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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



|(X) |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|--- |  | ---------------------------------------------------------------------------------------

For the quarterly period ended April 30, 2003

OR



|(  ) |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|---- |  | ----------------------------------------------------------------------------------------

For the transition period from               to

Commission file number 000-19608

ARI Network Services, Inc.




(Exact name of registrant as specified in its charter.)


|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|WISCONSIN                                                      |  | 39- 1388360                      
|                                                               |  |                                  
|(State or other jurisdiction of
incorporation or organization) |  | (IRS Employer Identification No.)

11425 W. Lake Park Drive, Milwaukee, Wisconsin 53224




(Address of principal executive office)


Registrants telephone number, including area code (414) 973-4300

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of The Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.

YES    ü       NO

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES        NO    ü


As of June 10, 2003 there were 6,645,191 shares of the registrants $0.001 par
value common stock outstanding.

1



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TABLE OF CONTENTS



|                                                |                                                                                       |                                                   |  |  |  |  |  | 
|----------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                 
|                                                | Item 1. Financial statements                                                         
|                                                |                                                                                       | Condensed balance sheets                         
|                                                |                                                                                       | Condensed statements of operations               
|                                                |                                                                                       | Condensed statements of cash flows               
|                                                |                                                                                       | Notes to unaudited condensed financial statements
|                                                | Managements discussion and analysis of financial condition and results of operations
|                                                | Item 3. Quantitative and qualitative disclosures about market risk                   
|                                                | Item 4. Controls and procedures                                                      
|PART II  OTHER INFORMATION                    
|                                                | Item 1. Legal proceedings                                                            
|                                                | Item 2. Changes in securities and use of proceeds                                    
|                                                | Item 3. Defaults upon senior securities                                              
|                                                | Item 6. Exhibits and reports on Form 8-K                                             
|Signatures                                     
|Certifications                                 
|EX-4.1 Form of Promissory Note                 
|EX-10.1 Exchange Agreement                     
|EX-10.2 Assignment                             
|EX-10.3 Amendment to Receivable Sales Agreement
|EX-10.4 Amendment to Receivable Sales Agreement
|EX-99.1 Section 906 Certification of CEO       
|EX-99.2 Section 906 Certification of CFO       



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ARI Network Services, Inc.

FORM 10-Q

FOR THE THREE MONTHS ENDED APRIL 30, 2003

INDEX

|                               |        |  |                                                                                       |                                                                                                |      |     
|------------------------------ | ------ |  | ------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ---- | ----
|                               |        |  |                                                                                       |                                                                                                |      | Page
|                               |        |  |                                                                                       |                                                                                                |      |     
|PART I - FINANCIAL INFORMATION |        | 
|                               | Item 1 |  | Financial statements                                                                  |                                                                                                |     
|                               |        |  |                                                                                       | Condensed balance sheets  April 30, 2003 and July 31, 2002                                    |      | 3-4 
|                               |        |  |                                                                                       | Condensed statements of operations for the three and nine months ended
April 30, 2003 and 2002 |      | 5   
|                               |        |  |                                                                                       | Condensed statements of cash flows for the nine months ended
April 30, 2003 and 2002           |      | 6   
|                               |        |  |                                                                                       | Notes to unaudited condensed financial statements                                              |      | 7-8 
|                               | Item 2 |  | Managements discussion and analysis of financial condition and results
of operations |                                                                                                | 9-17
|                               | Item 3 |  | Quantitative and qualitative disclosures about market risk                            |                                                                                                | 17  
|                               | Item 4 |  | Controls and procedures                                                               |                                                                                                | 18  
|PART II - OTHER INFORMATION    |        | 
|                               | Item 1 |  | Legal proceedings                                                                     |                                                                                                | 18  
|                               | Item 2 |  | Changes in securities and use of proceeds                                             |                                                                                                | 19  
|                               | Item 3 |  | Defaults upon senior securities                                                       |                                                                                                | 19  
|                               | Item 6 |  | Exhibits and reports on Form 8-K                                                      |                                                                                                | 19  
|Signatures                     |        | 
|Certifications                 |        | 

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ARI Network Services, Inc.
Balance Sheets(In thousands, except share and per share data)(Unaudited)

|                                         |                                                                                                             |              |        |          |       |         |        |        |       | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------ | ------ | -------- | ----- | ------- | ------ | ------ | ----- | 
|                                         |                                                                                                             |              |        | April 30 |       | July 31
|                                         |                                                                                                             | 2003         |        | 2002    
|                                         |                                                                                                             |              |        |         
|ASSETS                                   |                                                                                                             |              |        |         
|Current assets:                          |                                                                                                             |              |        |          |       |         |        |       
|                                         | Cash                                                                                                        |              | $      | 1,576    |       |         | $      | 879    |      
|                                         | Trade receivables, less allowance for doubtful accounts of $133
at April 30, 2003 and $140 at July 31, 2002 |              |        | 1,332    |       |         |        | 1,743  |      
|                                         | Prepaid expenses and other                                                                                  |              |        | 92       |       |         |        | 84     |      
|                                         |                                                                                                             |              |        |          |       |         |        |        |      
|Total current assets                     |                                                                                                             |              | 3,000  |          |       |         | 2,706  |       
|Equipment and leasehold improvements:    |                                                                                                             |              |        |          |       |         |        |       
|                                         | Computer equipment                                                                                          |              |        | 4,430    |       |         |        | 4,394  |      
|                                         | Leasehold improvements                                                                                      |              |        | 73       |       |         |        | 73     |      
|                                         | Furniture and equipment                                                                                     |              |        | 1,313    |       |         |        | 1,292  |      
|                                         |                                                                                                             |              |        |          |       |         |        |        |      
|                                         |                                                                                                             |              | 5,816  |          |       |         | 5,759  |       
|                                         | Less accumulated depreciation and amortization                                                              |              |        | 5,426    |       |         |        | 5,262  |      
|                                         |                                                                                                             |              |        |          |       |         |        |        |      
|Net equipment and leasehold improvements |                                                                                                             |              | 390    |          |       |         | 497    |       
|Other assets                             |                                                                                                             |              |       |          |       |         | 105    |       
|Capitalized software product costs       |                                                                                                             |              | 23,954 |          |       |         | 23,585 |       
|                                         | Less accumulated amortization                                                                               |              |        | 21,823   |       |         |        | 20,519 |      
|                                         |                                                                                                             |              |        |          |       |         |        |        |      
|Net capitalized software product costs   |                                                                                                             |              | 2,131  |          |       |         | 3,066  |       
|                                         |                                                                                                             |              |        |          |       |         |        |        |      
|                                         |                                                                                                             | Total Assets |        | $        | 5,521 |         |        | $      | 6,374 | 
|                                         |                                                                                                             |              |        |          |       |         |        |        |      

3



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ARI Network Services, Inc.
Balance Sheets(In thousands, except share and per share data)(Unaudited)

|                                               |                                                                                                                                                                                |                                                      |        |          |          |  |         |         |       |  | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------- | ------ | -------- | -------- |  | ------- | ------- | ----- |  | 
|                                               |                                                                                                                                                                                |                                                      |        |          | April 30 |  | July 31
|                                               |                                                                                                                                                                                | 2003                                                 |        | 2002    
|                                               |                                                                                                                                                                                |                                                      |        |         
|LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) |                                                                                                                                                                                |                                                      |        |         
|Current liabilities:                           |                                                                                                                                                                                |                                                      |        |          |          |  |         |        
|                                               | Current portion of notes payable to shareholder                                                                                                                                |                                                      | $      |         |          |  | $       | 50      |      
|                                               | Current portion of notes payable                                                                                                                                               |                                                      |        | 258      |          |  |         | 3,490   |      
|                                               | RFC financed receivables facility                                                                                                                                              |                                                      |        | 662      |          |  |         | 360     |      
|                                               | Accounts payable                                                                                                                                                               |                                                      |        | 226      |          |  |         | 567     |      
|                                               | Deferred revenue                                                                                                                                                               |                                                      |        | 5,172    |          |  |         | 4,619   |      
|                                               | Accrued payroll and related liabilities                                                                                                                                        |                                                      |        | 1,010    |          |  |         | 1,140   |      
|                                               | Other accrued liabilities                                                                                                                                                      |                                                      |        | 450      |          |  |         | 1,042   |      
|                                               | Current portion of capital lease obligations                                                                                                                                   |                                                      |        | 47       |          |  |         | 151     |      
|                                               |                                                                                                                                                                                |                                                      |        |          |          |  |         |         |      
|Total current liabilities                      |                                                                                                                                                                                |                                                      | 7,825  |          |          |  | 11,419  |        
|Long term liabilities:                         |                                                                                                                                                                                |                                                      |        |          |          |  |         |        
|                                               | Notes payable (net of discount)                                                                                                                                                |                                                      |        | 3,988    |          |  |         |        |      
|                                               | Capital lease obligations                                                                                                                                                      |                                                      |        | 20       |          |  |         | 26      |      
|                                               | Other long term liabilities                                                                                                                                                    |                                                      |        | 444      |          |  |         | 535     |      
|                                               |                                                                                                                                                                                |                                                      |        |          |          |  |         |         |      
|Total long term liabilities                    |                                                                                                                                                                                |                                                      | 4,452  |          |          |  | 561     |        
|Shareholders equity (deficit):                |                                                                                                                                                                                |                                                      |        |          |          |  |         |        
|                                               | Cumulative preferred stock, par value $.001 per share,
1,000,000 shares authorized; 20,350 shares issued and
outstanding at April 30, 2003 and July 31, 2002                   |                                                      |        |         |          |  |         |        |      
|                                               | Common stock, par value $.001 per share, 25,000,000 shares
authorized; 6,645,191 and 6,329,301 shares issued and outstanding at April 30, 2003 and July 31, 2002, respectively |                                                      |        | 6        |          |  |         | 6       |      
|                                               | Common stock warrants and options                                                                                                                                              |                                                      |        | 36       |          |  |         | 2,459   |      
|                                               | Additional paid-in-capital                                                                                                                                                     |                                                      |        | 94,400   |          |  |         | 91,853  |      
|                                               | Accumulated deficit                                                                                                                                                            |                                                      |        | (101,198 | )        |  |         | (99,924 | )    
|                                               |                                                                                                                                                                                |                                                      |        |          |          |  |         |         |      
|Total shareholders equity (deficit)           |                                                                                                                                                                                |                                                      | (6,756 | )        |          |  | (5,606  | )      
|                                               |                                                                                                                                                                                |                                                      |        |          |          |  |         |         |      
|                                               |                                                                                                                                                                                | Total Liabilities and Shareholders Equity (Deficit) |        | $        | 5,521    |  |         | $       | 6,374 | 
|                                               |                                                                                                                                                                                |                                                      |        |          |          |  |         |         |      

See notes to unaudited condensed financial statements.

Note: The balance sheet at July 31, 2002 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.

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ARI Network Services, Inc.
Statements of Operations(In thousands, except per share data)
(Unaudited)

|                                              |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |       |        |  
|--------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ----- | ------------------ | ---- | ----------------- | ----- | ----- | ---- | ---- | ------ | ----- | ----- | - | ------ | ----- | ------ | -
|                                              |                                                                                                                               |                                                |       | Three months ended |      | Nine months ended
|                                              |                                                                                                                               |                                                |       | April 30           |      | April 30         
|                                              |                                                                                                                               |                                                |       | 2003               |      | 2002              |       | 2003  |      | 2002
|                                              |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |     
|Net revenues:                                 |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |      
|                                              | Subscriptions, support and other services fees                                                                                |                                                | $     | 2,137              |      |                   | $     | 2,106 |      |      | $      | 6,168 |       |   | $      | 6,789 |       
|                                              | Software licenses and renewals                                                                                                |                                                |       | 608                |      |                   |       | 637   |      |      |        | 1,713 |       |   |        | 2,128 |       
|                                              | Professional services                                                                                                         |                                                |       | 509                |      |                   |       | 665   |      |      |        | 1,521 |       |   |        | 1,629 |       
|                                              |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |      
|                                              |                                                                                                                               |                                                | 3,254 |                    |      |                   | 3,408 |       |      |      | 9,402  |       |       |   | 10,546 |      
|Operating expenses:                           |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |      
|                                              | Cost of products and services sold:                                                                                           |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |       |       
|                                              |                                                                                                                               | Subscriptions, support and other services fees |       |                    | 152  |                   |       |       | 30   |      |        |       | 453   |   |        |       | 181    |  
|                                              |                                                                                                                               | Software licenses and renewals *               |       |                    | 455  |                   |       |       | 435  |      |        |       | 1,328 |   |        |       | 1,254  |  
|                                              |                                                                                                                               | Professional services                          |       |                    | 242  |                   |       |       | 266  |      |        |       | 586   |   |        |       | 626    |  
|                                              |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |      
|                                              |                                                                                                                               |                                                | 849   |                    |      |                   | 731   |       |      |      | 2,367  |       |       |   | 2,061  |      
|                                              | Depreciation and amortization (exclusive of
amortization of software products included in
cost of products and services sold) |                                                |       | 52                 |      |                   |       | 55    |      |      |        | 164   |       |   |        | 162   |       
|                                              | Customer operations and support                                                                                               |                                                |       | 290                |      |                   |       | 308   |      |      |        | 912   |       |   |        | 902   |       
|                                              | Selling, general and administrative                                                                                           |                                                |       | 2,157              |      |                   |       | 1,657 |      |      |        | 5,359 |       |   |        | 5,174 |       
|                                              | Software development and technical support                                                                                    |                                                |       | 363                |      |                   |       | 457   |      |      |        | 1,239 |       |   |        | 1,644 |       
|                                              |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |      
|Operating expenses before amounts capitalized |                                                                                                                               |                                                | 3,711 |                    |      |                   | 3,208 |       |      |      | 10,041 |       |       |   | 9,943  |      
|                                              |                                                                                                                               | Less capitalized portion                       |       |                    | (86  | )                 |       |       | (153 | )    |        |       | (369  | ) |        |       | (583   | )
|                                              |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |      
|Net operating expenses                        |                                                                                                                               |                                                | 3,625 |                    |      |                   | 3,055 |       |      |      | 9,672  |       |       |   | 9,360  |      
|                                              |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |      
|Operating income (loss)                       |                                                                                                                               |                                                | (371  | )                  |      |                   | 353   |       |      |      | (270   | )     |       |   | 1,186  |      
|Other income (expense):                       |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |      
|                                              |                                                                                                                               | Interest expense                               |       |                    | (291 | )                 |       |       | (342 | )    |        |       | (970  | ) |        |       | (1,082 | )
|                                              |                                                                                                                               | Other, net                                     |       |                    | 8    |                   |       |       | 7    |      |        |       | (34   | ) |        |       | 11     |  
|                                              |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |      
|Total other expense                           |                                                                                                                               |                                                | (283  | )                  |      |                   | (335  | )     |      |      | (1,004 | )     |       |   | (1,071 | )    
|                                              |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |      
|Net income (loss)                             |                                                                                                                               | $                                              | (654  | )                  |      | $                 | 18    |       |      | $    | (1,274 | )     |       | $ | 115    |      
|                                              |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |      
|Average common shares outstanding             |                                                                                                                               |                                                | 6,581 |                    |      |                   | 6,223 |       |      |      | 6,449  |       |       |   | 6,201  |      
|Basic and diluted net income (loss) per share |                                                                                                                               | $                                              | (0.10 | )                  |      | $                 | 0.00  |       |      | $    | (0.20  | )     |       | $ | 0.02   |      
|                                              |                                                                                                                               |                                                |       |                    |      |                   |       |       |      |      |        |       |       |   |        |      

See notes to unaudited condensed financial statements.



|* |  | Includes amortization of software products of $440, $410, $1,304 and
$1,205 and excludes other depreciation and amortization shown separately
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

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ARI Network Services, Inc.




|                                                                           |                                                                                          |                                                                                                 |       |                   |       |      |       |       |       |  
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ----- | ----------------- | ----- | ---- | ----- | ----- | ----- | -
|                                                                           |                                                                                          |                                                                                                 |       | Nine months ended
|                                                                           |                                                                                          |                                                                                                 |       | April 30         
|                                                                           |                                                                                          |                                                                                                 |       | 2003              |       | 2002
|                                                                           |                                                                                          |                                                                                                 |       |                   |       |     
|Operating activities                                                       |                                                                                          |                                                                                                 |       |                   |       |      |       |      
|                                                                           | Net income (loss)                                                                        |                                                                                                 | $     | (1,274            | )     |      | $     | 115   |      
|                                                                           | Adjustments to reconcile net income (loss) to net cash provided
by operating activities: |                                                                                                 |       |                   |       |      |       |       |      
|                                                                           |                                                                                          | Amortization of software products                                                               |       |                   | 1,304 |      |       |       | 1,205 |  
|                                                                           |                                                                                          | Amortization of goodwill                                                                        |       |                   |      |      |       |       | 10    |  
|                                                                           |                                                                                          | Amortization of deferred financing costs and debt discount                                      |       |                   | 701   |      |       |       | 710   |  
|                                                                           |                                                                                          | Depreciation and other amortization                                                             |       |                   | 164   |      |       |       | 152   |  
|                                                                           |                                                                                          | Interest expense converted to subordinated debt                                                 |       |                   | 229   |      |       |       |      |  
|                                                                           |                                                                                          | Stock issued as consideration to vendor                                                         |       |                   | 44    |      |       |       |      |  
|                                                                           |                                                                                          | Net change in receivables, prepaid expenses and other
current assets                            |       |                   | 403   |      |       |       | 821   |  
|                                                                           |                                                                                          | Net change in accounts payable, deferred revenue,
accrued liabilities and long term liabilities |       |                   | 194   |      |       |       | (610  | )
|                                                                           |                                                                                          |                                                                                                 |       |                   |       |      |       |      
|                                                                           | Net cash provided by operating activities                                                |                                                                                                 |       | 1,765             |       |      |       | 2,403 |      
|Investing activities                                                       |                                                                                          |                                                                                                 |       |                   |       |      |       |      
|                                                                           | Purchase of equipment and leasehold improvements                                         |                                                                                                 |       | (42               | )     |      |       |      |      
|                                                                           | Software product costs capitalized                                                       |                                                                                                 |       | (369              | )     |      |       | (583  | )    
|                                                                           |                                                                                          |                                                                                                 |       |                   |       |      |       |      
|                                                                           | Net cash used in investing activities                                                    |                                                                                                 |       | (411              | )     |      |       | (583  | )    
|Financing activities                                                       |                                                                                          |                                                                                                 |       |                   |       |      |       |      
|                                                                           | Repayments under line of credit                                                          |                                                                                                 |       |                  |       |      |       | (200  | )    
|                                                                           | Borrowings under notes payable                                                           |                                                                                                 |       | 58                |       |      |       |      |      
|                                                                           | Payments under notes payable                                                             |                                                                                                 |       | (634              | )     |      |       | (471  | )    
|                                                                           | Payments of capital lease obligations                                                    |                                                                                                 |       | (125              | )     |      |       | (133  | )    
|                                                                           | Proceeds from issuance of common stock                                                   |                                                                                                 |       | 44                |       |      |       | 14    |      
|                                                                           |                                                                                          |                                                                                                 |       |                   |       |      |       |      
|                                                                           | Net cash used in financing activities                                                    |                                                                                                 |       | (657              | )     |      |       | (790  | )    
|                                                                           |                                                                                          |                                                                                                 |       |                   |       |      |       |      
|Net increase in cash                                                       |                                                                                          |                                                                                                 | 697   |                   |       |      | 1,030 |      
|Cash at beginning of period                                                |                                                                                          |                                                                                                 | 879   |                   |       |      | 313   |      
|                                                                           |                                                                                          |                                                                                                 |       |                   |       |      |       |      
|Cash at end of period                                                      |                                                                                          | $                                                                                               | 1,576 |                   |       | $    | 1,343 |      
|                                                                           |                                                                                          |                                                                                                 |       |                   |       |      |       |      
|Cash paid for interest                                                     |                                                                                          | $                                                                                               | 65    |                   |       | $    | 372   |      
|                                                                           |                                                                                          |                                                                                                 |       |                   |       |      |       |      
|Noncash investing and financing activities                                 |                                                                                          |                                                                                                 |       |                   |       |      |       |      
|Capital lease obligations incurred for;
Computer equipment                 |                                                                                          | $                                                                                               | 15    |                   |       | $    | 24    |      
|Conversion of accrued interest to subordinated debt                        |                                                                                          |                                                                                                 | 493   |                   |       |      |      |      
|Issuance of common stock warrants in connection
with restructuring of debt |                                                                                          |                                                                                                 | 36    |                   |       |      |      |      

See notes to unaudited condensed financial statements.

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Notes to Condensed Financial Statements
(Unaudited)
April 30, 2003

| | 
| | 
| | 



|1. |  | BASIS OF PRESENTATION
|-- |  | ---------------------

The accompanying unaudited financial statements have been prepared and reviewed
in accordance with accounting principles generally accepted in the United
States for interim financial information. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for fiscal year end financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended April 30, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 31, 2003. For further information, refer to the financial
statements and footnotes thereto included in the Companys annual report on
Form 10-K for the year ended July 31, 2002.



|2. |  | BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
|-- |  | ---------------------------------------------

The weighted average number of shares outstanding used to calculate basic and
diluted earnings per share result in the same earnings (loss) per share amount.



|3. |  | STOCK-BASED COMPENSATION
|-- |  | ------------------------

The Company has stock-based compensation plans. SFAS No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure requires companies with
stock-based compensation plans to disclose the pro forma effect of stock-based
compensation on earnings and earnings per share. The following table sets
forth the effect on earnings and earnings per share of stock-based compensation
had the cost been determined based upon the fair value at the grant date for
awards under the plan using the Black-Scholes valuation method:

|                                                     |  |                    |       |                   |  |      |       |      |  |   |        |   |  |   |       |  
|---------------------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                     |  | Three months ended |       | Nine months ended
|                                                     |  | April 30           |       | April 30         
|                                                     |  | 2003               |       | 2002              |  | 2003 |       | 2002
|                                                     |  |                    |       |                   |  |      |       |     
|Net income (loss), as reported                       |  | $                  | (654  | )                 |  | $    | 18    |      |  | $ | (1,274 | ) |  | $ | 115   |  
|Stock-based compensation using the
fair value method |  |                    | (63   | )                 |  |      | (63   | )    |  |   | (185   | ) |  |   | (186  | )
|                                                     |  |                    |       |                   |  |      |       |      |  |   |        |   |  |   |       |  
|Pro forma net income (loss)                          |  | $                  | (717  | )                 |  | $    | (45   | )    |  | $ | (1,459 | ) |  | $ | (71   | )
|Net income (loss) per share, as reported             |  | $                  | (0.10 | )                 |  | $    | 0.00  |      |  | $ | (0.20  | ) |  | $ | 0.02  |  
|Pro forma net income (loss) per share                |  | $                  | (0.11 | )                 |  | $    | (0.01 | )    |  | $ | (0.23  | ) |  | $ | (0.01 | )



|4. |  | PREFERRED STOCK
|-- |  | ---------------

At April 30, 2003, the Company has 20,350 shares of Series A Preferred Stock
outstanding. Each share is entitled to a cumulative annual dividend equal to
the product of $100 and prime plus 2%, with a minimum of 10% and a maximum of
14%, payable quarterly, as and when declared by the Board of Directors. The
Company may redeem outstanding shares at any time at the redemption price of
$100 per share plus accrued and unpaid dividends. In the event of liquidation
or dissolution of the Company, the holders of shares of Series A Preferred
Stock shall be entitled to receive $100 per share plus accrued and unpaid
dividends before any distribution is made to the holders of common stock.
Accumulated dividends in arrears were $1,412,000 at April 30, 2003 and
$1,441,000 at June 16, 2003.



|5. |  | NOTES PAYABLE
|-- |  | -------------

On April 27, 2000, the Company issued and sold to RGC International Investors,
LDC (RGC) (i) a convertible subordinated Debenture (the Debenture) in the
amount of $4,000,000 due on April 27, 2003, (ii) warrants to purchase 600,000
shares of Common Stock at a price of $6 per share (the Warrants) expiring
April 27, 2005, and (iii) an Investment Option to purchase 800,000 shares of
Common Stock at a price of $6 per share (the Investment Option) which expired
on October 27, 2001.

In September 2002, RGC transferred the Debenture and the Warrants to ARI
Network Services Partners (which is not in any way affiliated with the
Company), Dolphin Offshore Partners, LP and SDS Merchant Fund, LP. (the
Transferees). See Note 5 below and Item 1. Legal Proceedings.

On April 24, 2003, the Company restructured the foregoing instruments. In
exchange for the Debenture and the Warrants, the Company issued to a group of
investors affiliated with the Transferees (collectively, the New Holders), in
aggregate, $500,000 in cash, new unsecured notes in the amount of $3.9 million
(the New Notes) and new warrants for 250,000 common shares, exercisable at
$1.00 per share (the New Warrants). In addition, the Transferees assigned to
the Company all their rights and claims against RGC. The interest rate on the
New Notes is prime plus 2%. The New Notes are payable in $200,000 quarterly

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installments commencing March 31, 2004 through December 31, 2005 and $300,000
quarterly installments commencing March 31, 2006 until paid in full. The New
Notes do not contain any financial covenants, but the Company is restricted
from permitting certain liens on its assets. In addition, in the event of
payment default that is not cured within ninety (90) days, Taglich Brothers,
Inc., one of the New Holders, has the right to appoint one designee to the
Companys Board of Directors. The original Warrants and Investment Options
were estimated using a Black Scholes valuation model to have a value of
$2,354,000, and the New Warrants are estimated to have a value of $36,000, of
which the unamortized amount reduces the carrying amount of the debt.

In accordance with SFAS No. 15, Accounting by Debtors and Creditors for
Troubled Debt Restructurings, the exchange of the Debenture plus accrued
interest and the Warrants for $500,000 in cash, the New Notes and the New
Warrants was accounted for as a troubled debt restructuring and no gain was
recorded. Instead the liability in excess of the future cash flows to the New
Holders of approximately $322,000 remains on the balance sheet as a long term
debt and is being amortized as a reduction of interest expense over the life of
the New Notes.



|6. |  | LITIGATION
|-- |  | ----------

On August 28, 2002, RGC orally offered to enter into an eight month
stand-still agreement with the Company under which RGC would not exercise any
claimed acceleration rights under the Debenture in return for an immediate
payment of $500,000 by the Company and an option to buy back the Debenture and
all other securities sold to RGC for $1 million at any time during the
eight-month stand-still period. On September 13, 2002, the Company accepted
RGCs offer. RGC later changed its position and informed the Company that it
would not live up to the terms of the standstill and buy-back agreement.

On November 8, 2002, the Company filed a lawsuit in the Milwaukee County
Circuit Court, Milwaukee, Wisconsin (the Wisconsin Lawsuit), against RGC and
the Transferees to enforce the terms of the stand-still and buy-back agreement.
RGC denies that any such agreement exists, and the defendants each moved to
dismiss the Wisconsin Lawsuit on the grounds that a Wisconsin court does not
have personal jurisdiction over these parties and because they believe that the
claims set forth in the Wisconsin Lawsuit should be heard in Delaware pursuant
to a forum selection clause contained in the Securities Purchase Agreement
dated as of April 25, 2000.

On January 2, 2003, RGC commenced a lawsuit in the United States District Court
for the District of Delaware (the Delaware Lawsuit) against the Company
seeking a declaration of RGCs and the Companys rights under the Securities
Purchase Agreement dated as of April 25, 2000, between RGC and the Company,
pursuant to which the Debenture, Warrants and the Investment Option were
issued. RGC also seeks specific performance and injunctive relief enjoining
the Company from maintaining and prosecuting the Wisconsin Lawsuit. In
addition, RGC seeks damages in an unspecified amount for alleged breach of
contract and breach of the duty of good faith and fair dealing. The Company
vigorously denies these allegations and moved to dismiss the Delaware Lawsuit
on numerous grounds on February 11, 2003.

On June 9, 2003, the Company filed a cross-claim against RGC in the Wisconsin
Lawsuit asserting the claims assigned to the Company by the Transferees. The
cross-claim alleges, among other things, claims for breach of warranty, breach
of contract, indemnification, breach of the covenant of good faith and fair
dealing, strict responsibility misrepresentation, negligent misrepresentation,
intentional misrepresentation and securities fraud. RGC has not yet responded
to the cross-claim.

The Company intends to vigorously pursue the Wisconsin Lawsuit to compel RGC to
honor the terms of the stand-still and buy-back agreement the Company asserts
it reached with RGC in September 2002, as well as the claims assigned to the
Company by the Transferees. The outcomes of the Wisconsin Lawsuit and the
Delaware Lawsuit may have a significant impact on the Companys results of
operations in fiscal 2003.

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Total revenue for the quarter ended April 30, 2003 decreased $154,000 or 5%
compared to the same period last year, primarily due to the expected decline in
non-Equipment Industry revenue. Earnings decreased from net income of $18,000,
or $0.00 per share for the quarter ended April 30, 2002 to a net loss of
$654,000 or $0.10 per share for the quarter ended April 30, 2003. Management
believes that the Company will continue to generate enough cash from operations
to fund operations, investments and debt payments now that the Debenture has
been restructured. The Company expects earnings to be approximately at
breakeven for the fourth quarter of fiscal 2003 and to generate income in
fiscal 2004, although there can be no assurance that this will occur. See
Liquidity and Capital Resources and Forward Looking Statements.

Critical Accounting Policies and Estimates

General

The Companys discussion and analysis of its financial condition and results of
operations are based upon its financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to customer contracts, bad debts, capitalized software
product costs, financing instruments, revenue recognition and other accrued
expenses. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.

The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its financial
statements.

Revenue Recognition

Revenue for use of the network and for information services is recognized in
the period such services are utilized. Revenue from annual or periodic
maintenance fees, license and license renewal fees and catalog subscription
fees is recognized ratably over the period the service is provided.
Arrangements that include acceptance terms beyond the Companys standard terms
are not recognized until acceptance has occurred. If collectibility is not
considered probable, revenue is recognized when the fee is collected.
Arrangements that include professional services are evaluated to determine
whether those services are essential to the functionality of other elements of
the arrangement. When professional services are not considered essential, the
revenue allocable to the professional services is recognized as the services
are performed. When professional services are considered essential, revenue
under the arrangement is recognized pursuant to contract accounting using the
percentage-of-completion method with progress-to-completion measured based upon
labor hours incurred. When the current estimates of total contract revenue and
contract cost indicate a loss, a provision for the entire loss on the contract
is made. Revenue on arrangements with customers who are not the ultimate users
(resellers) is deferred if there is any contingency on the ability and intent
of the reseller to sell such software to a third party.

Bad Debts

The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company currently reserves for most amounts due over 90 days, unless there is
reasonable assurance of collectability. If the financial condition of the
Companys customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.

Use of Estimates

The preparation of the Companys financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions about accrued expenses that affect
the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.

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Debt Instruments

The Company valued debt discounts for Common Stock Warrants and Options granted
in consideration for the Debenture using the Black-Scholes valuation method.
Non-cash interest expense is recorded for the amortization of the debt discount
over the term of the debt.

Impairment of Long-Lived Assets

Equipment and leasehold improvements and capitalized software product costs are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between the fair value
and carrying value of the asset or group of assets.

Revenues

The Company is a leading provider of electronic catalog-enabled business
solutions for sales, service and life cycle product support in the manufactured
equipment market. The Company currently provides 81 catalogs of manufactured
equipment for 60 manufacturers to approximately 20,000 dealers in more than 100
countries in 12 segments of the worldwide manufactured equipment market
including outdoor power, recreation vehicles, auto and truck parts aftermarket,
marine, construction, power sports, floor maintenance and others.
Collectively, dealers and distributors have approximately 76,000 catalog
subscriptions. The Company supplies three types of software and services:
robust Web and CD-ROM interactive electronic parts catalogs, template-based
website services and communication or transaction services. The Companys
primary product line is electronic cataloging; the other products are
supplementary offerings that leverage its position in the catalog market.

The following table sets forth certain Catalog, Customer and Subscription
information by region derived from the Companys financial and customer
databases. The number of distinct distributors and dealers is estimated
because some subscriptions are distributed by third parties (including
manufacturers), which may or may not inform ARI of the distributors and/or
dealers to which the subscription is distributed. Because the estimating
methodology is still being refined, comparisons to prior quarters may or may
not be indicative of business trends.

Catalog, Customer and Subscription Information by Region
(As of April 30, 2003)

|                         |       |  |          |    |               |  |               |    |             |  |             |        |              |  |          |     |          |  |        |        | 
|------------------------ | ----- |  | -------- | -- | ------------- |  | ------------- | -- | ----------- |  | ----------- | ------ | ------------ |  | -------- | --- | -------- |  | ------ | ------ | 
|                         |       |  |          |    |               |  |               |    |             |  |             |        |              |  | Distinct |     | Distinct
|                         |       |  |          |    |               |  | Distinct      |    |             |  |             |        | Distributors |  | Dealers 
|                         |       |  | Catalogs |    | Manufacturers |  | Subscriptions |    | (Estimated) |  | (Estimated)
|                         |       |  |          |    |               |  |               |    |             |  |            
|North American           |       |  | 74       |    |               |  | 52            |    |             |  | 60,625      |        |              |  | 113      |     |          |  | 14,991 |       
|Non-North American       |       |  | 71       |    |               |  | 8             |    |             |  | 15,078      |        |              |  | 18       |     |          |  | 5,053  |       
|Included in both Regions |       |  | (64      | )  |               |  |              |    |             |  |            |        |              |  |         |     |          |  |       |       
|                         | Total |  |          | 81 |               |  |               | 60 |             |  |             | 75,703 |              |  |          | 131 |          |  |        | 20,044 | 

|                        |  |   |  |                                                                                                                                                                                                   
|----------------------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Catalog               |  | = |  | A separately sold and/or distributed parts catalog. A
manufacturer may have more
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 have more than one subscription.                                                   
|                        |  |   |  |                                                                                                                                                                                                   
|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.                                                                                                                

As part of its historical business practice, the Company continues to provide
electronic directory and transaction services to the U.S. and Canadian
agribusiness industry. As the Company focuses on its core businesses in the
Equipment industry, particularly on catalog and related products, revenues in
the non-equipment industry are expected to continue to decline during fiscal
2003.

Management reviews the Companys recurring vs. non-recurring revenue in the
aggregate and within the North American Equipment, non-North American Equipment
and non-Equipment industries and by product category within the Equipment
Industry.

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The following tables set forth, for the periods indicated, certain revenue
information derived from the Companys unaudited financial statements.

Revenue by Industry Sector
(In thousands)

|                       |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |     |     |    |   
|---------------------- | ------------------------ | ------------- | -------- | ----- | ------------------ | ------ | ------- | ----- | -------- | ----- | ----------------- | ------ | --- | -- | -- | ----- | ----- | ----- | - | ------ | ----- | ----- | --- | --- | --- | -- | --
|                       |                          |               |          |       | Three months ended |        |         |       |          |       | Nine months ended |        |     |    |   
|                       |                          |               |          |       | April 30           |        | Percent |       | April 30 |       | Percent          
|Industry Sector:       |                          | 2003          |          | 2002  |                    | Change |         | 2003  |          | 2002  |                   | Change
|                       |                          |               |          |       |                    |        |         |       |          |       |                   |       
|Equipment Industry     |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |    
|                       | North American           |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |     |    
|                       |                          | Recurring     |          | $     | 2,313              |        |         | $     | 1,994    |       |                   |        | 16  | %  |    | $     | 6,398 |       |   | $      | 5,877 |       |     |     | 9   | % 
|                       |                          | Non-recurring |          |       | 449                |        |         |       | 681      |       |                   |        | (34 | %) |    |       | 1,262 |       |   |        | 1,841 |       |     |     | (31 | %)
|                       |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |    
|                       |                          |               | Subtotal |       |                    | 2,762  |         |       |          | 2,675 |                   |        |     | 3  | %  |       |       | 7,660 |   |        |       | 7,718 |     |     |     | (1 | %)
|                       | Non-North American       |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |     |    
|                       |                          | Recurring     |          |       | 264                |        |         |       | 202      |       |                   |        | 30  | %  |    |       | 748   |       |   |        | 680   |       |     |     | 10  | % 
|                       |                          | Non-recurring |          |       | 42                 |        |         |       | 103      |       |                   |        | (59 | %) |    |       | 193   |       |   |        | 226   |       |     |     | (14 | %)
|                       |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |    
|                       |                          |               | Subtotal |       |                    | 306    |         |       |          | 305   |                   |        |     | 0  | %  |       |       | 941   |   |        |       | 906   |     |     |     | 4  | % 
|                       | Total Equipment Industry |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |     |    
|                       |                          | Recurring     |          |       | 2,577              |        |         |       | 2,196    |       |                   |        | 17  | %  |    |       | 7,146 |       |   |        | 6,557 |       |     |     | 9   | % 
|                       |                          | Non-recurring |          |       | 491                |        |         |       | 784      |       |                   |        | (37 | %) |    |       | 1,455 |       |   |        | 2,067 |       |     |     | (30 | %)
|                       |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |    
|                       |                          |               | Subtotal |       |                    | 3,068  |         |       |          | 2,980 |                   |        |     | 3  | %  |       |       | 8,601 |   |        |       | 8,624 |     |     |     | (0 | %)
|Non-equipment Industry |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |    
|                       | Recurring                |               |          | 176   |                    |        |         | 428   |          |       |                   | (59    | %)  |    |    | 755   |       |       |   | 1,922  |       |       |     | (61 | %) 
|                       | Non-recurring            |               |          | 10    |                    |        |         |      |          |       |                   | N/A    |     |    | 46 |       |       |       |  |        |       |       | N/A
|                       |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |    
|                       | Subtotal                 |               |          | 186   |                    |        |         | 428   |          |       |                   | (57    | %)  |    |    | 801   |       |       |   | 1,922  |       |       |     | (58 | %) 
|Total Revenue          |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |    
|                       | Recurring                |               |          | 2,753 |                    |        |         | 2,624 |          |       |                   | 5      | %   |    |    | 7,901 |       |       |   | 8,479  |       |       |     | (7  | %) 
|                       | Non-recurring            |               |          | 501   |                    |        |         | 784   |          |       |                   | (36    | %)  |    |    | 1,501 |       |       |   | 2,067  |       |       |     | (27 | %) 
|                       |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |    
|                       | Grand Total              |               | $        | 3,254 |                    |        | $       | 3,408 |          |       |                   | (5     | %)  |    | $  | 9,402 |       |       | $ | 10,546 |       |       |     | (11 | %) 
|                       |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |    |    |       |       |       |   |        |       |       |     |    

Revenue by Product in the Equipment Industry
(In thousands)

|                   |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |     |    |       |       |       |   |       |       |       |  |    |     |     |   
|------------------ | ------------------------ | ------------- | -------- | ----- | ------------------ | ------ | ------- | ----- | -------- | ----- | ----------------- | ------ | --- | --- | -- | ----- | ----- | ----- | - | ----- | ----- | ----- |  | -- | --- | --- | --
|                   |                          |               |          |       | Three months ended |        |         |       |          |       | Nine months ended |        |     |     |   
|                   |                          |               |          |       | April 30           |        | Percent |       | April 30 |       | Percent          
|Product:           |                          | 2003          |          | 2002  |                    | Change |         | 2003  |          | 2002  |                   | Change
|                   |                          |               |          |       |                    |        |         |       |          |       |                   |       
|Equipment Industry |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |     |    |       |       |       |   |       |       |       |  |   
|                   | Catalog and related      |               |          |       |                    |        |         |       |          |       |                   |        |     |     |    |       |       |       |   |       |       |       |  |    |    
|                   |                          | Recurring     |          | $     | 2,475              |        |         | $     | 2,030    |       |                   |        | 22  | %   |    | $     | 6,819 |       |   | $     | 6,015 |       |  |    | 13  | %  
|                   |                          | Non-recurring |          |       | 480                |        |         |       | 770      |       |                   |        | (38 | %)  |    |       | 1,432 |       |   |       | 1,969 |       |  |    | (27 | %) 
|                   |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |     |    |       |       |       |   |       |       |       |  |   
|                   |                          |               | Subtotal |       |                    | 2,955  |         |       |          | 2,800 |                   |        |     | 6   | %  |       |       | 8,251 |   |       |       | 7,984 |  |    |     | 3   | % 
|                   | Communications           |               |          |       |                    |        |         |       |          |       |                   |        |     |     |    |       |       |       |   |       |       |       |  |    |    
|                   |                          | Recurring     |          |       | 102                |        |         |       | 166      |       |                   |        | (39 | %)  |    |       | 327   |       |   |       | 542   |       |  |    | (40 | %) 
|                   |                          | Non-recurring |          |       | 11                 |        |         |       | 14       |       |                   |        | (21 | %)  |    |       | 23    |       |   |       | 98    |       |  |    | (77 | %) 
|                   |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |     |    |       |       |       |   |       |       |       |  |   
|                   |                          |               | Subtotal |       |                    | 113    |         |       |          | 180   |                   |        |     | (37 | %) |       |       | 350   |   |       |       | 640   |  |    |     | (45 | %)
|                   |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |     |    |       |       |       |   |       |       |       |  |   
|                   | Total Equipment Industry |               | $        | 3,068 |                    |        | $       | 2,980 |          |       |                   | 3      | %   |     | $  | 8,601 |       |       | $ | 8,624 |       |       |  | (0 | %) 
|                   |                          |               |          |       |                    |        |         |       |          |       |                   |        |     |     |    |       |       |       |   |       |       |       |  |   

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Recurring revenues are derived from catalog subscription fees, catalog data
update fees, software maintenance and support fees, software license renewals,
network traffic and support fees and other miscellaneous subscription fees.
Non-recurring revenues are derived from initial software licenses and
professional services fees. Recurring revenue, as a percentage of total
revenue, was 84% for the nine months ended April 30, 2003 compared to 80% for
the same period last year. Management believes that the relationship of
approximately three quarters recurring revenue to one quarter non-recurring
revenue establishes an appropriate level of base revenue while the Company
continues to add new sales to drive future increases in recurring revenue. If
the manufacturing sector of the economy improves in the future, the percentage
of non-recurring revenue may grow, indicating a higher amount of new business.
This ratio is expected to fluctuate from quarter to quarter and year to year,
depending on the size and timing of new business.

Equipment Industry

The Equipment Industry has been a growing percentage of the Companys revenue
over the past five years and is composed of several vertical markets including
outdoor power, recreation vehicles, motorcycles, auto and truck parts
after-market, farm equipment, marine, construction, power sports, floor
maintenance and others primarily in the U.S., Canada, Europe and Australia.
Managements strategy is to expand the Companys electronic parts catalog
software and services business with manufacturers and distributors and their
dealers in the existing vertical markets, add supplemental products for
existing customers, and then expand to other similar markets in the future.
Revenues in the Equipment Industry increased, as a percentage of total
revenues, from 82% for the nine months ended April 30, 2002 to 91% for the nine
months ended April 30, 2003.



| |  | North American                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Recurring revenues in the North American Equipment Industry increased for the
three and nine month periods ended April 30, 2003, compared to the same
periods last year, primarily due to an increase in the base revenue of
subscription renewals from the Companys catalog products. Non-recurring
revenues in the North American Equipment Industry decreased for the three and
nine month periods ended April 30, 2003, compared to the same periods last
year, primarily due to fewer new customer contracts and customization
projects because of the continued decline in the manufacturing sector of the
economy.                                                                                                                                
|
| |  | Non-North American                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Recurring revenues in the non-North American Equipment Industry increased for
the three and nine month periods ended April 30, 2003, compared to the same
periods last year, primarily due to an increase in the base revenue from the
Companys foreign catalog related products. Non-recurring revenues in the
non-North American Equipment Industry decreased for the three and nine month
periods ended April 30, 2003, compared to the same periods last year,
primarily due to fewer new customer contracts and customization projects.                                                                                                                                                                                                             
|
| |  | Catalog and Related Products                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Recurring revenues from the Companys catalog and related products in the
Equipment Industry increased for the three and nine month periods ended April
30, 2003, compared to the same periods last year, primarily due to an
increase in the Companys base revenue of catalog customers and an increase
in the volume of catalogs purchased by dealers. Management expects recurring
catalog and related revenues to continue at the same level or higher in both
the North American and non-North American Equipment Industry for the
remainder of fiscal 2003, as the Company continues to focus attention and
resources on its catalog products, but that non-recurring catalog and related
revenue growth may be delayed until the economy improves.
|
| |  | Communications Products                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Revenues from the Companys communications products decreased for the three
and nine month periods ended April 30, 2003, compared to the same periods
last year as the Company focused the business primarily on its catalog
products. Management expects revenues from communications products will be a
declining percentage of total revenue for the remainder of fiscal 2003.                                                                                                                                                                                                                                                                                                                                                                         

Non-Equipment Industry Business

The Companys business outside of the Equipment Industry includes sales of
database management and electronic communication services to the agricultural
inputs industry and, for part of fiscal 2002, the on-line provision of
information for republication to the non-daily newspaper publishing industry.
Revenues in this business have decreased for the three and nine month periods
ended April 30, 2003, compared to the same periods last year. The Companys
five-year contract with the Associated Press expired in February 2002. Revenue
from this contract was approximately $865,000 for the nine months ended April
30, 2002. Management cautions that revenue from its database management
services to the agricultural inputs industry, which was approximately $500,000
last year, has declined significantly in the second half of fiscal 2003 due to
competitive pressure from a new offering planned by the industry association.

12



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##### Table of Contents



Cost of Products and Services Sold

The following table sets forth, for the periods indicated, certain revenue and
cost of products and services sold information derived from the Companys
unaudited financial statements.

Cost of Products and Services Sold as a Percent of Revenue by Revenue Type(In thousands)

|                                               |                                         |  |                    |       |         |  |          |       |                   |  |      |     |        |  |   |       |   |  |   |        |   |  |  |     |   
|---------------------------------------------- | --------------------------------------- |  | ------------------ | ----- | ------- |  | -------- | ----- | ----------------- |  | ---- | --- | ------ |  | - | ----- | - |  | - | ------ | - |  |  | --- | --
|                                               |                                         |  | Three months ended |       |         |  |          |       | Nine months ended |  |      |     |       
|                                               |                                         |  | April 30           |       | Percent |  | April 30 |       | Percent          
|                                               |                                         |  | 2003               |       | 2002    |  | Change   |       | 2003              |  | 2002 |     | Change
|                                               |                                         |  |                    |       |         |  |          |       |                   |  |      |     |       
|Subscriptions, support and other
services fees |                                         |  |                    |       |         |  |          |       |                   |  |      |     |        |  |   |       |   |  |   |        |   |  |  |    
|                                               | Revenue                                 |  | $                  | 2,137 |         |  | $        | 2,106 |                   |  |      | 1   | %      |  | $ | 6,168 |   |  | $ | 6,789  |   |  |  | (9  | %)
|                                               | Cost of revenue                         |  |                    | 152   |         |  |          | 30    |                   |  |      | 407 | %      |  |   | 453   |   |  |   | 181    |   |  |  | 150 | % 
|                                               | Cost of revenue as a percent of revenue |  |                    | 7     | %       |  |          | 1     | %                 |  |      |     |        |  |   | 7     | % |  |   | 3      | % |  |  |     |   
|Software licenses and renewals                 |                                         |  |                    |       |         |  |          |       |                   |  |      |     |        |  |   |       |   |  |   |        |   |  |  |    
|                                               | Revenue                                 |  |                    | 608   |         |  |          | 637   |                   |  |      | (5  | %)     |  |   | 1,713 |   |  |   | 2,128  |   |  |  | (20 | %)
|                                               | Cost of revenue                         |  |                    | 455   |         |  |          | 435   |                   |  |      | 5   | %      |  |   | 1,328 |   |  |   | 1,254  |   |  |  | 6   | % 
|                                               | Cost of revenue as a percent of revenue |  |                    | 75    | %       |  |          | 68    | %                 |  |      |     |        |  |   | 78    | % |  |   | 59     | % |  |  |     |   
|Professional services                          |                                         |  |                    |       |         |  |          |       |                   |  |      |     |        |  |   |       |   |  |   |        |   |  |  |    
|                                               | Revenue                                 |  |                    | 509   |         |  |          | 665   |                   |  |      | (23 | %)     |  |   | 1,521 |   |  |   | 1,629  |   |  |  | (7  | %)
|                                               | Cost of revenue                         |  |                    | 242   |         |  |          | 266   |                   |  |      | (9  | %)     |  |   | 586   |   |  |   | 626    |   |  |  | (6  | %)
|                                               | Cost of revenue as a percent of revenue |  |                    | 48    | %       |  |          | 40    | %                 |  |      |     |        |  |   | 39    | % |  |   | 38     | % |  |  |     |   
|Total                                          |                                         |  |                    |       |         |  |          |       |                   |  |      |     |        |  |   |       |   |  |   |        |   |  |  |    
|                                               | Revenue                                 |  | $                  | 3,254 |         |  | $        | 3,408 |                   |  |      | (5  | %)     |  | $ | 9,402 |   |  | $ | 10,546 |   |  |  | (11 | %)
|                                               | Cost of revenue                         |  |                    | 849   |         |  |          | 731   |                   |  |      | 16  | %      |  |   | 2,367 |   |  |   | 2,061  |   |  |  | 15  | % 
|                                               | Cost of revenue as a percent of revenue |  |                    | 26    | %       |  |          | 21    | %                 |  |      |     |        |  |   | 25    | % |  |   | 20     | % |  |  |     |   

Cost of subscriptions, support and other services fees consists primarily of
telecommunications and catalog replication and distribution costs and, during
fiscal 2002, royalties on revenues in the publishing industry. Cost of
subscriptions, support and other services fees as a percentage of revenue
increased significantly for the three and nine month periods ended April 30,
2003, compared to the same periods last year, primarily due to the reduction of
an accrual for royalties related to the settlement of a contract in the
publishing industry during fiscal 2002. Management expects gross margins, as a
percent of revenue from subscriptions, support and other services fees, to be
relatively consistent from quarter to quarter.

Cost of software licenses and renewals consists primarily of amortization of
software products, royalties and software distribution costs. Cost of software
license and renewals as a percentage of revenue increased for the three and
nine month periods ended April 30, 2003, compared to the same periods last
year, primarily due to lower software license revenues. Gross margins from
software licenses and renewals will fluctuate from quarter to quarter based on
the level of revenue, while costs remain relatively the same as amortization of
software is not related to the level of revenue generated from software license
and renewals.

Cost of professional services consists of software customization and catalog
production labor, which has a higher margin. Cost of professional services as
a percentage of revenue increased for the three and nine month periods ended
April 30, 2003, compared to the same periods last year, as the Company provided
catalog production labor at no charge to the manufacturer for catalogs
requested by the dealers in exchange for subscription fees from the dealers.
Management expects cost of professional services to fluctuate from quarter to
quarter depending on the mix of services sold and on the Companys performance
towards the contracted amount for customization projects.

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##### Table of Contents



Operating Expenses

The following table sets forth, for the periods indicated, certain operating
expense information derived from the Companys unaudited financial statements.

Operating Expenses(In thousands)

|                                           |                        |   |                    |       |         |   |          |       |                   |  |      |    |        |   |       |       |  |   |       |       |  |  |     |    |  
|------------------------------------------ | ---------------------- | - | ------------------ | ----- | ------- | - | -------- | ----- | ----------------- |  | ---- | -- | ------ | - | ----- | ----- |  | - | ----- | ----- |  |  | --- | -- | -
|                                           |                        |   | Three months ended |       |         |   |          |       | Nine months ended |  |      |    |       
|                                           |                        |   | April 30           |       | Percent |   | April 30 |       | Percent          
|                                           |                        |   | 2003               |       | 2002    |   | Change   |       | 2003              |  | 2002 |    | Change
|                                           |                        |   |                    |       |         |   |          |       |                   |  |      |    |       
|Cost of products and services sold         |                        | $ | 849                |       |         | $ | 731      |       |                   |  | 16   | %  |        | $ | 2,367 |       |  | $ | 2,061 |       |  |  | 15  | % 
|Customer operations and support            |                        |   | 290                |       |         |   | 308      |       |                   |  | (6   | %) |        |   | 912   |       |  |   | 902   |       |  |  | 1   | % 
|Selling, general and administrative        |                        |   | 2,157              |       |         |   | 1,657    |       |                   |  | 30   | %  |        |   | 5,359 |       |  |   | 5,174 |       |  |  | 4   | % 
|Software development and technical support |                        |   | 363                |       |         |   | 457      |       |                   |  | (21  | %) |        |   | 1,239 |       |  |   | 1,644 |       |  |  | (25 | %)
|Less capitalized portion                   |                        |   | (86                | )     |         |   | (153     | )     |                   |  | (44  | %) |        |   | (369  | )     |  |   | (583  | )     |  |  | (37 | %)
|Depreciation and amortization              |                        |   | 52                 |       |         |   | 55       |       |                   |  | (5   | %) |        |   | 164   |       |  |   | 162   |       |  |  | 1   | % 
|                                           |                        |   |                    |       |         |   |          |       |                   |  |      |    |        |   |       |       |  |   |       |       |  |  |     |   
|                                           | Net operating expenses |   | $                  | 3,625 |         |   | $        | 3,055 |                   |  |      | 19 | %      |   | $     | 9,672 |  |   | $     | 9,360 |  |  |     | 3  | %
|                                           |                        |   |                    |       |         |   |          |       |                   |  |      |    |        |   |       |       |  |   |       |       |  |  |     |   

Customer operations and support consists primarily of server room operations,
software maintenance agreements for the Companys core network and customer
support costs. Customer operations and support costs decreased slightly for
the three month period ended April 30, 2003, compared to the same period last
year, and increased slightly for the nine month period ended April 30, 2003,
compared to the same period last year, primarily due to the reallocation of
personnel from the technical support group to the customer support group.
Management expects customer operations and support costs to continue at
relatively the same level for the remainder of fiscal 2003.

Selling, general and administrative expenses (SG&A) increased for the three
and nine month periods ended April 30, 2003, compared to the same periods last
year, primarily due to increased professional service fees related to the
Companys lawsuit to enforce the agreement regarding the Debenture and to
restructure the Debenture. SG&A, as a percentage of revenue, increased from
49% for the nine month period ended April 30, 2002 to 57% for the nine month
period ended April 30, 2003. Management expects SG&A costs to decline now
that the Debenture has been restructured, but remain higher than the previous
year until the lawsuit is resolved.

The Companys technical staff (in-house and contracted) performs both software
development and technical support and software customization and data
conversion services for customer applications. Therefore, management expects
fluctuations between software customization and data conversion services and
development and technical support expenses quarter to quarter, as the mix of
development and customization activities will change based on customer
requirements. Software development and technical support costs decreased for
the three and nine month periods ended April 30, 2003, compared to the same
periods last year, primarily due to the reduction of resources in that area.
Management expects software development and technical support costs to continue
to remain relatively the same for the remainder of fiscal 2003.

Capitalized software product costs represented 30% of software development and
technical support for the nine month period ended April 30, 2003, compared to
35% for the same period last year. Management expects capitalized software
product costs to fluctuate from quarter to quarter depending on the deployment
of the Companys resources between early stage research, software development
available for capitalization, data conversion, customer customizations and
maintenance and technical support.

Depreciation and amortization expense remained relatively the same for the nine
month period ended April 30, 2003, compared to the same period last year.
Management expects depreciation and amortization to continue at relatively the
same level for the remainder of fiscal 2003.

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##### Table of Contents



Other Items

Earnings decreased from net income of $115,000 for the nine month period ended
April 30, 2002, to a net loss of $1,274,000 for the nine month period ended
April 30, 2003. The decrease in earnings is primarily due to the reduction in
revenue, which was only partially offset by other cost reductions, and costs
incurred to restructure the Debenture and the lawsuit to enforce the agreement
regarding the Debenture. Management expects earnings to be approximately at
breakeven for the fourth quarter of fiscal 2003 and positive for fiscal 2004,
although results may fluctuate quarter to quarter.

Interest expense includes both cash and non-cash interest. Interest paid or
accrued for payment decreased from $467,000 for the nine month period ended
April 30, 2002, to $374,000 for the nine month period ended April 30, 2003
primarily due to lower principal balances of debt and the RFC facility. In
addition, non-cash interest expense of approximately $596,000 and $615,000 was
incurred for each of the nine month periods ended April 30, 2003 and 2002,
respectively, due to amortization of debt discount related to the Debenture and
shareholder note.

Since December 1995, the Company has had a formal business development program
aimed at identifying, evaluating and closing acquisitions that augment and
strengthen the Companys market position, product offerings, and personnel
resources. Since the programs inception, four acquisitions have been
completed, all of which were fully integrated into the Companys operations
prior to fiscal year 2000. The business development program is still an
important component of the Companys long-term growth strategy and the Company
expects to pursue it more aggressively now that the Debenture has been
restructured.

Liquidity and Capital Resources

The following table sets forth, for the periods indicated, certain cash flow
information derived from the Companys unaudited financial statements.

Cash Flow Information(In thousands)

|                                                                            |                                                          |   |                    |       |         |   |          |       |                   |  |      |    |        |   |        |       |  |   |       |       |  |  |     |     |   
|--------------------------------------------------------------------------- | -------------------------------------------------------- | - | ------------------ | ----- | ------- | - | -------- | ----- | ----------------- |  | ---- | -- | ------ | - | ------ | ----- |  | - | ----- | ----- |  |  | --- | --- | --
|                                                                            |                                                          |   | Three months ended |       |         |   |          |       | Nine months ended |  |      |    |       
|                                                                            |                                                          |   | April 30           |       | Percent |   | April 30 |       | Percent          
|                                                                            |                                                          |   | 2003               |       | 2002    |   | Change   |       | 2003              |  | 2002 |    | Change
|                                                                            |                                                          |   |                    |       |         |   |          |       |                   |  |      |    |       
|Net income (loss)                                                           |                                                          | $ | (654               | )     |         | $ | 18       |       |                   |  |      |    |        | $ | (1,274 | )     |  | $ | 115   |       |  |  |     |    
|                                                                            | Amortization of software products                        |   |                    | 440   |         |   |          | 410   |                   |  |      |    |        |   |        | 1,304 |  |   |       | 1,205 |  |  |     |     |   
|                                                                            | Amortization of goodwill                                 |   |                    |      |         |   |          | 4     |                   |  |      |    |        |   |        |      |  |   |       | 10    |  |  |     |     |   
|                                                                            | Amortization of deferred finance costs
and
debt discount |   |                    | 191   |         |   |          | 237   |                   |  |      |    |        |   |        | 701   |  |   |       | 710   |  |  |     |     |   
|                                                                            | Depreciation and other amortization                      |   |                    | 52    |         |   |          | 51    |                   |  |      |    |        |   |        | 164   |  |   |       | 152   |  |  |     |     |   
|                                                                            | Interest expense converted to
subordinated debt          |   |                    | 229   |         |   |          |      |                   |  |      |    |        |   |        | 229   |  |   |       |      |  |  |     |     |   
|                                                                            | Stock issued as consideration to vendor                  |   |                    | 44    |         |   |          |      |                   |  |      |    |        |   |        | 44    |  |   |       |      |  |  |     |     |   
|                                                                            |                                                          |   |                    |       |         |   |          |       |                   |  |      |    |        |   |        |       |  |   |       |       |  |  |     |    
|Net cash provided by operating activities
before changes in working capital |                                                          | $ | 302                |       |         | $ | 720      |       |                   |  | (57  | %) |        | $ | 1,168  |       |  | $ | 2,192 |       |  |  | (47 | %) 
|Effect of net changes in working capital                                    |                                                          |   | 735                |       |         |   | 413      |       |                   |  | 178  | %  |        |   | 597    |       |  |   | 211   |       |  |  | 283 | %  
|                                                                            |                                                          |   |                    |       |         |   |          |       |                   |  |      |    |        |   |        |       |  |   |       |       |  |  |     |    
|                                                                            | Net cash provided by operating activities                |   |                    | 1,037 |         |   |          | 1,133 |                   |  |      | (8 | %)     |   |        | 1,765 |  |   |       | 2,403 |  |  |     | (27 | %)
|Net cash used in investing activities                                       |                                                          |   | (125               | )     |         |   | (153     | )     |                   |  | (18  | %) |        |   | (411   | )     |  |   | (583  | )     |  |  | (30 | %) 
|                                                                            |                                                          |   |                    |       |         |   |          |       |                   |  |      |    |        |   |        |       |  |   |       |       |  |  |     |    
|                                                                            | Net cash provided by operating and
investing activities  |   | $                  | 912   |         |   | $        | 980   |                   |  |      | (7 | %)     |   | $      | 1,354 |  |   | $     | 1,820 |  |  |     | (26 | %)
|                                                                            |                                                          |   |                    |       |         |   |          |       |                   |  |      |    |        |   |        |       |  |   |       |       |  |  |     |    

Net cash provided by operating activities decreased for the three and nine
month periods ended April 30, 2003, compared to the same periods last year,
primarily due to the reduction in revenue and to costs associated with
restructuring the Debenture. Net cash used in investing activities decreased
for the three and nine month periods ended April 30, 2003, compared to the same
periods last year, due to decreased capitalized software product costs. The
effect of net changes in working capital is dependent on the timing of payroll
and other cash disbursements, accruals and the timing of invoices and may vary
significantly from quarter to quarter. Management expects the total of cash
provided by operating activities and used in investing activities to continue
to be positive for the remainder of the fiscal year ended July 31, 2003,
although there can be no assurance that this result will be ultimately
achieved.

At April 30, 2003, the Company had cash of approximately $1,576,000 compared to
approximately $879,000 at July 31, 2002.

15



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##### Table of Contents



The following table sets forth, for the periods indicated, certain information
related to the Companys debt derived from the Companys unaudited financial
statements.

Debt Schedule(In thousands)

|                        |                                                                  |                              |       |          |       |         |       |        |       |   |     |      |     |  
|----------------------- | ---------------------------------------------------------------- | ---------------------------- | ----- | -------- | ----- | ------- | ----- | ------ | ----- | - | --- | ---- | --- | -
|                        |                                                                  |                              |       | April 30 |       | July 31 |       | Net   
|                        |                                                                  |                              |       | 2003     |       | 2002    |       | Change
|                        |                                                                  |                              |       |          |       |         |       |       
|Debt to Shareholder:    |                                                                  |                              |       |          |       |         |       |        |       |   |     |     
|                        | Current portion of notes payable                                 |                              |       |         |       |         |       | 56     |       |   |     | (56  | )  
|                        | Debt discount (common stock warrants)                            |                              |       |         |       |         |       | (6     | )     |   |     | 6    |    
|                        |                                                                  |                              |       |          |       |         |       |        |       |   |     |     
|                        |                                                                  | Total Debt to Shareholder    |       |          |      |         |       |        | 50    |   |     |      | (50 | )
|Subordinated Debenture: |                                                                  |                              |       |          |       |         |       |        |       |   |     |     
|                        | Current portion of notes payable                                 |                              |       | 200      |       |         |       |       |       |   |     | 200  |    
|                        | Notes payable                                                    |                              |       | 3,700    |       |         |       | 4,000  |       |   |     | (300 | )  
|                        | Carrying value in excess of the face amount of the notes
payable |                              |       | 322      |       |         |       |       |       |   |     | 322  |    
|                        | Debt discount (common stock warrants and options)                |                              |       | (34      | )     |         |       | (588   | )     |   |     | 554  |    
|                        |                                                                  |                              |       |          |       |         |       |        |       |   |     |     
|                        |                                                                  | Total Subordinated Debenture |       |          | 4,188 |         |       |        | 3,412 |   |     |      | 776 |  
|Other Debt:             |                                                                  |                              |       |          |       |         |       |        |       |   |     |     
|                        | Current portion of notes payable other                           |                              |       | 58       |       |         |       | 78     |       |   |     | (20  | )  
|                        |                                                                  |                              |       |          |       |         |       |        |       |   |     |     
|                        |                                                                  | Total Other Debt             |       |          | 58    |         |       |        | 78    |   |     |      | (20 | )
|                        |                                                                  |                              |       |          |       |         |       |        |       |   |     |     
|Total Debt              |                                                                  | $                            | 4,246 |          |       | $       | 3,540 |        |       | $ | 706 |     
|                        |                                                                  |                              |       |          |       |         |       |        |       |   |     |     

On April 27, 2000, the Company issued and sold to RGC International Investors,
LDC (RGC) (i) a convertible subordinated Debenture (the Debenture) in the
amount of $4,000,000 due on April 27, 2003, (ii) warrants to purchase 600,000
shares of Common Stock at a price of $6 per share (the Warrants) expiring
April 27, 2005, and (iii) an Investment Option to purchase 800,000 shares of
Common Stock at a price of $6 per share (the Investment Option) which expired
on October 27, 2001.

In September 2002, RGC transferred the Debenture and the Warrants to the
Transferees.

On April 24, 2003, the Company restructured the foregoing instruments. In
exchange for the Debenture accrued interest and the Warrants, the Company issued to a group of
investors affiliated with the Transferees (collectively, the New Holders), in
aggregate, $500,000 in cash, new unsecured notes in the amount of $3.9 million
(the New Notes) and new warrants for 250,000 common shares, exercisable at
$1.00 per share (the New Warrants). In addition, the Transferees assigned to
the Company all their rights and claims against RGC. The interest rate on the
New Notes is prime plus 2%. The New Notes are payable in $200,000 quarterly
installments commencing March 31, 2004 through December 31, 2005 and $300,000
quarterly installments commencing March 31, 2006 until paid in full. The New
Notes do not contain any financial covenants, but the Company is restricted
from permitting certain liens on its assets. In addition, in the event of
payment default that is not cured within ninety (90) days, Taglich Brothers,
Inc., one of the New Holders, has the right to appoint one designee to the
Companys Board of Directors. The original Warrants and Investment Options
were estimated to have a value of $2,354,000, and the New Warrants are
estimated to have a value of $36,000, of which the unamortized amount reduces
the carrying amount of the debt.

As set forth in Part II, Item 1  Legal Proceedings, the Company filed a
lawsuit in Milwaukee County Circuit Court against the original holder of the
Debenture and the Transferees to enforce the terms of a stand-still and
buy-back agreement between the Company and RGC.

During fiscal 2002, the Company had a term loan and a revolving line of credit
with WITECH Corporation. The term loan was initially for $1.0 million, payable
in equal monthly installments over three years, and the revolving line of
credit was for a maximum of $1.0 million. The interest rate on the term loan
was at prime plus 4.0% and the interest rate on the revolving line of credit
was prime plus 3.25%. The revolving line of credit terminated on December 31,
2001 and the term loan was repaid in full on October 1, 2002.

On September 28, 1999, ARI and RFC Capital Corporation (RFC) executed a
Receivables Sales Agreement (the Sale Agreement) establishing a $3.0 million
working capital facility, pursuant to which RFC purchases 90% of eligible
receivables. In connection with the Sale Agreement, ARI has paid commitment
and accommodation fees. In addition, ARI is obligated to pay a monthly program
fee equal to the greater of (a) $3,000 or (b) the amount of the purchased but
uncollected receivables times the prime rate plus 2%. The Sale Agreement has
been extended through July 24, 2003. If the Sale Agreement is not renewed
beyond the current expiration date, ARIs primary source of additional
liquidity will no longer be available to it. As of June 10, 2003, the balance
of the RFC Facility was $568,000.

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##### Table of Contents



Management believes that funds generated from operations and the Sale Agreement
will be adequate to fund the Companys operations, investments and debt
payments through fiscal 2003 and beyond.

Earnings before interest, taxes, depreciation and amortization (EBITDA)
decreased $696,000 or 84% for the three month period ended April 30, 2003 and
$1,400,000 or 55% for the nine month period ended April 30, 2003, compared to
the same periods last year, primarily due to the decrease in revenue and to
costs associated with restructuring the Debenture. Management believes that
EBITDA will continue to be positive in fiscal 2003 and beyond, although there
can be no assurance that this will occur.

The following table sets forth, for the periods indicated, certain
information reconciling earnings before interest, taxes, depreciation and
amortization to the Companys unaudited financial statements.

Earnings before Interest, Taxes, Depreciation and Amortization

|                                                               |                |                                     |      |                    |     |      |         |     |          |                   |         |    |      |   |        |     |       |   |       |       |       |  |     |    |  | 
|-------------------------------------------------------------- | -------------- | ----------------------------------- | ---- | ------------------ | --- | ---- | ------- | --- | -------- | ----------------- | ------- | -- | ---- | - | ------ | --- | ----- | - | ----- | ----- | ----- |  | --- | -- |  | 
|                                                               |                |                                     |      | Three months ended |     |      |         |     |          | Nine months ended |         |    |     
|                                                               |                |                                     |      | April 30           |     |      | Percent |     | April 30 |                   | Percent
|                                                               |                |                                     |      | 2003               |     | 2002 |         |     | Change   |                   | 2003    |    | 2002 |   | Change
|                                                               |                |                                     |      |                    |     |      |         |     |          |                   |         |    |      |   |       
|Net income (loss)                                              |                | $                                   | (654 | )                  |     | $    | 18      |     |          |                   |         |    |      | $ | (1,274 | )   |       | $ | 115   |       |       |  |     |   
|                                                               | Plus: Interest |                                     |      | 291                |     |      |         | 342 |          |                   |         |    |      |   |        | 970 |       |   |       | 1,082 |       |  |     |    | 
|                                                               |                | Amortization of software products   |      |                    | 440 |      |         |     | 410      |                   |         |    |      |   |        |     | 1,304 |   |       |       | 1,205 |  |     |    |  | 
|                                                               |                | Other depreciation and amortization |      |                    | 52  |      |         |     | 55       |                   |         |    |      |   |        |     | 164   |   |       |       | 162   |  |     |    |  | 
|                                                               |                |                                     |      |                    |     |      |         |     |          |                   |         |    |      |   |        |     |       |   |       |       |       |  |     |   
|Earnings before interest, taxes, depreciation and
amortization |                | $                                   | 129  |                    |     | $    | 825     |     |          |                   | (84     | %) |      | $ | 1,164  |     |       | $ | 2,564 |       |       |  | (55 | %)
|                                                               |                |                                     |      |                    |     |      |         |     |          |                   |         |    |      |   |        |     |       |   |       |       |       |  |     |   

This Managements Discussion and Analysis of Financial Condition and Results of
Operations discloses EBITDA (earnings before interest and other taxes,
depreciation and amortization) and cash from operations and investment before
changes in working capital (earn/burn rate), each of which may be considered
a non-GAAP financial measure. Generally, a non-GAAP financial measure is a
numerical measure of a companys performance, financial position or cash flows
that either excludes or includes amounts that are not normally excluded or
included in the most directly comparable measure calculated and presented in
accordance with generally accepted accounting principles. In order to fully
assess the Companys financial results, management believes that EBITDA and
earn/burn rate are appropriate measures of evaluating operating performance and
liquidity. EBITDA is a commonly used measurement of financial performance. In
addition, management believes EBITDA is helpful in understanding
period-over-period operating results separate and apart from items that may, or
could, have a disproportionate impact on the Companys results of operations in
any particular period. The Company believes that cash from operations and
investment before changes in working capital items (earn/burn rate) is helpful
in determining and measuring the amount of cash generated from the Companys
business, separate and apart from changes caused by changes in working capital
items, which, over several periods, tend to offset each other. However, these
measures should be considered in addition to, and not as a substitute to
operating income, cash flows or other measures of financial performance
prepared in accordance with generally accepted accounting principles and may
not necessarily be comparable to similarly titled measures of other companies.

Forward Looking Statements

Certain statements contained in this Form 10-Q are forward looking statements
including projected revenue growth, future cash flows and cash generation and
sources of liquidity. Expressions such as believes, anticipates,
expects, and similar expressions are intended to identify such forward
looking statements. Several important factors can cause actual results to
materially differ from those stated or implied in the forward looking
statements. Such factors include, but are not limited to the factors listed on
exhibit 99.1 of the Companys annual report on Form 10-K for the year ended
July 31, 2002, which is incorporated herein by reference. The forward-looking
statements are made only as of the date hereof, and the Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ARI is subject to market risks pertaining to interest rate movements and
collectibility of accounts receivable. ARIs only expenses subject to interest
rate risk are monthly program fees owed with respect to the Sale Agreement and
interest fees with respect to the New Notes. See Liquidity and Capital
Resources. The monthly program fees under the Sale Agreement are also tied to
prevailing market interest rates. An increase or decrease of one percent in
the prime interest rate would affect ARIs net income (loss) by approximately
plus or minus $46,000, annualized, based on the outstanding balances under the
Sale agreement and New Notes at June 10, 2003. As a result, ARI believes that
the market risk relating to interest rate movements is minimal.

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ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of the
Companys disclosure controls and procedures within 90 days before the filing
date of this quarterly report. Based on that evaluation, management, including
the CEO and CFO, concluded that the disclosure controls and procedures of the
Company are adequate and effective. There have been no significant changes in
the Companys internal controls or in other factors that could significantly
affect these controls subsequent to the evaluation, including any corrective
actions with regard to significant deficiencies or material weaknesses.




PART II - OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

On November 8, 2002, the Company filed a lawsuit in the Milwaukee County
Circuit Court, Milwaukee, WI (the Wisconsin Lawsuit), against RGC
International Investors, LDC (RGC), ARI Network Services Partners (which is
not in any way affiliated with the Company), Dolphin Offshore Partners, LP and
SDS Merchant Fund, LP. RGC is the original purchaser of the Companys
outstanding convertible subordinated Debenture due 2003 (the Debenture) and
the other defendants are the transferees of the Debenture.

In the Wisconsin Lawsuit, the Company alleges that on August 28, 2002, RGC
orally offered to enter into an eight month stand-still agreement with the
Company under which RGC would not exercise any claimed acceleration rights
under the Debenture. On August 28, 2002, RGC orally offered to enter into this
eight month stand-still in return for an immediate payment of $500,000 by the
Company. RGC also offered to give the Company an option to buy back the
Debenture and all other securities sold to RGC in return for a payment of $1
million at any time during the eight month stand-still period. RGC
subsequently confirmed the offer in writing. The Company accepted RGCs offer
on September 13, 2002.

Although RGC verbally confirmed the agreement with the Company, RGC later
changed its position and informed the Company it would not live up to the terms
of the agreement. RGC then told the Company that it had sold the Debenture and
the Warrants.

The Complaint alleges, among other things, claims for a declaratory judgment,
breach of contract, specific performance and breach of the covenant of good
faith and fair dealing. The Complaint requests, among other things, damages
and specific performance of the agreement. RGC denies that any such agreement
exists and to dismiss the Wisconsin Lawsuit on the grounds that a Wisconsin
court does not have personal jurisdiction and because RGC believes that the
claims set forth in the Wisconsin Lawsuit should be heard in Delaware pursuant
to a forum selection clause contained in the Securities Purchase Agreement
dated as of April 25, 2000.

On January 2, 2003, RGC commenced a lawsuit in the United States District Court
for the District of Delaware (the Delaware Lawsuit) against the Company
seeking a declaration of RGCs and the Companys rights under the Securities
Purchase Agreement dated as of April 25, 2000, between RGC and the Company, as
well as under the Debenture, stock warrants and an investment option issued
pursuant to the Securities Purchase Agreement. RGC also seeks specific
performance and injunctive relief enjoining the Company from maintaining and
prosecuting the Wisconsin Lawsuit. In addition, RGC seeks damages in an
unspecified amount for alleged breach of contract and breach of the duty of
good faith and fair dealing. The Company vigorously denies these allegations
and moved to dismiss the Delaware Lawsuit on numerous grounds on February 11,
2003.

On June 9, 2003, the Company filed a cross-claim against RGC in the Wisconsin
Lawsuit asserting the claims assigned to the Company by the Transferees. The
cross-claim alleges, among other things, claims for breach of warranty, breach
of contract, indemnification, breach of the covenant of good faith and fair
dealing, strict responsibility misrepresentation, negligent misrepresentation,
intentional misrepresentation and securities fraud. RGC has not yet responded
to the cross-claim.

The Company intends to vigorously pursue the Wisconsin Lawsuit to compel RGC to
honor the terms of the stand-still and buy-back agreement the Company asserts
it reached with RGC in September 2002, as well as the claims assigned to the
Company by the Transferees. The outcomes of the Wisconsin Lawsuit and the
Delaware Lawsuit may have a significant impact on the Companys results of
operations in fiscal 2003.

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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On March 4, 2003, ARI issued 183,419 common shares to a consultant in respect
of services rendered, valued at $50,000. The consultant provided
representations regarding, among other things, its investment intent and
financial and business knowledge and experience. In addition, the shares bear
a restrictive legend. The transaction was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof.

On April 24, 2003, the Company issued warrants for 250,000 shares of common
stock, exercisable at $1.00 per share. The warrants were issued as partial
consideration under an Exchange Agreement, pursuant to which the buyers
assigned and surrendered to the Company, among other things, their interest in
the Companys previously existing convertible subordinated debenture in the
principal amount of $4.0 million plus accrued interest and warrants to purchase
600,000 shares of common stock. The buyers provided representations regarding,
among other things, their investment intent, and the warrants bear a
restrictive legend. The transaction was exempt from registration under the
Securities Act pursuant to Section 3(a)(9) or 4(2) thereof.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

See Note 4 of Notes to Condensed Financial Statements for information
concerning dividends in arrears on the Companys Series A Preferred Stock. The
accumulated dividends in arrears have not been declared by the Company, and are
therefore, not due and payable. The preferred stock terms do not require the
Company to declare dividends, but dividends that are not paid continue to
accumulate.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------
|

| | 4.1  |  | Form of Promissory note dated April 24, 2003 (Exhibit A to the
Exchange Agreement referenced in Exhibit 10.1).                                                                                                                       
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 10.1 |  | Exchange Agreement dated April 24, 2003 between ARI Network
Services, Inc., ARI Network Services Partners, LP, Dolphin Offshore
Partners, LP, and SDS Merchant Fund, LP, including form of Common
Stock Purchase Warrant (Exhibit B).
|
| | 10.2 |  | Assignment by ARI Network Services Partners, LP, Dolphin
Offshore Partners, LP, and SDS Merchant Fund, LP, in favor of ARI
Network Services, Inc. (Exhibit C to the Exchange Agreement
referenced in Exhibit 10.1).                  
|
| | 10.3 |  | Amendment to Receivable Sales Agreement dated May 27, 2003                                                                                                                                                                           
|
| | 10.4 |  | Amendment to Receivable Sales Agreement dated June 13, 2003                                                                                                                                                                          
|
| | 99.1 |  | Section 906 certification of Chief Executive Officer                                                                                                                                                                                 
|
| | 99.2 |  | Section 906 certification of Chief Financial Officer                                                                                                                                                                                 
|

| | (b) | Reports on Form 8-K                                                                             
| | --- | ------------------------------------------------------------------------------------------------
|
| |     | On February 21, 2003 ARI furnished a Form 8-K (dated February 20, 2003)
with respect to Item 12.
|
| |     | On April 28, 2003 ARI filed a Form 8-K (dated April 25, 2003) with
respect to Items 5 and 7.    

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



| |  | ARI Network Services, Inc.
(Registrant)
| |  | ---------------------------------------

|                     |  |                                          
|-------------------- |  | -----------------------------------------
|Date:  June 16, 2003 |  | /s/ Brian E. Dearing                     
|                     |  | Brian E. Dearing, Chairman of the Board  
|                     |  |                                          
|                     |  | /s/ Timothy Sherlock                     
|                     |  | Timothy Sherlock, Chief Financial Officer

20



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##### Table of Contents






CERTIFICATIONS



| | I, Brian E. Dearing, certify that:
| | ----------------------------------
|

| | 1. |  | I have reviewed this quarterly report on Form
10-Q of ARI Network Services, Inc.;                                                                                                                                                                                                                                                 
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does
not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this quarterly report; and
|
| | 3. |  | Based on my knowledge, the financial statements,
and other financial information included in this quarterly
report, fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.                       
|
| | 4. |  | The registrants other certifying officers and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:                                                                                                         
|

| | a) |  | designed such disclosure controls and procedures to ensure that material information relating
to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date
within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        
|

| | 5. |  | The registrants other certifying officers and I
have disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of registrants
board of directors (or persons performing the equivalent
function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors and material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that
involves management or other employees who have a
significant role in the registrants internal controls; and                                                                                                                                        
|

| | 6. |  | The registrants other certifying officers and
I have indicated in this quarterly report
whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |  |                                     | 
|-------------------- |  |  | ----------------------------------- | 
|Date:  June 16, 2003 |  |  | /s/ Brian E. Dearing               
|                     |  |  | By:  Brian E. Dearing              
|                     |  |  | Title:  Chairman, President and CEO

21



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##### Table of Contents





| | I, Timothy Sherlock, certify that:
| | ----------------------------------
|

| | 1. |  | I have reviewed this quarterly report on Form
10-Q of ARI Network Services, Inc.;                                                                                                                                                                                                                                                 
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does
not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report; and
|
| | 3. |  | Based on my knowledge, the financial statements,
and other financial information included in this quarterly
report, fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.                       
|
| | 4. |  | The registrants other certifying officers and I
are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:                                                                                                         
|

| | a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        
|

| | 5. |  | The registrants other certifying officers and I
have disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of registrants
board of directors (or persons performing the equivalent
function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | a) |  | all significant deficiencies in the design
or operation of internal controls which could adversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for
the registrants auditors and material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that
involves management or other employees who have a
significant role in the registrants internal controls; and                                                                                                                                        
|

| | 6. |  | The registrants other certifying officers and I
have indicated in this quarterly report
whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    |  |  |                                             | 
|------------------- |  |  | ------------------------------------------- | 
|Date: June 16, 2003 |  |  |                                             | 
|                    |  |  | /s/ Timothy Sherlock                       
|                    |  |  | By:  Timothy Sherlock                      
|                    |  |  | Title:  Chief Financial Officer, Secretary,
|                    |  |  | Treasurer, and VP of Finance               

22