##### 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 April 30, 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  April 30, 2007 and July 31, 2006
    
    
    3-4Condensed consolidated statements of operations for the three and nine months
ended April 30, 2007 and 2006
    
    
    5Condensed consolidated statements of cash flows for the nine months ended
April 30, 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
    
    
    23Amendment to Credit AgreementNote Modification AgreementSection 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)
 April 30
    
    
    July 312007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,468
    
    
    $
    3,584Trade receivables, less allowance for doubtful accounts of $120 and
$103 at April 30, 2007 and July 31, 2006, respectively
    
    
    1,137
    
    
    
    885Work in Process
    
    
    206
    
    
    
    163Prepaid expenses and other
    
    
    491
    
    
    
    254Deferred income taxes
    
    
    675
    
    
    
    675Total Current Assets
    
    
    3,977
    
    
    
    5,561Equipment and leasehold improvements:Computer equipment
    
    
    5,221
    
    
    
    5,084Leasehold improvements
    
    
    128
    
    
    
    116Furniture and equipment
    
    
    2,495
    
    
    
    2,0577,844
    
    
    
    7,257Less accumulated depreciation and amortization
    
    
    6,550
    
    
    
    6,275Net equipment and leasehold improvements
    
    
    1,294
    
    
    
    982Deferred income taxes
    
    
    1,419
    
    
    
    1,419Goodwill
    
    
    875
    
    
    
    Other assets
    
    
    1,201
    
    
    
    6Capitalized software product costs
    
    
    12,381
    
    
    
    11,557Less accumulated amortization
    
    
    10,686
    
    
    
    10,089Net capitalized software product costs
    
    
    1,695
    
    
    
    1,468Total Assets
    
    $
    10,461
    
    
    $
    9,436
 3




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ARI Network Services, Inc.
Consolidated Balance Sheets  (In thousands, except share and per share data)  (Unaudited)
 April 30
    
    
    July 312007
    
    
    2006LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Current portion of notes payable
    
    $
    1,184
    
    
    $
    1,400Accounts payable
    
    
    671
    
    
    
    500Deferred revenue
    
    
    5,470
    
    
    
    5,616Accrued payroll and related liabilities
    
    
    983
    
    
    
    1,006Accrued sales, use and income taxes
    
    
    26
    
    
    
    38Accrued vendor specific liabilities
    
    
    
    
    
    
    104Other accrued liabilities
    
    
    455
    
    
    
    254Current portion of capital lease obligations
    
    
    20
    
    
    
    Total Current Liabilities
    
    
    8,809
    
    
    
    8,918Long term liabilities:Notes payable (net of discount)
    
    
    558
    
    
    
    580Long term payroll related
    
    
    202
    
    
    
    202Other long term liabilities
    
    
    33
    
    
    
    48Capital lease obligations
    
    
    9
    
    
    
    Total Long Term Liabilities
    
    
    802
    
    
    
    830Shareholders equity (deficit):Cumulative preferred stock, par value $.001 per share,
1,000,000 shares authorized; no shares issued and
outstanding at April 30, 2007 and July 31, 2006, respectively
    
    
    
    
    
    
    Common stock, par value $.001 per share, 25,000,000 shares
authorized; 6,618,405 and 6,202,529 shares issued and outstanding
at April 30, 2007 and July 31, 2006, respectively
    
    
    7
    
    
    
    6Common stock warrants and options
    
    
    144
    
    
    
    36Additional paid-in-capital
    
    
    94,623
    
    
    
    93,838Accumulated deficit
    
    
    (93,924
    )
    
    
    (94,192
    )Total Shareholders Equity (Deficit)
    
    
    850
    
    
    
    (312
    )Total Liabilities and Shareholders Equity (Deficit)
    
    $
    10,461
    
    
    $
    9,436
 See notes to unaudited condensed consolidated financial statements.
 Note:
    
    The balance sheet at July 31, 2006 has been derived from the audited balance sheet at
that date but does not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial statements. 4




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ARI Network Services, Inc.
 
 Consolidated Statements of Operations
 (In thousands, except per share data)
 (Unaudited)
 Three months ended
    
    
    Nine months endedApril 30
    
    
    April 302007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues:Subscriptions, support and other services fees
    
    $
    2,916
    
    
    $
    2,621
    
    
    $
    8,333
    
    
    $
    7,733Software licenses and renewals
    
    
    547
    
    
    
    498
    
    
    
    1,665
    
    
    
    1,531Professional services
    
    
    638
    
    
    
    434
    
    
    
    1,297
    
    
    
    1,3024,101
    
    
    
    3,553
    
    
    
    11,295
    
    
    
    10,566Cost of products and services sold:Subscriptions, support and other services fees
    
    
    282
    
    
    
    265
    
    
    
    888
    
    
    
    653Software licenses and renewals *
    
    
    253
    
    
    
    168
    
    
    
    655
    
    
    
    490Professional services
    
    
    296
    
    
    
    81
    
    
    
    418
    
    
    
    276831
    
    
    
    514
    
    
    
    1,961
    
    
    
    1,419Gross Margin
    
    
    3,270
    
    
    
    3,039
    
    
    
    9,334
    
    
    
    9,147Operating expenses:Depreciation and amortization (exclusive of
amortization of software
products included in cost
of products and services sold)
    
    
    203
    
    
    
    104
    
    
    
    419
    
    
    
    278Customer operations and support
    
    
    298
    
    
    
    273
    
    
    
    842
    
    
    
    855Selling, general and administrative
    
    
    2,491
    
    
    
    1,862
    
    
    
    6,577
    
    
    
    5,561Software development and technical support
    
    
    450
    
    
    
    344
    
    
    
    1,178
    
    
    
    924Net operating expenses
    
    
    3,442
    
    
    
    2,583
    
    
    
    9,016
    
    
    
    7,618Operating income (loss)
    
    
    (172
    )
    
    
    456
    
    
    
    318
    
    
    
    1,529Other income (expense):Interest expense
    
    
    (40
    )
    
    
    (45
    )
    
    
    (110
    )
    
    
    (144
    )Other, net
    
    
    16
    
    
    
    46
    
    
    
    77
    
    
    
    94Total other income (expense)
    
    
    (24
    )
    
    
    1
    
    
    
    (33
    )
    
    
    (50
    )Income (loss) before provision for income taxes
    
    
    (196
    )
    
    
    457
    
    
    
    285
    
    
    
    1,479Income tax benefit (provision)
    
    
    (9
    )
    
    
    1,008
    
    
    
    (17
    )
    
    
    1,008Net income (loss)
    
    $
    (205
    )
    
    $
    1,465
    
    
    $
    268
    
    
    $
    2,487Average common shares outstanding:Basic
    
    
    6,444
    
    
    
    6,175
    
    
    
    6,320
    
    
    
    6,152Diluted
    
    
    6,844
    
    
    
    6,621
    
    
    
    6,720
    
    
    
    6,598Basic and diluted net income (loss) per share:Basic
    
    $
    (0.03
    )
    
    $
    0.24
    
    
    $
    0.04
    
    
    $
    0.40Diluted
    
    $
    (0.03
    )
    
    $
    0.22
    
    
    $
    0.04
    
    
    $
    0.38
 See notes to unaudited condensed consolidated financial statements.
 
 *
    
    Includes amortization of software products of $213, $161, $598 and $458 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)
 Nine months endedApril 302007
    
    
    2006Operating activitiesNet income
    
    $
    268
    
    
    $
    2,487Adjustments to reconcile net income to net cash provided
by operating activities:Amortization of capitalized software products
    
    
    598
    
    
    
    458Amortization of deferred financing costs, debt discount and
excess carrying value over face amount of notes payable
    
    
    (22
    )
    
    
    (44
    )Depreciation and other amortization
    
    
    419
    
    
    
    278Stock based compensation related to stock options
    
    
    109
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    (1,038
    )Stock issued as contribution to 401(k) plan
    
    
    42
    
    
    
    21Net change in receivables, prepaid expenses and other
current assets
    
    
    (428
    )
    
    
    (335
    )Net change in accounts payable, deferred revenue,
accrued liabilities and long term liabilities
    
    
    61
    
    
    
    (70
    )Net cash provided by operating activities
    
    
    1,047
    
    
    
    1,757Investing activitiesPurchase of equipment and leasehold improvements
    
    
    (629
    )
    
    
    (494
    )Purchase of assets related to acquisitions, net of cash acquired
    
    
    (1,179
    )
    
    
    Software product costs capitalized
    
    
    (247
    )
    
    
    (468
    )Net cash used in investing activities
    
    
    (2,055
    )
    
    
    (962
    )Financing activitiesPayments under notes payable
    
    
    (1,145
    )
    
    
    (850
    )Payments on capital lease obligations
    
    
    
    
    
    
    (4
    )Proceeds from issuance of common stock
    
    
    37
    
    
    
    60Net cash used in financing activities
    
    
    (1,108
    )
    
    
    (794
    )Net increase (decrease) in cash and cash equivalents
    
    
    (2,116
    )
    
    
    1Balance at beginning of period
    
    
    3,584
    
    
    
    3,651Balance at end of period
    
    $
    1,468
    
    
    $
    3,652Cash paid for interest
    
    $
    137
    
    
    $
    190Cash paid for income taxes
    
    $
    20
    
    
    $
    Noncash investing and financing activitiesRedemption of common stock in connection with exercise of stock options
    
    $
    
    
    
    $
    54Issuance of common stock in connection with acquisition
    
    
    707
    
    
    
    Debt issued in connection with acquisition
    
    
    700
    
    
    
    Debt assumed in connection with acquisition
    
    
    37
    
    
    
    Accrued liabilities related to acquisition
    
    
    175
    
    
    
    Stock based compensation related to stock options
    
    
    109
    
    
    
    
 See notes to unaudited condensed consolidated financial statements.
 6




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Notes to Condensed Consolidated Financial Statements
(Unaudited)
April 30, 2007
 1. BASIS OF PRESENTATION
    2. BASIC AND DILUTED NET INCOME PER SHARE
  Three months ended
    
    Nine months endedApril 30
    
    April 302007
    
    2006
    
    2007
    
    2006Weighted average common shares outstanding
    
    
    6,444
    
    
    
    6,175
    
    
    
    6,320
    
    
    
    6,152Dilutive effect of stock options and warrants
    
    
    400
    
    
    
    446
    
    
    
    400
    
    
    
    446Diluted weighted average common shares outstanding
    
    
    6,844
    
    
    
    6,621
    
    
    
    6,720
    
    
    
    6,598Options that could potentially dilute net income per share
in the future that are not included in the computation of
diluted net income per share, as their impact is antidilutive
    
    
    319
    
    
    
    225
    
    
    
    319
    
    
    
    225
 3. STOCK-BASED COMPENSATION
    7




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Three months ended
    
    Nine months endedApril 30,
    
    April 30,2007
    
    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
    
    
    Nine monthsended
    
    
    endedApril 30, 2006
    
    
    April 30, 2006Net income as reported
    
    $
    1,465
    
    
    $
    2,487Stock-based compensation expense
determined under fair value based
method for options
    
    
    (85
    )
    
    
    (247
    )Pro forma net income
    
    $
    1,380
    
    
    $
    2,240Pro forma net income per share  basic
    
    $
    .22
    
    
    $
    .36Pro forma net income per share  diluted
    
    $
    .21
    
    
    $
    .34
 Employee Stock Purchase Plans
  Stock Option Plans
  1991 Stock Option Plan
   8




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##### Table of Contents



Three months ended
    
    Nine months endedApril 30, 2007
    
    April 30, 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
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.34
    
    
    $
    13,125
    
    
    
    146,686
    
    
    $
    2.28
    
    
    
    2.85
    
    
    $
    13,125Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    $
    3.25Outstanding at end
of period
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.09
    
    
    $
    13,125
    
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.09
    
    
    $
    13,125Exercisable at end
of period
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.09
    
    
    $
    13,125
    
    
    
    145,686
    
    
    $
    2.27
    
    
    
    2.09
    
    
    $
    13,125
  1993 Director Stock Option Plan
    Three months ended
    
    Nine months endedApril 30, 2007
    
    April 30, 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
    
    
    
    3.22
    
    
    
    
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.22Exercisable at end
of period
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.22
    
    
    $
    152
    
    
    
    1,313
    
    
    $
    2.65
    
    
    
    3.22
    
    
    $
    152
  9




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2000 Stock Option Plan
      Three months ended
    
    Nine months endedApril 30, 2007
    
    April 30, 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
    
    
    1,082,850
    
    
    $
    1.43
    
    
    
    7.10
    
    
    $
    688,028
    
    
    
    1,054,350
    
    
    $
    1.35
    
    
    
    7.27
    
    
    $
    814,975Granted
    
    
    750
    
    
    $
    1.53
    
    
    
    
    
    
    
    
    
    
    
    111,000
    
    
    $
    2.02Exercised
    
    
    (13,750
    )
    
    $
    0.75
    
    
    
    
    
    
    
    
    
    
    
    (34,126
    )
    
    $
    0.48Forfeited
    
    
    (25,374
    )
    
    $
    1.38
    
    
    
    
    
    
    
    
    
    
    
    (86,748
    )
    
    $
    1.43Outstanding at end
of period
    
    
    1,044,476
    
    
    $
    1.44
    
    
    
    6.85
    
    
    $
    654,011
    
    
    
    1,044,476
    
    
    $
    1.44
    
    
    
    6.85
    
    
    $
    654,011Exercisable at end
of period
    
    
    802,080
    
    
    $
    1.34
    
    
    
    6.32
    
    
    $
    588,159
    
    
    
    802,080
    
    
    $
    1.34
    
    
    
    6.32
    
    
    $
    588,159
  Three months ended
    
    Nine months endedApril 30, 2007
    
    April 30, 2007Wt-Avg Grant
    
    
    
    
    
    Wt-Avg GrantOptions
    
    Date Fair Value
    
    Options
    
    Date Fair ValueNon-vested at beginning of period
    
    
    265,238
    
    
    $
    1.74
    
    
    
    188,799
    
    
    $
    1.59Granted
    
    
    750
    
    
    $
    1.96
    
    
    
    111,000
    
    
    $
    2.02Vested
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (23,592
    )
    
    $
    1.27
    
    
    
    (57,403
    )
    
    $
    1.60Non-vested at end of period
    
    
    242,396
    
    
    $
    1.79
    
    
    
    242,396
    
    
    $
    1.79
  4. ACQUISITIONS
   10




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##### Table of Contents



Three months ended
    
    
    Nine months endedApril 30, 2007
    
    
    April 30, 20072007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    4,101
    
    
    $
    3,889
    
    
    $
    11,954
    
    
    $
    11,431Net income (loss)
    
    $
    (205
    )
    
    $
    1,486
    
    
    $
    20
    
    
    $
    2,347Net income (loss) per basic share
    
    $
    (.03
    )
    
    $
    .23
    
    
    $
    0.00
    
    
    $
    .36Net income (loss) per diluted
share
    
    $
    (.03
    )
    
    $
    .21
    
    
    $
    0.00
    
    
    $
    .33
  5. NOTES PAYABLE
     6. SHAREHOLDER RIGHTS PLAN
  11




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##### Table of Contents



7. INCOME TAXES
  Three months ended
    
    
    Nine months endedApril 30
    
    
    April 302007
    
    
    2006
    
    
    2007
    
    
    2006Current:Federal
    
    $
    140
    
    
    $
    145
    
    
    $
    323
    
    
    $
    493State
    
    
    32
    
    
    
    46
    
    
    
    83
    
    
    
    108Deferred
    
    
    
    
    
    
    (1,000
    )
    
    
    
    
    
    
    (1,000
    )Utilization of net operating loss carryforwards
    
    
    (163
    )
    
    
    (199
    )
    
    
    (389
    )
    
    
    (609
    )Income tax (benefit) provision
    
    $
    9
    
    
    $
    (1,008
    )
    
    $
    17
    
    
    $
    (1,008
    )
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Results of Operations
   Critical Accounting Policies and Estimates
 General
  12




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##### Table of Contents



Revenue Recognition
  Bad Debts
  Use of Estimates
  Legal Provisions
  Impairment of Long-Lived Assets
  Cash and Cash Equivalents
  Debt Instruments
  Deferred Tax Asset
  13




---



##### Table of Contents



Stock-Based Compensation
  Revenues
   Catalog, Customer and Subscription Information by Region
(As of April 30, 2007)
 Distinct
    
    DistinctDistinct
    
    
    
    
    
    Distributors
    
    DealersCatalogs
    
    Manufacturers
    
    Subscriptions
    
    (Estimated)
    
    (Estimated)North America
    
    
    89
    
    
    
    63
    
    
    
    65,912
    
    
    
    92
    
    
    
    21,055Rest of World
    
    
    52
    
    
    
    7
    
    
    
    6,749
    
    
    
    65
    
    
    
    3,642Included in both Regions
    
    
    (42
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    99
    
    
    
    70
    
    
    
    72,661
    
    
    
    157
    
    
    
    24,697
 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.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.
  14




---



##### Table of Contents



Revenue by Location and
Service  (In Thousands)
 Three months ended
    
    
    
    
    
    
    Nine months endedApril 30
    
    
    Percent
    
    
    April 30
    
    
    Percent2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    ChangeNorth AmericanCatalog subscriptions
    
    $
    2,503
    
    
    $
    2,562
    
    
    
    -2
    %
    
    $
    7,711
    
    
    $
    7,721
    
    
    
    0
    %Catalog professional services
    
    
    329
    
    
    
    418
    
    
    
    -21
    %
    
    
    923
    
    
    
    1,212
    
    
    
    -24
    %Marketing service subscriptions
    
    
    536
    
    
    
    147
    
    
    
    265
    %
    
    
    1,047
    
    
    
    322
    
    
    
    225
    %Marketing professional services
    
    
    230
    
    
    
    
    
    
    
    100
    %
    
    
    230
    
    
    
    
    
    
    
    100
    %Dealer & distributor communications
    
    
    165
    
    
    
    216
    
    
    
    -24
    %
    
    
    512
    
    
    
    631
    
    
    
    -19
    %Subtotal
    
    
    3,763
    
    
    
    3,343
    
    
    
    13
    %
    
    
    10,423
    
    
    
    9,886
    
    
    
    5
    %Rest of the WorldCatalog subscriptions
    
    
    257
    
    
    
    195
    
    
    
    32
    %
    
    
    727
    
    
    
    579
    
    
    
    26
    %Catalog professional services
    
    
    81
    
    
    
    15
    
    
    
    440
    %
    
    
    145
    
    
    
    101
    
    
    
    44
    %Subtotal
    
    
    338
    
    
    
    210
    
    
    
    61
    %
    
    
    872
    
    
    
    680
    
    
    
    28
    %Total RevenueCatalog subscriptions
    
    
    2,760
    
    
    
    2,757
    
    
    
    0
    %
    
    
    8,438
    
    
    
    8,300
    
    
    
    2
    %Catalog professional services
    
    
    410
    
    
    
    433
    
    
    
    -5
    %
    
    
    1,068
    
    
    
    1,313
    
    
    
    -19
    %Marketing service subscriptions
    
    
    536
    
    
    
    147
    
    
    
    265
    %
    
    
    1,047
    
    
    
    322
    
    
    
    225
    %Marketing professional services
    
    
    230
    
    
    
    
    
    
    
    100
    %
    
    
    230
    
    
    
    
    
    
    
    100
    %Dealer & distributor communications
    
    
    165
    
    
    
    216
    
    
    
    -24
    %
    
    
    512
    
    
    
    631
    
    
    
    -19
    %Total
    
    $
    4,101
    
    
    $
    3,553
    
    
    
    15
    %
    
    $
    11,295
    
    
    $
    10,566
    
    
    
    7
    %
 North America
 Catalog Subscriptions
  Catalog Professional Services
  Marketing Service Subscriptions
  15




---



##### Table of Contents



Marketing Professional 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
    
    
    
    
    
    Nine months endedApril 30
    
    
    
    
    
    April 30%2007
    
    2006
    
    % Chg
    
    2007
    
    2006
    
    ChgCatalog subscriptionsRevenue
    
    $
    2,760
    
    
    $
    2,757
    
    
    
    0
    %
    
    $
    8,438
    
    
    $
    8,300
    
    
    
    2
    %Cost of revenue
    
    
    286
    
    
    
    289
    
    
    
    (1
    %)
    
    
    859
    
    
    
    827
    
    
    
    4
    %Cost of revenue as a percent of revenue
    
    
    10
    %
    
    
    10
    %
    
    
    
    
    
    
    10
    %
    
    
    10
    %Catalog professional servicesRevenue
    
    
    410
    
    
    
    433
    
    
    
    (5
    %)
    
    
    1,068
    
    
    
    1,313
    
    
    
    (19
    %)Cost of revenue
    
    
    210
    
    
    
    119
    
    
    
    77
    %
    
    
    448
    
    
    
    338
    
    
    
    33
    %Cost of revenue as a percent of revenue
    
    
    51
    %
    
    
    27
    %
    
    
    
    
    
    
    42
    %
    
    
    26
    %Marketing services subscriptionsRevenue
    
    
    536
    
    
    
    147
    
    
    
    265
    %
    
    
    1,047
    
    
    
    322
    
    
    
    225
    %Cost of revenue
    
    
    244
    
    
    
    75
    
    
    
    225
    %
    
    
    511
    
    
    
    155
    
    
    
    230
    %Cost of revenue as a percent of revenue
    
    
    45
    %
    
    
    51
    %
    
    
    
    
    
    
    49
    %
    
    
    48
    %Marketing professional servicesRevenue
    
    
    230
    
    
    
    
    
    
    
    100
    %
    
    
    230
    
    
    
    
    
    
    
    100
    %Cost of revenue
    
    
    75
    
    
    
    
    
    
    
    100
    %
    
    
    75
    
    
    
    
    
    
    
    100
    %Cost of revenue as a percent of revenue
    
    
    33
    %
    
    
    0
    %
    
    
    
    
    
    
    33
    %
    
    
    0
    %Dealer and distributor communicationsRevenue
    
    
    165
    
    
    
    216
    
    
    
    (24
    %)
    
    
    512
    
    
    
    631
    
    
    
    (19
    %)Cost of revenue
    
    
    16
    
    
    
    31
    
    
    
    (49
    %)
    
    
    68
    
    
    
    99
    
    
    
    (31
    %)Cost of revenue as a percent of revenue
    
    
    10
    %
    
    
    14
    %
    
    
    
    
    
    
    13
    %
    
    
    16
    %TotalRevenue
    
    $
    4,101
    
    
    $
    3,553
    
    
    
    15
    %
    
    $
    11,295
    
    
    $
    10,566
    
    
    
    7
    %Cost of revenue
    
    
    831
    
    
    
    514
    
    
    
    62
    %
    
    
    1,961
    
    
    
    1,419
    
    
    
    38
    %Cost of revenue as a percent of revenue
    
    
    20
    %
    
    
    14
    %
    
    
    
    
    
    
    17
    %
    
    
    13
    %
     17




---



##### Table of Contents



Operating Expenses
  Operating Expenses  (In thousands)
 Three months ended
    
    
    
    
    
    Nine months endedApril 30
    
    
    
    
    
    April 302007
    
    2006
    
    % Chg
    
    2007
    
    2006
    
    % ChgCustomer operations and support
    
    $
    298
    
    
    $
    273
    
    
    
    9
    %
    
    $
    842
    
    
    $
    855
    
    
    
    (2
    %)Selling, general and administrative
    
    
    2,491
    
    
    
    1,862
    
    
    
    34
    %
    
    
    6,577
    
    
    
    5,561
    
    
    
    18
    %Software development and technical support
    
    
    450
    
    
    
    344
    
    
    
    31
    %
    
    
    1,178
    
    
    
    924
    
    
    
    27
    %Depreciation and amortization
    
    
    203
    
    
    
    104
    
    
    
    95
    %
    
    
    419
    
    
    
    278
    
    
    
    51
    %Net operating expenses
    
    $
    3,442
    
    
    $
    2,583
    
    
    
    33
    %
    
    $
    9,016
    
    
    $
    7,618
    
    
    
    18
    %
     Other Items
  18




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##### Table of Contents



Acquisitions
   Liquidity and Capital Resources
  Cash Flow Information  (In thousands)
 Three months ended
    
    
    
    
    
    
    Nine months endedApril 30
    
    
    
    
    
    
    April 302007
    
    
    2006
    
    
    % Chg
    
    
    2007
    
    
    2006
    
    
    % ChgNet income
    
    $
    (205
    )
    
    $
    1,465
    
    
    
    (114
    %)
    
    $
    268
    
    
    $
    2,487
    
    
    
    (89
    %)Amortization of software products
    
    
    213
    
    
    
    161
    
    
    
    32
    %
    
    
    598
    
    
    
    458
    
    
    
    31
    %Amortization of deferred finance costs
and
debt discount
    
    
    11
    
    
    
    (13
    )
    
    
    185
    %
    
    
    (22
    )
    
    
    (44
    )
    
    
    (50
    %)Depreciation and other amortization
    
    
    203
    
    
    
    104
    
    
    
    95
    %
    
    
    419
    
    
    
    278
    
    
    
    51
    %Stock based compensation related to
stock
options
    
    
    41
    
    
    
    
    
    
    
    100
    %
    
    
    109
    
    
    
    
    
    
    
    100
    %Deferred income taxes
    
    
    
    
    
    
    (1,038
    )
    
    
    100
    %
    
    
    
    
    
    
    (1,038
    )
    
    
    100
    %Stock issued as contribution to 401(k)
plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    21
    
    
    
    100
    %Net change in working capital
    
    
    506
    
    
    
    195
    
    
    
    160
    %
    
    
    (367
    )
    
    
    (405
    )
    
    
    9
    %Net cash provided by operating activities
    
    
    769
    
    
    
    874
    
    
    
    (12
    %)
    
    
    1,047
    
    
    
    1,757
    
    
    
    (40
    %)Net cash used in investing activities
    
    
    (501
    )
    
    
    (452
    )
    
    
    (11
    %)
    
    
    (2,055
    )
    
    
    (962
    )
    
    
    (114
    %)Net cash used in financing activities
    
    
    (439
    )
    
    
    (354
    )
    
    
    (24
    %)
    
    
    (1,108
    )
    
    
    (794
    )
    
    
    (40
    %)Net change in cash
    
    $
    (171
    )
    
    $
    68
    
    
    
    (351
    %)
    
    $
    (2,116
    )
    
    $
    1
    
    
    
    (2,117
    %)
   19




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##### Table of Contents



Debt Schedule  (In thousands)
 April 30
    
    
    July 312007
    
    
    2006
    
    
    Net(Unaudited)
    
    
    (Audited)
    
    
    ChangeNote payable to WITECH:Current portion of note payable
    
    $
    100
    
    
    $
    200
    
    
    $
    (100
    )Long term portion of note payable
    
    
    
    
    
    
    50
    
    
    
    (50
    )Total note payable to WITECH
    
    
    100
    
    
    
    250
    
    
    
    (150
    )Notes payable to New Holders:Current portion of notes payable
    
    
    800
    
    
    
    1,200
    
    
    
    (400
    )Long term portion of notes payable
    
    
    
    
    
    
    500
    
    
    
    (500
    )Total face value of notes payable to New Holders
    
    
    800
    
    
    
    1,700
    
    
    
    (900
    )Carrying value in excess of face amount of notes payable
    
    
    8
    
    
    
    42
    
    
    
    (34
    )Debt discount (common stock warrants and options)
    
    
    (4
    )
    
    
    (12
    )
    
    
    8Total carrying value of notes payable to New Holders
    
    
    804
    
    
    
    1,730
    
    
    
    (926
    )Debt related to acquisition of OC-Net, Inc.:Current portion of note payable
    
    
    234
    
    
    
    
    
    
    
    233Long term portion of note payable
    
    
    408
    
    
    
    
    
    
    
    409Long term cash holdback
    
    
    150
    
    
    
    
    
    
    
    150792
    
    
    
    
    
    
    
    792Total debt
    
    $
    1,696
    
    
    $
    1,980
    
    
    $
    (284
    )
      20




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##### Table of Contents



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




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 6. EXHIBITS
 10.1
    
    Amendment to Credit Agreement dated May 10, 2007, between
the Company and JPMorgan Chase Bank, NA, successor by merger to Bank
One, NA.10.2
    
    Note Modification Agreement dated May 10, 2007, between the
Company and JPMorgan Chase Bank, NA, successsor by merger to Bank
One, NA.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:
    
    June 19, 2007
    
    /s/ Brian E. Dearing

Brian E. Dearing, Chairman of the Board and Chief Executive Officer/s/ Timothy Sherlock

Timothy Sherlock, Chief Financial Officer
 23