##### 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 October 31, 2007
 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.
     
 PagePART I  FINANCIAL INFORMATIONItem 1
    
    Financial statementsCondensed consolidated balance sheets  October 31, 2007 (unaudited)  and
July 31, 2007
    
    3-4Condensed consolidated
statements of operations (unaudited) for the three
    months ended October 31, 2007 and 2006
    
    5Condensed consolidated
statements of cash flows (unaudited) for the three
    months ended
    October 31, 2007 and 2006
    
    6Notes to unaudited condensed consolidated financial statements
    
    7-13Item 2
    
    Managements discussion and analysis or plan of operation
    
    14-21Item 3
    
    Quantitative and qualitative disclosures about market risk
    
    21Item 4
    
    Controls and procedures
    
    21PART II  OTHER INFORMATIONItem 1
    
    Legal proceedings
    
    21Item 1A
    
    Risk factors
    
    21Item 2
    
    Unregistered sales of equity securities and use of proceeds
    
    21Item 3
    
    Defaults upon senior securities
    
    21Item 4
    
    Submission of matters to a vote of security holders
    
    21Item 5
    
    Other information
    
    21Item 6
    
    Exhibits
    
    21Signatures
    
    
    
    22Change of Control AgreementChange of Control AgreementChange of Control Agreement302 Certification of Chief Executive Officer906 Certification of Chief Executive Officer
  2




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ARI Network Services, Inc.
Consolidated Balance Sheets  (In thousands, except share and per share data)  (Unaudited)
 October 31
    
    
    July 312007
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,075
    
    
    $
    1,050Trade receivables, less allowance for doubtful accounts of $155 and
$148 at October 31, 2007 and July 31, 2007, respectively
    
    
    787
    
    
    
    1,302Work in progress
    
    
    105
    
    
    
    223Prepaid expenses and other
    
    
    260
    
    
    
    291Deferred income taxes
    
    
    555
    
    
    
    555Total current assets
    
    
    2,782
    
    
    
    3,421Equipment and leasehold improvements:Computer equipment
    
    
    5,355
    
    
    
    5,324Leasehold improvements
    
    
    128
    
    
    
    128Furniture and equipment
    
    
    2,773
    
    
    
    2,7498,256
    
    
    
    8,201Less accumulated depreciation and amortization
    
    
    7,133
    
    
    
    6,991Net equipment and leasehold improvements
    
    
    1,123
    
    
    
    1,210Other long term assets:Deferred income taxes
    
    
    1,539
    
    
    
    1,539Goodwill
    
    
    1,079
    
    
    
    1,079Other assets
    
    
    1,012
    
    
    
    1,072Total other long term assets
    
    
    3,630
    
    
    
    3,690Capitalized software product costs
    
    
    12,541
    
    
    
    12,455Less accumulated amortization
    
    
    11,043
    
    
    
    10,849Net capitalized software product costs
    
    
    1,498
    
    
    
    1,606Total Assets
    
    $
    9,033
    
    
    $
    9,927
 3




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ARI Network Services, Inc.
Consolidated Balance Sheets  (In thousands, except share and per share data)  (Unaudited)
 October 31
    
    
    July 312007
    
    
    2007LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Current portion of notes payable
    
    $
    683
    
    
    $
    1,023Accounts payable
    
    
    144
    
    
    
    703Deferred revenue
    
    
    5,002
    
    
    
    5,619Accrued payroll and related liabilities
    
    
    1,078
    
    
    
    962Accrued sales, use and income taxes
    
    
    10
    
    
    
    28Accrued vendor specific liabilities
    
    
    190
    
    
    
    175Other accrued liabilities
    
    
    401
    
    
    
    124Current portion of capital lease obligations
    
    
    8
    
    
    
    8Total current liabilities
    
    
    7,516
    
    
    
    8,642Long term liabilities:Notes payable (net of discount)
    
    
    418
    
    
    
    479Long term portion of accrued bonus
    
    
    76
    
    
    
    55Capital lease obligations
    
    
    4
    
    
    
    5Other long term liabilities
    
    
    22
    
    
    
    28Total long term liabilities
    
    
    520
    
    
    
    567Shareholders equity (deficit):Cumulative preferred stock, par value $.001 per share,
1,000,000 shares authorized; 0 shares issued and
outstanding at October 31, 2007 and July 31, 2007, respectively
    
    
    
    
    
    
    Common stock, par value $.001 per share, 25,000,000 shares
authorized; 6,647,155 and 6,623,605 shares issued and outstanding
at October 31, 2007 and July 31, 2007, respectively
    
    
    7
    
    
    
    7Common stock warrants and options
    
    
    204
    
    
    
    195Additional paid-in-capital
    
    
    94,664
    
    
    
    94,627Accumulated deficit
    
    
    (93,848
    )
    
    
    (94,091
    )Other accumulated comprehensive income
    
    
    (30
    )
    
    
    (20
    )Total shareholders equity (deficit)
    
    
    997
    
    
    
    718Total Liabilities and Shareholders Equity (Deficit)
    
    $
    9,033
    
    
    $
    9,927
 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 endedOctober 312007
    
    
    2006Net revenues:Subscriptions, support and other services fees
    
    $
    2,980
    
    
    $
    2,663Software licenses and renewals
    
    
    541
    
    
    
    543Professional services
    
    
    703
    
    
    
    2974,224
    
    
    
    3,503Cost of products and services sold:Subscriptions, support and other services fees
    
    
    284
    
    
    
    272Software licenses and renewals *
    
    
    202
    
    
    
    196Professional services
    
    
    261
    
    
    
    78747
    
    
    
    546Gross margin
    
    
    3,477
    
    
    
    2,957Operating expenses:Depreciation and amortization (exclusive of amortization of
software products included in cost of products and
services sold)
    
    
    195
    
    
    
    106Customer operations and support
    
    
    280
    
    
    
    268Selling, general and administrative
    
    
    2,380
    
    
    
    1,985Software development and technical support
    
    
    349
    
    
    
    369Net operating expenses
    
    
    3,204
    
    
    
    2,728Operating income
    
    
    273
    
    
    
    229Other income (expense):Interest expense
    
    
    (35
    )
    
    
    (38
    )Other, net
    
    
    11
    
    
    
    34Total other income (expense)
    
    
    (24
    )
    
    
    (4
    )Income before provision for income taxes
    
    
    249
    
    
    
    225Income tax benefit (provision)
    
    
    (6
    )
    
    
    Net income
    
    $
    243
    
    
    $
    225Average common shares outstanding:Basic
    
    
    6,634
    
    
    
    6,210Diluted
    
    
    6,818
    
    
    
    6,587Basic and diluted net income per share:Basic
    
    $
    0.04
    
    
    $
    0.04Diluted
    
    $
    0.04
    
    
    $
    0.03
 See notes to unaudited condensed consolidated financial statements.
 
 *
    
    Includes amortization of software products of $194 and $187 and excludes other depreciation
and amortization shown separately 5




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ARI Network Services, Inc.
Consolidated Statements of Cash Flows  (In thousands)
(Unaudited)
 Three months endedOctober 312007
    
    
    2006Operating activitiesNet income
    
    $
    243
    
    
    $
    225Adjustments to reconcile net income to net cash provided
by operating activities:Amortization of software products
    
    
    194
    
    
    
    187Amortization of deferred financing costs, debt discount and
excess carrying value over face amount of notes payable
    
    
    8
    
    
    
    (11
    )Depreciation and other amortization
    
    
    195
    
    
    
    106Stock based compensation related to stock options
    
    
    9
    
    
    
    26Stock issued as contribution to 401(k) plan
    
    
    37
    
    
    
    42Net change in receivables, prepaid expenses and other
current assets
    
    
    671
    
    
    
    307Net change in accounts payable, deferred revenue,
accrued liabilities and other long term liabilities
    
    
    (797
    )
    
    
    (716
    )Net cash provided by operating activities
    
    
    560
    
    
    
    166Investing activitiesPurchase of equipment and leasehold improvements
    
    
    (43
    )
    
    
    (134
    )Software product costs capitalized
    
    
    (86
    )
    
    
    (78
    )Net cash used in investing activities
    
    
    (129
    )
    
    
    (212
    )Financing activitiesPayments under notes payable
    
    
    (409
    )
    
    
    (350
    )Payments of capital lease obligations
    
    
    (1
    )
    
    
    Proceeds from issuance of common stock
    
    
    
    
    
    
    3Net cash used in financing activities
    
    
    (410
    )
    
    
    (347
    )Effect of foreign currency exchange rate changes on cash
    
    
    4
    
    
    
    Net increase (decrease) in cash
    
    
    25
    
    
    
    (393
    )Cash at beginning of period
    
    
    1,050
    
    
    
    3,584Cash at end of period
    
    $
    1,075
    
    
    $
    3,191Cash paid for interest
    
    $
    49
    
    
    $
    51Cash paid for income taxes
    
    $
    10
    
    
    $
    14
 See notes to unaudited condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
October 31, 2007
 1. BASIS OF PRESENTATION
    2. BASIC AND DILUTED NET INCOME PER SHARE
  Three months endedOctober 312007
    
    2006Weighted average common shares outstanding
    
    
    6,634
    
    
    
    6,210Dilutive effect of stock options and warrants
    
    
    184
    
    
    
    377Diluted weighted average common shares outstanding
    
    
    6,818
    
    
    
    6,587
 3. STOCK-BASED COMPENSATION
    7




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Three months endedOctober 31,2007
    
    2006Expected life (years)
    
    10 years
    
    10 yearsRisk-free interest rate
    
    
    4.88
    %
    
    
    4.88
    %Expected volatility
    
    
    122
    %
    
    
    124
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
 Employee Stock Purchase Plans
  1991 Stock Option Plan
     8




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Three Months Ended
    
    Three Months EndedOctober 31, 2007
    
    October 31, 2006Wt-Avg
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wt-AvgWt-Avg
    
    Remaining
    
    Aggregate
    
    
    
    
    
    Wt-Avg
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    Contractual
    
    IntrinsicOptions
    
    Price
    
    Period
    
    Value
    
    Options
    
    Price
    
    Period
    
    ValueOutstanding at the
beginning of period
    
    
    125,686
    
    
    $
    2.31
    
    
    
    1.89
    
    
    $
    
    
    
    
    146,686
    
    
    $
    2.28
    
    
    
    2.85
    
    
    $
    13,125Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Forfeited
    
    
    (500
    )
    
    $
    4.06
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Outstanding at the
end of period
    
    
    125,186
    
    
    $
    2.30
    
    
    
    1.64
    
    
    $
    
    
    
    
    146,686
    
    
    $
    2.28
    
    
    
    2.60
    
    
    $
    Exercisable at the
end of period
    
    
    125,186
    
    
    $
    2.30
    
    
    
    1.64
    
    
    $
    
    
    
    
    146,686
    
    
    $
    2.28
    
    
    
    2.60
    
    
    $
    
  1993 Director Stock Option Plan
    Three Months Ended
    
    Three Months EndedOctober 31, 2007
    
    October 31, 2006Wt-Avg
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wt-AvgWt-Avg
    
    Remaining
    
    Aggregate
    
    
    
    
    
    Wt-Avg
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    Contractual
    
    IntrinsicOptions
    
    Price
    
    Period
    
    Value
    
    Options
    
    Price
    
    Period
    
    ValueOutstanding at the
beginning of period
    
    
    1,313
    
    
    $
    2.65
    
    
    
    2.97
    
    
    $
    
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.97
    
    
    $
    152Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    Outstanding at the
end of period
    
    
    1,313
    
    
    $
    2.65
    
    
    
    2.72
    
    
    $
    
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.72
    
    
    $
    Exercisable at the
end of period
    
    
    1,313
    
    
    $
    2.65
    
    
    
    2.72
    
    
    $
    
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.72
    
    
    $
    
  2000 Stock Option Plan
   9




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Three Months Ended
    
    Three Months EndedOctober 31, 2007
    
    October 31, 2006Wt-Avg
    
    
    
    
    
    
    
    
    
    
    
    
    
    Wt-AvgWt-Avg
    
    Remaining
    
    Aggregate
    
    
    
    
    
    Wt-Avg
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    Intrinsic
    
    
    
    
    
    Exercise
    
    Contractual
    
    IntrinsicOptions
    
    Price
    
    Period
    
    Value
    
    Options
    
    Price
    
    Period
    
    ValueOutstanding at the
beginning of period
    
    
    1,013,100
    
    
    $
    1.45
    
    
    
    6.61
    
    
    $
    320,062
    
    
    
    1,054,350
    
    
    $
    1.35
    
    
    
    7.27
    
    
    $
    814,975Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    $
    2.10
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    (6,250
    )
    
    $
    0.28
    
    
    
    
    
    
    
    Forfeited
    
    
    (89,186
    )
    
    $
    1.07
    
    
    
    
    
    
    
    
    
    
    
    (53,500
    )
    
    $
    1.38
    
    
    
    
    
    
    
    Outstanding at the
end of period
    
    
    923,914
    
    
    $
    1.48
    
    
    
    6.42
    
    
    $
    275,417
    
    
    
    1,044,600
    
    
    $
    1.39
    
    
    
    7.18
    
    
    $
    710,480Exercisable at the
end of period
    
    
    800,675
    
    
    $
    1.43
    
    
    
    6.11
    
    
    $
    267,319
    
    
    
    818,051
    
    
    $
    1.30
    
    
    
    6.79
    
    
    $
    624,157
  Three Months Ended October 31,2007
    
    2006Wt-Avg
    
    
    
    
    
    Wt-AvgExercise
    
    
    
    
    
    ExerciseOptions
    
    Price
    
    Options
    
    PriceNon-vested at the
beginning of period
    
    
    137,675
    
    
    $
    1.79
    
    
    
    188,799
    
    
    $
    1.59Granted
    
    
    
    
    
    $
    
    
    
    
    50,000
    
    
    $
    2.10Vested
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Forfeited
    
    
    (14,436
    )
    
    $
    1.28
    
    
    
    (12,250
    )
    
    $
    1.35Non-vested at the
end of period
    
    
    123,239
    
    
    $
    1.85
    
    
    
    226,549
    
    
    $
    1.72
  4. ACQUISITIONS
   10




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Three months endedOctober 312007
    
    2006Actual
    
    Pro FormaRevenue
    
    $
    4,224
    
    
    $
    3,829Net income
    
    $
    243
    
    
    $
    88Net income per share
    
    $
    0.04
    
    
    $
    0.01Net income per diluted share
    
    $
    0.04
    
    
    $
    0.01
  5. NOTES PAYABLE
  Debt Schedule  (In thousands)
 October 31
    
    July 312007
    
    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
    
    
    200
    
    
    
    500
    
    
    
    (300
    )Long term portion of notes payable
    
    
    
    
    
    
    
    
    
    
    Total face value of notes payable to New Holders
    
    
    200
    
    
    
    500
    
    
    
    (300
    )Carrying value in excess of face value of notes payable
    
    
    1
    
    
    
    4
    
    
    
    (3
    )Debt discount (common stock warrants and options)
    
    
    (1
    )
    
    
    (3
    )
    
    
    2Total carrying value of notes payable to New Holders
    
    
    200
    
    
    
    501
    
    
    
    (301
    )Debt related to acquisition of OC-Net:Current portion of notes payable
    
    
    233
    
    
    
    233
    
    
    
    Long term portion of notes payable
    
    
    291
    
    
    
    350
    
    
    
    (59
    )Total notes payable
    
    
    524
    
    
    
    583
    
    
    
    (59
    )Current cash earn out
    
    
    250
    
    
    
    250
    
    
    
    Long term cash holdback
    
    
    150
    
    
    
    150
    
    
    
    Imputed interest on cash earn out/holdback
    
    
    (23
    )
    
    
    (32
    )
    
    
    9Total debt related to acquisition of OC-Net
    
    
    901
    
    
    
    951
    
    
    
    (50
    )Total debt
    
    $
    1,101
    
    
    $
    1,502
    
    
    $
    401
  11




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6. SHAREHOLDER RIGHTS PLAN
  7. INCOME TAXES
  Three months endedOctober 312007
    
    
    2006Current:Federal
    
    $
    143
    
    
    $
    80State
    
    
    29
    
    
    
    20Deferred
    
    
    
    
    
    
    Utilization of net operating loss carryforwards,
net of
change in valuation allowance
    
    
    (178
    )
    
    
    (100
    )Income tax benefit (provision)
    
    $
    (6
    )
    
    $
    
   12




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8. BUSINESS SEGMENTS
   Business Segment Information  (In thousands)
 Three months endedOctober 31,Revenue
    
    2007
    
    
    2006Netherlands
    
    $
    161
    
    
    $
    169United States
    
    
    4,063
    
    
    
    3,334Consolidated
    
    
    4,224
    
    
    
    3,503Net Income (Loss)Netherlands
    
    $
    (69
    )
    
    $
    (157
    )United States
    
    
    312
    
    
    
    382Consolidated
    
    $
    243
    
    
    $
    225
 October 31,
    
    July 31,Total Assets
    
    2007
    
    2006Netherlands
    
    $
    240
    
    
    $
    309United States
    
    $
    8,793
    
    
    $
    9,618Consolidated
    
    $
    9,033
    
    
    $
    9,927
 13




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##### 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
  14




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##### Table of Contents



Impairment of Long-Lived Assets
  Cash and Cash Equivalents
  Debt Instruments
  Deferred Tax Asset
  Stock-Based Compensation
  Revenues
   15




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##### Table of Contents



Revenue by Geography and Service
(In Thousands)
 Three months endedOctober 31
    
    
    Percent2007
    
    
    2006
    
    
    ChangeNorth AmericaCatalog subscriptions
    
    $
    2,592
    
    
    $
    2,583
    
    
    
    0
    %Catalog professional services
    
    
    289
    
    
    
    282
    
    
    
    2
    %Marketing services
    
    
    536
    
    
    
    217
    
    
    
    147
    %Marketing professional services
    
    
    409
    
    
    
    
    
    
    
    100
    %Dealer & distributor communications
    
    
    163
    
    
    
    198
    
    
    
    (18
    %)Subtotal
    
    
    3,989
    
    
    
    3,280
    
    
    
    22
    %Rest of the WorldCatalog subscriptions
    
    
    235
    
    
    
    203
    
    
    
    16
    %Catalog professional services
    
    
    
    
    
    
    20
    
    
    
    (100
    %)Subtotal
    
    
    235
    
    
    
    223
    
    
    
    5
    %Total RevenueCatalog subscriptions
    
    
    2,827
    
    
    
    2,786
    
    
    
    1
    %Catalog professional services
    
    
    289
    
    
    
    302
    
    
    
    (4
    %)Marketing services
    
    
    536
    
    
    
    217
    
    
    
    147
    %Marketing professional services
    
    
    409
    
    
    
    
    
    
    
    100
    %Dealer & distributor communications
    
    
    163
    
    
    
    198
    
    
    
    (18
    %)Total
    
    $
    4,224
    
    
    $
    3,503
    
    
    
    21
    %
 North America
 Catalog Subscriptions
  Catalog Professional Services
  16




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##### Table of Contents



Marketing Services
  Marketing Professional Services
  Dealer and Distributor Communications
  Rest of the World
 Catalog Subscriptions
  Catalog Professional Services
  17




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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 endedOctober 31
    
    Percent2007
    
    2006
    
    ChangeCatalog subscriptionsRevenue
    
    $
    2,827
    
    
    $
    2,786
    
    
    
    1
    %Cost of revenue
    
    
    342
    
    
    
    295
    
    
    
    16
    %Cost of revenue as a percent of revenue
    
    
    12
    %
    
    
    11
    %Catalog professional servicesRevenue
    
    
    289
    
    
    
    302
    
    
    
    (4
    %)Cost of revenue
    
    
    146
    
    
    
    125
    
    
    
    17
    %Cost of revenue as a percent of revenue
    
    
    51
    %
    
    
    41
    %Marketing services subscriptionsRevenue
    
    
    536
    
    
    
    217
    
    
    
    147
    %Cost of revenue
    
    
    140
    
    
    
    94
    
    
    
    48
    %Cost of revenue as a percent of revenue
    
    
    26
    %
    
    
    43
    %Marketing professional servicesRevenue
    
    
    409
    
    
    
    
    
    
    
    100
    %Cost of revenue
    
    
    115
    
    
    
    
    
    
    
    100
    %Cost of revenue as a percent of revenue
    
    
    28
    %
    
    
    Dealer and distributor communicationsRevenue
    
    
    163
    
    
    
    198
    
    
    
    (18
    %)Cost of revenue
    
    
    4
    
    
    
    32
    
    
    
    (88
    %)Cost of revenue as a percent of revenue
    
    
    2
    %
    
    
    16
    %TotalRevenue
    
    $
    4,224
    
    
    $
    3,503
    
    
    
    21
    %Cost of revenue
    
    
    747
    
    
    
    546
    
    
    
    37
    %Cost of revenue as a percent of revenue
    
    
    18
    %
    
    
    16
    %
    18




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##### Table of Contents



Operating Expenses
  Operating Expenses  (In thousands)
 Three months endedOctober 31
    
    
    Percent2007
    
    
    2006
    
    
    ChangeCustomer operations and support
    
    $
    280
    
    
    $
    268
    
    
    
    4
    %Selling, general and administrative
    
    
    2,380
    
    
    
    1,985
    
    
    
    20
    %Software development and technical support
    
    
    349
    
    
    
    369
    
    
    
    (5
    %)Depreciation and amortization
    
    
    195
    
    
    
    106
    
    
    
    84
    %Net operating expenses
    
    $
    3,204
    
    
    $
    2,728
    
    
    
    17
    %
     Other Items
  19




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##### Table of Contents



Liquidity and Capital Resources
  Cash Flow Information  (In thousands)
 Three months endedOctober 31
    
    
    Percent2007
    
    
    2006
    
    
    ChangeNet income
    
    $
    243
    
    
    $
    225
    
    
    
    8
    %Amortization of software products
    
    
    194
    
    
    
    187
    
    
    
    4
    %Amortization of deferred finance costs and
debt discount
    
    
    8
    
    
    
    (11
    )
    
    
    173
    %Depreciation and other amortization
    
    
    195
    
    
    
    106
    
    
    
    84
    %Stock based compensation related to options
    
    
    9
    
    
    
    26
    
    
    
    (65
    %)Stock issued as contribution to 401(k) plan
    
    
    37
    
    
    
    42
    
    
    
    (12
    %)Net change in working capital
    
    
    (126
    )
    
    
    (409
    )
    
    
    71
    %Net cash provided by operating activities
    
    
    560
    
    
    
    166
    
    
    
    243
    %Net cash used in investing activities
    
    
    (129
    )
    
    
    (212
    )
    
    
    37
    %Net cash used in financing activities
    
    
    (410
    )
    
    
    (347
    )
    
    
    (18
    %)Effect of foreign currency exchange rate
change on cash
    
    
    4
    
    
    
    
    
    
    
    100
    %Net change in cash
    
    $
    25
    
    
    
    ($393
    )
    
    
    106
    %
     Acquisitions
   Off-Balance Sheet Arrangements
  20




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##### Table of Contents



Forward Looking Statements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS
  
 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  None.
 
 ITEM 5. OTHER INFORMATION  None.
 
 ITEM 6. EXHIBITS
 10.1
    
    Change of Control Agreement between the Company and Brian E. Dearing, dated as of April
1, 2006.10.2
    
    Change of Control Agreement between the Company and John C. Bray, dated as of April 1,
2006.10.3
    
    Change of Control Agreement between the Company and Roy W. Olivier, dated as of September
13, 2006.31.1
    
    Section 302 Certification of Chief Executive Officer.32.1
    
    Section 906 Certification of Chief Executive Officer.
 21




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##### Table of Contents



SIGNATURES
  
 Date: December 17, 2007
    /s/ Brian E. DearingBrian E. Dearing, Chief Executive Officer and Acting Chief Financial Officer 22