##### 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, 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
    
    (IRS Employer Identification No.)incorporation or organization)
 11425 W. Lake Park Drive, Milwaukee, Wisconsin 53224
   þ o
  o þ
   o þ




---



##### 



ARI Network Services, Inc.
    PagePART I  FINANCIAL INFORMATIONItem 1 Financial statementsCondensed consolidated balance sheets  January 31, 2007 and July 31, 2006
    
    
    3-4Condensed consolidated statements of operations for the three and six months
ended January 31, 2007 and 2006
    
    
    5Condensed consolidated statements of cash flows for the six months ended
January 31, 2007 and 2006
    
    
    6Notes to unaudited condensed consolidated financial statements
    
    
    7-12Item 2 Managements discussion and analysis or plan of operation
    
    
    12-21Item 3 Controls and procedures
    
    
    21PART II  OTHER INFORMATIONItem 2 Unregistered sales of equity securities and use of proceeds
    
    
    22Item 6 Exhibits
    
    
    22Signatures
    
    
    23Section 302 Certification of Chief Executive OfficerSection 302 Certification of Chief Financial OfficerSection 906 Certification of Chief Executive OfficerSection 906 Certification of Chief Financial 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 312007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,639
    
    
    $
    3,584Trade receivables, less allowance for doubtful accounts of $94 and
$103 at January 31, 2007 and July 31, 2006, respectively
    
    
    1,446
    
    
    
    885Work in Process
    
    
    168
    
    
    
    163Prepaid expenses and other
    
    
    238
    
    
    
    254Deferred income taxes
    
    
    675
    
    
    
    675Total Current Assets
    
    
    4,166
    
    
    
    5,561Equipment and leasehold improvements:Computer equipment
    
    
    5,178
    
    
    
    5,084Leasehold improvements
    
    
    128
    
    
    
    116Furniture and equipment
    
    
    2,328
    
    
    
    2,0577,634
    
    
    
    7,257Less accumulated depreciation and amortization
    
    
    6,491
    
    
    
    6,275Net equipment and leasehold improvements
    
    
    1,143
    
    
    
    982Deferred income taxes
    
    
    1,419
    
    
    
    1,419Other assets
    
    
    2,629
    
    
    
    6Capitalized software product costs
    
    
    11,732
    
    
    
    11,557Less accumulated amortization
    
    
    10,462
    
    
    
    10,089Net capitalized software product costs
    
    
    1,270
    
    
    
    1,468Total Assets
    
    $
    10,627
    
    
    $
    9,436
 3




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ARI Network Services, Inc.
Consolidated Balance Sheets  (In thousands, except share and per share data)  (Unaudited)
 January 31
    
    
    July 312007
    
    
    2006LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Current portion of notes payable
    
    $
    1,520
    
    
    $
    1,400Accounts payable
    
    
    234
    
    
    
    500Deferred revenue
    
    
    5,560
    
    
    
    5,616Accrued payroll and related liabilities
    
    
    834
    
    
    
    1,006Accrued sales, use and income taxes
    
    
    22
    
    
    
    38Accrued vendor specific liabilities
    
    
    
    
    
    
    104Other accrued liabilities
    
    
    579
    
    
    
    254Total Current Liabilities
    
    
    8,749
    
    
    
    8,918Long term liabilities:Notes payable (net of discount)
    
    
    627
    
    
    
    580Long term payroll related
    
    
    202
    
    
    
    202Other long term liabilities
    
    
    41
    
    
    
    48Total Long Term Liabilities
    
    
    870
    
    
    
    830Shareholders equity (deficit):Cumulative preferred stock, par value $.001 per share,
1,000,000 shares authorized; 0 shares issued and
outstanding at January 31, 2007 and July 31, 2006, respectively
    
    
    
    
    
    
    Common stock, par value $.001 per share, 25,000,000 shares
authorized; 6,604,855 and 6,202,529 shares issued and outstanding
at January 31, 2007 and July 31, 2006, respectively
    
    
    7
    
    
    
    6Common stock warrants and options
    
    
    104
    
    
    
    36Additional paid-in-capital
    
    
    94,616
    
    
    
    93,838Accumulated deficit
    
    
    (93,719
    )
    
    
    (94,192
    )Total Shareholders Equity (Deficit)
    
    
    1,008
    
    
    
    (312
    )Total Liabilities and Shareholders Equity (Deficit)
    
    $
    10,627
    
    
    $
    9,436
 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 312007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues:Subscriptions, support and other services fees
    
    $
    2,754
    
    
    $
    2,548
    
    
    $
    5,417
    
    
    $
    5,112Software licenses and renewals
    
    
    575
    
    
    
    515
    
    
    
    1,118
    
    
    
    1,033Professional services
    
    
    362
    
    
    
    459
    
    
    
    659
    
    
    
    8683,691
    
    
    
    3,522
    
    
    
    7,194
    
    
    
    7,013Cost of products and services sold:Subscriptions, support and other services fees
    
    
    334
    
    
    
    207
    
    
    
    606
    
    
    
    388Software licenses and renewals *
    
    
    206
    
    
    
    164
    
    
    
    402
    
    
    
    322Professional services
    
    
    44
    
    
    
    84
    
    
    
    122
    
    
    
    195584
    
    
    
    455
    
    
    
    1,130
    
    
    
    905Gross Margin
    
    
    3,107
    
    
    
    3,067
    
    
    
    6,064
    
    
    
    6,108Operating expenses:Depreciation and amortization (exclusive of
amortization of software
products included in cost
of products and services sold)
    
    
    110
    
    
    
    94
    
    
    
    216
    
    
    
    174Customer operations and support
    
    
    276
    
    
    
    279
    
    
    
    544
    
    
    
    582Selling, general and administrative
    
    
    2,101
    
    
    
    1,840
    
    
    
    4,086
    
    
    
    3,699Software development and technical support
    
    
    359
    
    
    
    305
    
    
    
    728
    
    
    
    580Net operating expenses
    
    
    2,846
    
    
    
    2,518
    
    
    
    5,574
    
    
    
    5,035Operating income
    
    
    261
    
    
    
    549
    
    
    
    490
    
    
    
    1,073Other income (expense):Interest expense
    
    
    (32
    )
    
    
    (50
    )
    
    
    (70
    )
    
    
    (99
    )Other, net
    
    
    27
    
    
    
    25
    
    
    
    61
    
    
    
    48Total other expense
    
    
    (5
    )
    
    
    (25
    )
    
    
    (9
    )
    
    
    (51
    )Income before provision for income taxes
    
    
    256
    
    
    
    524
    
    
    
    481
    
    
    
    1,022Income tax benefit (provision)
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )
    
    
    Net income
    
    $
    248
    
    
    $
    524
    
    
    $
    473
    
    
    $
    1,022Average common shares outstanding:Basic
    
    
    6,304
    
    
    
    6,154
    
    
    
    6,257
    
    
    
    6,140Diluted
    
    
    6,707
    
    
    
    6,631
    
    
    
    6,660
    
    
    
    6,617Basic and diluted net income (loss) per share:Basic
    
    $
    0.04
    
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    0.17Diluted
    
    $
    0.04
    
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.15
 See notes to unaudited condensed consolidated financial statements.
 
 *
    
    Includes amortization of software products of $198, $152, $385 and $297 respectively and
excluding other depreciation and amortization shown separately 5




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ARI Network Services, Inc.
 
 Consolidated Statements of Cash Flows
 (In thousands)
 (Unaudited)
 Six months endedJanuary 312007
    
    
    2006Operating activitiesNet income
    
    $
    473
    
    
    $
    1,022Adjustments to reconcile net income to net cash provided
by operating activities:Amortization of software products
    
    
    385
    
    
    
    297Amortization of deferred financing costs, debt discount and
excess carrying value over face amount of notes payable
    
    
    (33
    )
    
    
    (31
    )Depreciation and other amortization
    
    
    216
    
    
    
    174Stock based compensation related to stock options
    
    
    68
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    Stock issued as contribution to 401(k) plan
    
    
    42
    
    
    
    21Net change in receivables, prepaid expenses and other
current assets
    
    
    (485
    )
    
    
    (512
    )Net change in accounts payable, deferred revenue,
Accrued liabilities and long term liabilities
    
    
    (388
    )
    
    
    (88
    )Net cash provided by operating activities
    
    
    278
    
    
    
    883Investing activitiesPurchase of equipment and leasehold improvements
    
    
    (292
    )
    
    
    (200
    )Purchase of assets related to acquisitions, net of cash acquired
    
    
    (1,081
    )
    
    
    Software product costs capitalized
    
    
    (181
    )
    
    
    (310
    )Net cash used in investing activities
    
    
    (1,554
    )
    
    
    (510
    )Financing activitiesPayments under notes payable
    
    
    (700
    )
    
    
    (500
    )Proceeds from issuance of common stock
    
    
    31
    
    
    
    60Net cash used in financing activities
    
    
    (669
    )
    
    
    (440
    )Net decrease in cash and cash equivalents
    
    
    (1,945
    )
    
    
    (67
    )Balance at beginning of period
    
    
    3,584
    
    
    
    3,651Balance at end of period
    
    $
    1,639
    
    
    $
    3,584Cash paid for interest
    
    $
    92
    
    
    $
    128Cash paid for income taxes
    
    $
    14
    
    
    $
    Noncash investing and financing activitiesIssuance of common stock in connection with acquisition
    
    $
    707
    
    
    $
    Debt issued in connection with acquisitions
    
    
    700
    
    
    
    Debt assumed in connection with acquisition
    
    
    37
    
    
    
    Accrued liabilities related to acquisition
    
    
    200
    
    
    
    Stock based compensation related to stock options
    
    
    68
    
    
    
    
 See notes to unaudited condensed consolidated financial statements.
 6




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Notes to Condensed Consolidated Financial Statements
(Unaudited)
January 31, 2007
 1. BASIS OF PRESENTATION
    2. BASIC AND DILUTED NET INCOME PER SHARE
  Three months ended
    
    Six months endedJanuary 31
    
    January 312007
    
    2006
    
    2007
    
    2006Weighted average common shares outstanding
    
    
    6,304
    
    
    
    6,154
    
    
    
    6,257
    
    
    
    6,140Dilutive effect of stock options and warrants
    
    
    403
    
    
    
    477
    
    
    
    403
    
    
    
    477Diluted weighted average common shares outstanding
    
    
    6,707
    
    
    
    6,631
    
    
    
    6,660
    
    
    
    6,617
 3. STOCK-BASED COMPENSATION
    7




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Three months ended
    
    Six months endedJanuary 31,
    
    January 31,2007
    
    2006
    
    2007
    
    2006Expected life (years)
    
    10 years
    
    10 years
    
    10 years
    
    10 yearsRisk-free interest rate
    
    
    4.88
    %
    
    
    4.00
    %
    
    
    4.88
    %
    
    
    4.00
    %Expected volatility
    
    
    124
    %
    
    
    124
    %
    
    
    124
    %
    
    
    124
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  Three months
    
    Six monthsended
    
    endedJanuary 31,
    
    January 31,2006
    
    2006Net income as reported
    
    
    $  524
    
    
    
    $ 1,022Stock-based compensation expense determined
under fair value based method for options
    
    
    (82
    )
    
    
    (162
    )Pro forma net income
    
    
    $  442
    
    
    
    $    860Pro forma net income per share  basic
    
    
    $   .07
    
    
    
    $     .14Pro forma net income per share  diluted
    
    
    $   .07
    
    
    
    $     .13
 Employee Stock Purchase Plans
  Stock Option Plans
  1991 Stock Option Plan
   8




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Three months ended
    
    Six months endedJanuary 31, 2007
    
    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
    
    
    146,686
    
    
    $
    2.28
    
    
    
    2.60
    
    
    $
    13,125
    
    
    
    146,686
    
    
    $
    2.28
    
    
    
    2.85
    
    
    $
    13,125Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (1,000
    )
    
    $
    3.25
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    $
    3.25Outstanding at end
of period
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.34
    
    
    $
    13,125
    
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.34
    
    
    $
    13,125Exercisable at end
of period
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.34
    
    
    $
    13,125
    
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.34
    
    
    $
    13,125
  1993 Director Stock Option Plan
    Three months ended
    
    Six months endedJanuary 31, 2007
    
    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
    
    
    
    3.72
    
    
    $
    152
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.97
    
    
    $
    152Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end
of period
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.72
    
    
    
    
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.47Exercisable at end
of period
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.72
    
    
    $
    152
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.47
    
    
    $
    152
  9




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2000 Stock Option Plan
      Three months ended
    
    Six months endedJanuary 31, 2007
    
    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
    
    
    1,044,374
    
    
    $
    1.39
    
    
    
    7.18
    
    
    $
    710,480
    
    
    
    1,054,350
    
    
    $
    1.35
    
    
    
    7.27
    
    
    $
    814,975Granted
    
    
    60,250
    
    
    $
    1.95
    
    
    
    
    
    
    
    
    
    
    
    110,250
    
    
    $
    2.02Exercised
    
    
    (14,500
    )
    
    $
    0.31
    
    
    
    
    
    
    
    
    
    
    
    (20,376
    )
    
    $
    0.30Forfeited
    
    
    (7,500
    )
    
    $
    2.00
    
    
    
    
    
    
    
    
    
    
    
    (61,374
    )
    
    $
    1.45Outstanding at end
of period
    
    
    1,082,850
    
    
    $
    1.43
    
    
    
    7.10
    
    
    $
    688,028
    
    
    
    1,082,850
    
    
    $
    1.43
    
    
    
    7.10
    
    
    $
    688,028Exercisable at end
of period
    
    
    817,612
    
    
    $
    1.33
    
    
    
    6.57
    
    
    $
    605,278
    
    
    
    817,612
    
    
    $
    1.33
    
    
    
    6.57
    
    
    $
    605,278
  Three months ended
    
    Six months endedJanuary 31, 2007
    
    January 31, 2007Wt-Avg Grant
    
    
    
    
    
    Wt-Avg GrantOptions
    
    Date Fair Value
    
    Options
    
    Date Fair ValueNon-vested at beginning of period
    
    
    226,549
    
    
    $
    1.72
    
    
    
    188,799
    
    
    $
    1.59Granted
    
    
    60,250
    
    
    $
    1.95
    
    
    
    110,250
    
    
    $
    2.02Vested
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (21,561
    )
    
    $
    2.12
    
    
    
    (33,811
    )
    
    $
    1.82Non-vested at end of period
    
    
    265,238
    
    
    $
    1.74
    
    
    
    265,238
    
    
    $
    1.74
  4. ACQUISITIONS
  10




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5. NOTES PAYABLE
     6. SHAREHOLDER RIGHTS PLAN
  11




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7. INCOME TAXES
  Three months ended
    
    Six months endedJanuary 31
    
    January 312007
    
    2006
    
    2007
    
    2006Current:Federal
    
    $
    103
    
    
    $
    179
    
    
    $
    183
    
    
    $
    348State
    
    
    31
    
    
    
    32
    
    
    
    51
    
    
    
    62Deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Utilization of net operating
loss carryforwards
    
    
    (126
    )
    
    
    (211
    )
    
    
    (226
    )
    
    
    (410
    )Income tax (benefit)
provision
    
    $
    8
    
    
    $
    
    
    
    $
    8
    
    
    $
    
  MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Results of Operations
   12




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Critical Accounting Policies and Estimates
 General
   Revenue Recognition
  Bad Debts
  Use of Estimates
  Legal Provisions
  Impairment of Long-Lived Assets
  Cash and Cash Equivalents
  13




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##### Table of Contents



Debt Instruments
  Deferred Tax Asset
  Stock-Based Compensation
  Revenues
   Catalog, Customer and Subscription Information by Region
(As of January 31, 2007)
 Distinct
    
    DistinctDistinct
    
    
    
    
    

    Distributors
    
    DealersCatalogs
    
    Manufacturers
    
    Subscriptions
    
    (Estimated)
    
    (Estimated)North America
    
    
    88
    
    
    
    66
    
    
    
    68,676
    
    
    
    98
    
    
    
    21,366Rest of World
    
    
    58
    
    
    
    9
    
    
    
    9,211
    
    
    
    59
    
    
    
    5,576Included in both Regions
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    100
    
    
    
    75
    
    
    
    77,887
    
    
    
    157
    
    
    
    26,942
 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 catalog subscribed to by a single dealer or distributor. A dealer
or distributor
may subscribe to more than one catalog.
 14




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##### Table of Contents



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
    Revenue by Location and Service
(In Thousands)
 Three months ended
    
    
    
    
    
    
    Six months endedJanuary 31
    
    
    Percent
    
    
    January 31
    
    
    Percent2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeNorth AmericanCatalog subscriptions
    
    $
    2,625
    
    
    $
    2,581
    
    
    
    2
    %
    
    $
    5,208
    
    
    $
    5,159
    
    
    
    1
    %Catalog professional services
    
    
    312
    
    
    
    439
    
    
    
    (29
    %)
    
    
    594
    
    
    
    794
    
    
    
    (25
    %)Dealer marketing services
    
    
    294
    
    
    
    107
    
    
    
    175
    %
    
    
    511
    
    
    
    175
    
    
    
    192
    %Dealer & distributor communications
    
    
    149
    
    
    
    188
    
    
    
    (21
    %)
    
    
    347
    
    
    
    415
    
    
    
    (16
    %)Subtotal
    
    
    3,380
    
    
    
    3,315
    
    
    
    2
    %
    
    
    6,660
    
    
    
    6,543
    
    
    
    2
    %Rest of the WorldCatalog subscriptions
    
    
    267
    
    
    
    170
    
    
    
    57
    %
    
    
    470
    
    
    
    384
    
    
    
    22
    %Catalog professional services
    
    
    44
    
    
    
    37
    
    
    
    19
    %
    
    
    64
    
    
    
    86
    
    
    
    (26
    %)Subtotal
    
    
    311
    
    
    
    207
    
    
    
    50
    %
    
    
    534
    
    
    
    470
    
    
    
    14
    %Total RevenueCatalog subscriptions
    
    
    2,892
    
    
    
    2,751
    
    
    
    5
    %
    
    
    5,678
    
    
    
    5,543
    
    
    
    2
    %Catalog professional services
    
    
    356
    
    
    
    476
    
    
    
    (25
    %)
    
    
    658
    
    
    
    880
    
    
    
    (25
    %)Dealer marketing services
    
    
    294
    
    
    
    107
    
    
    
    175
    %
    
    
    511
    
    
    
    175
    
    
    
    192
    %Dealer & distributor communications
    
    
    149
    
    
    
    188
    
    
    
    (21
    %)
    
    
    347
    
    
    
    415
    
    
    
    (16
    %)Total
    
    $
    3,691
    
    
    $
    3,522
    
    
    
    5
    %
    
    $
    7,194
    
    
    $
    7,013
    
    
    
    3
    %
 North America
 Catalog Subscriptions
  15




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##### Table of Contents



Catalog Professional Services
  Dealer Marketing Services
  Dealer and Distributor Communications
  Rest of the World
 Catalog Subscriptions
  Catalog Professional Services
  16




---



##### 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 312007
    
    2006
    
    % Chg
    
    2007
    
    2006
    
    % ChgCatalog subscriptionsRevenue
    
    $
    2,892
    
    
    $
    2,751
    
    
    
    5
    %
    
    $
    5,678
    
    
    $
    5,543
    
    
    
    2
    %Cost of revenue
    
    
    278
    
    
    
    260
    
    
    
    7
    %
    
    
    573
    
    
    
    538
    
    
    
    7
    %Cost of revenue as a percent of revenue
    
    
    10
    %
    
    
    9
    %
    
    
    
    
    
    
    10
    %
    
    
    10
    %Catalog professional servicesRevenue
    
    
    356
    
    
    
    476
    
    
    
    (25
    %)
    
    
    658
    
    
    
    880
    
    
    
    (25
    %)Cost of revenue
    
    
    112
    
    
    
    119
    
    
    
    (6
    %)
    
    
    237
    
    
    
    219
    
    
    
    8
    %Cost of revenue as a percent of revenue
    
    
    31
    %
    
    
    25
    %
    
    
    
    
    
    
    36
    %
    
    
    25
    %Dealer marketing servicesRevenue
    
    
    294
    
    
    
    107
    
    
    
    176
    %
    
    
    511
    
    
    
    175
    
    
    
    192
    %Cost of revenue
    
    
    174
    
    
    
    49
    
    
    
    255
    %
    
    
    268
    
    
    
    80
    
    
    
    235
    %Cost of revenue as a percent of revenue
    
    
    59
    %
    
    
    46
    %
    
    
    
    
    
    
    52
    %
    
    
    46
    %Dealer and distributor communicationsRevenue
    
    
    149
    
    
    
    188
    
    
    
    (21
    %)
    
    
    347
    
    
    
    415
    
    
    
    (16
    %)Cost of revenue
    
    
    20
    
    
    
    27
    
    
    
    (26
    %)
    
    
    52
    
    
    
    68
    
    
    
    (23
    %)Cost of revenue as a percent of revenue
    
    
    13
    %
    
    
    14
    %
    
    
    
    
    
    
    15
    %
    
    
    16
    %TotalRevenue
    
    $
    3,691
    
    
    $
    3,522
    
    
    
    5
    %
    
    $
    7,194
    
    
    $
    7,013
    
    
    
    3
    %Cost of revenue
    
    
    584
    
    
    
    455
    
    
    
    28
    %
    
    
    1,130
    
    
    
    905
    
    
    
    25
    %Cost of revenue as
a percent of
revenue
    
    
    16
    %
    
    
    13
    %
    
    
    
    
    
    
    16
    %
    
    
    13
    %
     17




---



##### Table of Contents



Operating Expenses
  Operating Expenses  (In thousands)
 Three months ended
    
    
    
    
    
    
    Six months endedJanuary 31
    
    
    
    
    
    
    January 312007
    
    
    2006
    
    
    % Chg
    
    
    2007
    
    
    2006
    
    
    % ChgCustomer operations and support
    
    $
    276
    
    
    $
    279
    
    
    
    (1
    %)
    
    $
    544
    
    
    $
    582
    
    
    
    (7
    %)Selling, general and administrative
    
    
    2,101
    
    
    
    1,840
    
    
    
    14
    %
    
    
    4,086
    
    
    
    3,699
    
    
    
    10
    %Software development and technical support
    
    
    359
    
    
    
    305
    
    
    
    18
    %
    
    
    728
    
    
    
    580
    
    
    
    26
    %Depreciation and amortization
    
    
    110
    
    
    
    94
    
    
    
    17
    %
    
    
    216
    
    
    
    174
    
    
    
    24
    %Net operating expenses
    
    $
    2,846
    
    
    $
    2,518
    
    
    
    13
    %
    
    $
    5,574
    
    
    $
    5,035
    
    
    
    11
    %
     Other Items
   18




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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 312007
    
    
    2006
    
    
    % Chg
    
    
    2007
    
    
    2006
    
    
    % ChgNet income
    
    $
    248
    
    
    $
    524
    
    
    
    (53
    %)
    
    $
    473
    
    
    $
    1,022
    
    
    
    (54
    %)Amortization of software products
    
    
    198
    
    
    
    152
    
    
    
    30
    %
    
    
    385
    
    
    
    297
    
    
    
    30
    %Amortization of deferred finance costs
and
debt discount
    
    
    (22
    )
    
    
    (15
    )
    
    
    (47
    %)
    
    
    (33
    )
    
    
    (31
    )
    
    
    (6
    %)Depreciation and other amortization
    
    
    110
    
    
    
    94
    
    
    
    18
    %
    
    
    216
    
    
    
    174
    
    
    
    24
    %Stock based compensation related to
stock
options
    
    
    42
    
    
    
    
    
    
    
    100
    %
    
    
    68
    
    
    
    
    
    
    
    100
    %Stock issued as contribution to 401(k)
plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    21
    
    
    
    100
    %Net change in working capital
    
    
    (464
    )
    
    
    (247
    )
    
    
    (88
    %)
    
    
    (873
    )
    
    
    (600
    )
    
    
    (46
    %)Net cash provided by operating activities
    
    
    112
    
    
    
    508
    
    
    
    (78
    %)
    
    
    278
    
    
    
    883
    
    
    
    (69
    %)Net cash used in investing activities
    
    
    (1,342
    )
    
    
    (255
    )
    
    
    (426
    %)
    
    
    (1,554
    )
    
    
    (510
    )
    
    
    (205
    %)Net cash used in financing activities
    
    
    (322
    )
    
    
    (224
    )
    
    
    (44
    %)
    
    
    (669
    )
    
    
    (440
    )
    
    
    (52
    %)Net change in cash
    
    
    ($1,552
    )
    
    $
    29
    
    
    
    (5452
    %)
    
    
    ($1,945
    )
    
    
    ($67
    )
    
    
    (2,803
    %)
   19




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##### Table of Contents



Debt Schedule  (In thousands)
 January 31
    
    
    July 312007
    
    
    2006
    
    
    Net(Unaudited)
    
    
    (Audited)
    
    
    ChangeNote payable to WITECH:Current portion of note payable
    
    $
    150
    
    
    $
    200
    
    
    $
    (50
    )Long term portion of note payable
    
    
    
    
    
    
    50
    
    
    
    (50
    )Total note payable to WITECH
    
    
    150
    
    
    
    250
    
    
    
    (100
    )Notes payable to New Holders:Current portion of notes payable
    
    
    1,100
    
    
    
    1,200
    
    
    
    (100
    )Long term portion of notes payable
    
    
    
    
    
    
    500
    
    
    
    (500
    )Total face value of notes payable to New Holders
    
    
    1,100
    
    
    
    1,700
    
    
    
    (600
    )Carrying value in excess of face amount of notes payable
    
    
    16
    
    
    
    42
    
    
    
    (26
    )Debt discount (common stock warrants and options)
    
    
    (6
    )
    
    
    (12
    )
    
    
    6Total carrying value of notes payable to New Holders
    
    
    1,110
    
    
    
    1,730
    
    
    
    (620
    )Debt related to acquisition of OC-Net, Inc.:Acquired short term debt
    
    
    37
    
    
    
    
    
    
    
    37Current portion of note payable
    
    
    233
    
    
    
    
    
    
    
    233Long term portion of note payable
    
    
    467
    
    
    
    
    
    
    
    467Long term cash holdback
    
    
    150
    
    
    
    
    
    
    
    150887
    
    
    
    
    
    
    
    887Total debt
    
    $
    2,147
    
    
    $
    1,980
    
    
    $
    (167
    )
      20




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##### Table of Contents



Off-Balance Sheet Arrangements
  Forward Looking Statements
  
 ITEM 3. CONTROLS AND PROCEDURES
   21




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##### Table of Contents



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
  (b)
    
    Votes cast for the election of Gordon J. Bridge to serve as director until the 2009 Annual
Shareholders Meeting were as follows:
 For
    
    
    5,204,605Withheld authority to vote for
    
    
    642,088
  For
    
    
    5,198,938Withheld authority to vote for
    
    
    647,775
 (c)
    
    Votes cast to ratify the appointment of Wipfli LLP as ARIs auditors for the year ending July
31, 2007 were as follows:
 For
    
    
    5,750,942Against
    
    
    37,105Abstained
    
    
    58,646
 
 ITEM 6. EXHIBITS
 2.1
    
    Stock Purchase Agreement dated January 26, 2007, by and among OC-Net, Inc., the
stockholders of OC-Net, Inc. and the Company, incorporated by reference to the Companys
Current Report on Form 8-K filed on January 29, 2007.31.1
    
    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.
 22




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##### Table of Contents



SIGNATURES
  ARI Network Services, Inc.
(Registrant)Date:   March 19, 2007
    /s/ Brian E. DearingBrian E. Dearing, Chairman of the Board and Chief Executive Officer/s/ Timothy SherlockTimothy Sherlock, Chief Financial Officer 23