotal
    
    
    3,315
    
    
    
    3,103
    
    
    
    7
    %
    
    
    6,543
    
    
    
    6,152
    
    
    
    6
    %Rest of the WorldCatalog subscriptions
    
    
    170
    
    
    
    201
    
    
    
    (15
    %)
    
    
    384
    
    
    
    417
    
    
    
    (8
    %)Catalog professional services
    
    
    37
    
    
    
    
    
    
    
    100
    %
    
    
    86
    
    
    
    10
    
    
    
    760
    %Subtotal
    
    
    207
    
    
    
    201
    
    
    
    3
    %
    
    
    470
    
    
    
    427
    
    
    
    10
    %Total RevenueCatalog subscriptions
    
    
    2,751
    
    
    
    2,666
    
    
    
    3
    %
    
    
    5,543
    
    
    
    5,307
    
    
    
    4
    %Catalog professional services
    
    
    476
    
    
    
    318
    
    
    
    50
    %
    
    
    880
    
    
    
    623
    
    
    
    41
    %Dealer marketing services
    
    
    107
    
    
    
    89
    
    
    
    20
    %
    
    
    175
    
    
    
    137
    
    
    
    28
    %Dealer & distributor communications
    
    
    188
    
    
    
    231
    
    
    
    (19
    %)
    
    
    415
    
    
    
    512
    
    
    
    (19
    %)Total
    
    $
    3,522
    
    
    $
    3,304
    
    
    
    7
    %
    
    $
    7,013
    
    
    $
    6,579
    
    
    
    7
    %
 North America
 Catalog Subscriptions
  Catalog Professional Services
  12




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Dealer Marketing Services
  Dealer and Distributor Communications
  Rest of the World
 Catalog Subscriptions
  Catalog Professional Services
  13




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##### 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 312006
    
    2005
    
    % Chg
    
    2006
    
    2005
    
    % ChgCatalog subscriptionsRevenue
    
    $
    2,751
    
    
    $
    2,666
    
    
    
    3
    %
    
    $
    5,543
    
    
    $
    5,307
    
    
    
    4
    %Cost of revenue
    
    
    260
    
    
    
    260
    
    
    
    0
    %
    
    
    538
    
    
    
    521
    
    
    
    3
    %Cost of revenue as a percent of revenue
    
    
    9
    %
    
    
    10
    %
    
    
    
    
    
    
    10
    %
    
    
    10
    %Catalog professional servicesRevenue
    
    
    476
    
    
    
    318
    
    
    
    50
    %
    
    
    880
    
    
    
    623
    
    
    
    41
    %Cost of revenue
    
    
    119
    
    
    
    84
    
    
    
    42
    %
    
    
    219
    
    
    
    145
    
    
    
    51
    %Cost of revenue as a percent of revenue
    
    
    25
    %
    
    
    26
    %
    
    
    
    
    
    
    25
    %
    
    
    23
    %Dealer marketing servicesRevenue
    
    
    107
    
    
    
    89
    
    
    
    20
    %
    
    
    175
    
    
    
    137
    
    
    
    28
    %Cost of revenue
    
    
    49
    
    
    
    48
    
    
    
    2
    %
    
    
    80
    
    
    
    64
    
    
    
    25
    %Cost of revenue as a percent of revenue
    
    
    46
    %
    
    
    54
    %
    
    
    
    
    
    
    46
    %
    
    
    47
    %Dealer and distributor communicationsRevenue
    
    
    188
    
    
    
    231
    
    
    
    (19
    %)
    
    
    415
    
    
    
    512
    
    
    
    (19
    %)Cost of revenue
    
    
    27
    
    
    
    34
    
    
    
    (21
    %)
    
    
    68
    
    
    
    125
    
    
    
    (46
    %)Cost of revenue as a percent of revenue
    
    
    14
    %
    
    
    15
    %
    
    
    
    
    
    
    16
    %
    
    
    24
    %Total
Revenue
    
    $
    3,522
    
    
    $
    3,304
    
    
    
    7
    %
    
    $
    7,013
    
    
    $
    6,579
    
    
    
    7
    %Cost of revenue
    
    
    455
    
    
    
    426
    
    
    
    7
    %
    
    
    905
    
    
    
    855
    
    
    
    6
    %Cost of revenue as a percent of revenue
    
    
    13
    %
    
    
    13
    %
    
    
    
    
    
    
    13
    %
    
    
    13
    %
     14




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##### Table of Contents



Operating Expenses
  Operating Expenses  (In thousands)
 Three months ended
    
    
    
    
    
    Six months endedJanuary 31
    
    
    
    
    January 312006
    
    
    2005
    
    
    % Chg
    
    
    2006
    
    
    2005
    
    
    % ChgCost of products and services sold
    
    $
    455
    
    
    $
    426
    
    
    
    7
    %
    
    $
    905
    
    
    $
    855
    
    
    
    6
    %Customer operations and support
    
    
    279
    
    
    
    257
    
    
    
    9
    %
    
    
    582
    
    
    
    519
    
    
    
    12
    %Selling, general and administrative
    
    
    1,840
    
    
    
    1,745
    
    
    
    5
    %
    
    
    3,699
    
    
    
    3,454
    
    
    
    7
    %Software development and technical support
    
    
    305
    
    
    
    301
    
    
    
    1
    %
    
    
    580
    
    
    
    560
    
    
    
    4
    %Depreciation and amortization
    
    
    94
    
    
    
    69
    
    
    
    36
    %
    
    
    174
    
    
    
    123
    
    
    
    41
    %Net operating expenses
    
    $
    2,973
    
    
    $
    2,798
    
    
    
    6
    %
    
    $
    5,940
    
    
    $
    5,511
    
    
    
    8
    %
     Other Items
   15




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##### Table of Contents



Acquisitions
   Liquidity and Capital Resources
  Cash Flow Information  (In thousands)
 Three months ended
    
    
    
    
    
    Six months endedJanuary 31
    
    
    
    
    
    January 312006
    
    
    2005
    
    
    % Chg
    
    
    2006
    
    
    2005
    
    
    % ChgNet income
    
    $
    524
    
    
    $
    455
    
    
    
    15
    %
    
    $
    1,022
    
    
    $
    949
    
    
    
    8
    %Amortization of software products
    
    
    152
    
    
    
    133
    
    
    
    14
    %
    
    
    297
    
    
    
    274
    
    
    
    8
    %Amortization of deferred finance costs
and
debt discount
    
    
    (15
    )
    
    
    (21
    )
    
    
    (29
    %)
    
    
    (31
    )
    
    
    (42
    )
    
    
    (26
    %)Depreciation and other amortization
    
    
    94
    
    
    
    69
    
    
    
    35
    %
    
    
    174
    
    
    
    123
    
    
    
    41
    %Stock issued as contribution to 401(k)
plan
    
    
    0
    
    
    
    
    
    
    
    0
    %
    
    
    21
    
    
    
    37
    
    
    
    (41
    %)Net change in working capital
    
    
    (247
    )
    
    
    (57
    )
    
    
    333
    %
    
    
    (600
    )
    
    
    (27
    )
    
    
    2122
    %Net cash provided by operating activities
    
    
    508
    
    
    
    579
    
    
    
    (12
    %)
    
    
    883
    
    
    
    1,314
    
    
    
    (33
    %)Net cash used in investing activities
    
    
    (255
    )
    
    
    (228
    )
    
    
    12
    %
    
    
    (510
    )
    
    
    (899
    )
    
    
    (43
    %)Net cash used in financing activities
    
    
    (224
    )
    
    
    (195
    )
    
    
    15
    %
    
    
    (440
    )
    
    
    (446
    )
    
    
    (1
    %)Net change in cash
    
    $
    29
    
    
    $
    156
    
    
    
    (81
    %)
    
    $
    (67
    )
    
    $
    (31
    )
    
    
    116
    %
   16




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##### Table of Contents



Debt Schedule  (In thousands)
 January 31
    
    
    July 312006
    
    
    2005
    
    
    Net(Unaudited)
    
    
    (Audited)
    
    
    ChangeNote payable to WITECH:Current portion of note payable
    
    
    200
    
    
    
    200
    
    
    
    Long term portion of note payable
    
    
    150
    
    
    
    250
    
    
    
    (100
    )Total note payable to WITECH
    
    
    350
    
    
    
    450
    
    
    
    (100
    )Notes payable to New Holders:Current portion of notes payable
    
    
    1,200
    
    
    
    1,000
    
    
    
    200Long term portion of notes payable
    
    
    1,100
    
    
    
    1,700
    
    
    
    (600
    )Total face value of notes payable to New Holders
    
    
    2,300
    
    
    
    2,700
    
    
    
    (400
    )Carrying value in excess of face amount of notes payable
    
    
    69
    
    
    
    105
    
    
    
    (36
    )Debt discount (common stock warrants and options)
    
    
    (15
    )
    
    
    (18
    )
    
    
    3Total carrying value of notes payable to New Holders
    
    
    2,354
    
    
    
    2,787
    
    
    
    (433
    )Total debt
    
    $
    2,704
    
    
    $
    3,237
    
    
    $
    (533
    )
     17




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##### Table of Contents



Forward Looking Statements
  18




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##### Table of Contents



ITEM 3. CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    ARI held its 2005 Annual Meeting of Shareholders on December 8, 2005.(b)
    
    Votes cast for the election of Brian E. Dearing to serve as director until the 2008 Annual
Shareholders Meeting were as follows:
 For
    
    
    5,698,248Withheld authority to vote for
    
    
    74,443
 (c)
    
    Votes cast to ratify the appointment of Wipfli LLP as ARIs auditors for the year ending July 31, 2006 were as follows:
 For
    
    
    5,746,414Against
    
    
    7,444Abstained
    
    
    18,833
 
 ITEM 6. EXHIBITS
 10.1
    
    
    Severance Agreement with Michael E. McGurk, dated January 13, 2006, incorporated
by reference to the Companys Current Report on Form 8-K filed on January 18, 2006.10.2
    
    
    First Amendment to the Rights Agreement dated November 10, 2005, incorporated by
reference to the Companys Current Report on Form 8-K filed on November 14, 2005.31.1
    
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    
    Section 302 Certification of Chief Financial Officer.32.1
    
    
    Section 906 Certification of Chief Executive Officer.32.2
    
    
    Section 906 Certification of Chief Financial Officer.
 19




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##### Table of Contents



SIGNATURES
  ARI Network Services, Inc.(Registrant)Date:
    
    March 17, 2006
    
    /s/ Brian E. DearingBrian E. Dearing, Chairman of the Board and Chief Executive Officer/s/ Timothy SherlockTimothy Sherlock, Chief Financial Officer
 20