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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(X)     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2004

OR

( )     TRANSITION REPORT UNDER 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 small business issuer as specified in its charter.)

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

11425 W. Lake Park Drive, Milwaukee, Wisconsin 53224

---

(Address of principal executive office)


Issuers telephone number (414) 973-4300

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of The Exchange Act during the past 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

Transitional Small Business Disclosure Format (check one).

YES              NO ü

As of March 10, 2004, there were 5,839,484 shares of the registrants shares
outstanding.

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|                 |  |  |  |  |  |  |  | 
|---------------- |  |  |  |  |  |  |  | 
|Letter Agreement
|Certification   
|Certification   
|Certification   
|Certification   



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

|                                         |                                                                                                              |              |       |            |       |         |       |       |       | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------ | ----- | ---------- | ----- | ------- | ----- | ----- | ----- | 
|                                         |                                                                                                              |              |       | January 31 |       | July 31
|                                         |                                                                                                              |              |       | 2004       |       | 2003   
|                                         |                                                                                                              |              |       |            |       |        
|                                         |                                                                                                              | ASSETS       |       |            |       |         |       |       |       | 
|Current assets:                          |                                                                                                              |              |       |            |       |         |       |      
|                                         | Cash                                                                                                         |              | $     | 2,723      |       |         | $     | 2,120 |      
|                                         | Trade receivables, less allowance for doubtful accounts of $109
at January 31, 2004 and $98 at July 31, 2003 |              |       | 654        |       |         |       | 1,088 |      
|                                         | Prepaid expenses and other                                                                                   |              |       | 67         |       |         |       | 115   |      
|                                         |                                                                                                              |              |       |            |       |         |       |      
|Total current assets                     |                                                                                                              |              | 3,444 |            |       |         | 3,323 |      
|Equipment and leasehold improvements:    |                                                                                                              |              |       |            |       |         |       |      
|                                         | Computer equipment                                                                                           |              |       | 4,480      |       |         |       | 4,475 |      
|                                         | Leasehold improvements                                                                                       |              |       | 73         |       |         |       | 73    |      
|                                         | Furniture and equipment                                                                                      |              |       | 1,444      |       |         |       | 1,372 |      
|                                         |                                                                                                              |              |       |            |       |         |       |      
|                                         |                                                                                                              |              | 5,997 |            |       |         | 5,920 |      
|                                         | Less accumulated depreciation and amortization                                                               |              |       | 5,546      |       |         |       | 5,474 |      
|                                         |                                                                                                              |              |       |            |       |         |       |      
|Net equipment and leasehold improvements |                                                                                                              |              | 451   |            |       |         | 446   |      
|Other assets                             |                                                                                                              |              | 18    |            |       |         | 0     |      
|Capitalized software product costs       |                                                                                                              |              | 9,931 |            |       |         | 9,602 |      
|                                         | Less accumulated amortization                                                                                |              |       | 8,609      |       |         |       | 7,721 |      
|                                         |                                                                                                              |              |       |            |       |         |       |      
|Net capitalized software product costs   |                                                                                                              |              | 1,322 |            |       |         | 1,881 |      
|                                         |                                                                                                              |              |       |            |       |         |       |      
|                                         |                                                                                                              | Total Assets |       | $          | 5,235 |         |       | $     | 5,650 | 
|                                         |                                                                                                              |              |       |            |       |         |       |      

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

|                                               |                                                                                                                                                                                    |                                                      |        |            |       |         |        |          |       | 
|---------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ------ | ---------- | ----- | ------- | ------ | -------- | ----- | 
|                                               |                                                                                                                                                                                    |                                                      |        | January 31 |       | July 31
|                                               |                                                                                                                                                                                    |                                                      |        | 2004       |       | 2003   
|                                               |                                                                                                                                                                                    |                                                      |        |            |       |        
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |                                                                                                                                                                                    |                                                      |        |            |       |         |        |         
|Current liabilities:                           |                                                                                                                                                                                    |                                                      |        |            |       |         |        |         
|                                               | Current portion of notes payable                                                                                                                                                   |                                                      | $      | 1,000      |       |         | $      | 400      |      
|                                               | RFC financed receivables facility                                                                                                                                                  |                                                      |        |           |       |         |        | 346      |      
|                                               | Accounts payable                                                                                                                                                                   |                                                      |        | 230        |       |         |        | 401      |      
|                                               | Deferred revenue                                                                                                                                                                   |                                                      |        | 5,208      |       |         |        | 5,280    |      
|                                               | Accrued payroll and related liabilities                                                                                                                                            |                                                      |        | 1,061      |       |         |        | 1,088    |      
|                                               | Other accrued liabilities                                                                                                                                                          |                                                      |        | 780        |       |         |        | 601      |      
|                                               | Current portion of capital lease obligations                                                                                                                                       |                                                      |        | 12         |       |         |        | 20       |      
|                                               |                                                                                                                                                                                    |                                                      |        |            |       |         |        |         
|Total current liabilities                      |                                                                                                                                                                                    |                                                      | 8,291  |            |       |         | 8,136  |         
|Long term liabilities:                         |                                                                                                                                                                                    |                                                      |        |            |       |         |        |         
|                                               | Notes payable (net of discount)                                                                                                                                                    |                                                      |        | 3,888      |       |         |        | 3,769    |      
|                                               | Other long term liabilities                                                                                                                                                        |                                                      |        | 553        |       |         |        | 559      |      
|                                               | Capital lease obligations                                                                                                                                                          |                                                      |        | 8          |       |         |        | 16       |      
|                                               |                                                                                                                                                                                    |                                                      |        |            |       |         |        |         
|Total long term liabilities                    |                                                                                                                                                                                    |                                                      | 4,449  |            |       |         | 4,344  |         
|Shareholders equity (deficit):                |                                                                                                                                                                                    |                                                      |        |            |       |         |        |         
|                                               | Cumulative preferred stock, par value $.001 per share,
1,000,000 shares authorized; 0 and 20,350 shares issued and
outstanding at January 31, 2004 and July 31, 2003, respectively |                                                      |        |           |       |         |        |         |      
|                                               | Common stock, par value $.001 per share, 25,000,000 shares
authorized; 5,814,484 and 6,645,191 shares issued and outstanding
at January 31, 2004 and July 31, 2003, respectively   |                                                      |        | 5          |       |         |        | 6        |      
|                                               | Common stock warrants and options                                                                                                                                                  |                                                      |        | 36         |       |         |        | 141      |      
|                                               | Additional paid-in-capital                                                                                                                                                         |                                                      |        | 93,479     |       |         |        | 94,295   |      
|                                               | Accumulated deficit                                                                                                                                                                |                                                      |        | (101,025   | )     |         |        | (101,272 | )    
|                                               |                                                                                                                                                                                    |                                                      |        |            |       |         |        |         
|Total shareholders equity (deficit)           |                                                                                                                                                                                    |                                                      | (7,505 | )          |       |         | (6,830 | )       
|                                               |                                                                                                                                                                                    |                                                      |        |            |       |         |        |         
|                                               |                                                                                                                                                                                    | Total Liabilities and Shareholders Equity (Deficit) |        | $          | 5,235 |         |        | $        | 5,650 | 
|                                               |                                                                                                                                                                                    |                                                      |        |            |       |         |        |         

See notes to unaudited condensed financial statements.

Note: The balance sheet at July 31, 2003 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 |     | Six months ended
|                                              |         |                                                                                                                               |                                                |       | January 31         |     | January 31      
|                                              |         |                                                                                                                               |                                                |       |                    |     |                 
|                                              |         |                                                                                                                               |                                                |       | 2004               |     | 2003             |       | 2004  |     | 2003 
|                                              |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |      
|Net revenues:                                 |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|                                              |         | Subscriptions, support and other services fees                                                                                |                                                | $     | 2,260              |     |                  | $     | 2,040 |     |       | $     | 4,549 |     |       | $     | 4,031 |    
|                                              |         | Software licenses and renewals                                                                                                |                                                |       | 604                |     |                  |       | 548   |     |       |       | 1,193 |     |       |       | 1,105 |    
|                                              |         | Professional services                                                                                                         |                                                |       | 429                |     |                  |       | 505   |     |       |       | 836   |     |       |       | 1,012 |    
|                                              |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|                                              |         |                                                                                                                               | 3,293                                          |       |                    |     | 3,093            |       |       |     | 6,578 |       |       |     | 6,148 |      
|Operating expenses:                           |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|                                              |         | Cost of products and services sold:                                                                                           |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |       |       |    
|                                              |         |                                                                                                                               | Subscriptions, support and other services fees |       |                    | 129 |                  |       |       | 112 |       |       |       | 284 |       |       |       | 301 | 
|                                              |         |                                                                                                                               | Software licenses and renewals *               |       |                    | 458 |                  |       |       | 448 |       |       |       | 920 |       |       |       | 873 | 
|                                              |         |                                                                                                                               | Professional services                          |       |                    | 149 |                  |       |       | 194 |       |       |       | 340 |       |       |       | 344 | 
|                                              |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|                                              |         |                                                                                                                               | 736                                            |       |                    |     | 754              |       |       |     | 1,544 |       |       |     | 1,518 |      
|                                              |         | Depreciation and amortization (exclusive of
amortization of software products included in
cost of products and services sold) |                                                |       | 37                 |     |                  |       | 53    |     |       |       | 72    |     |       |       | 112   |    
|                                              |         | Customer operations and support                                                                                               |                                                |       | 291                |     |                  |       | 312   |     |       |       | 574   |     |       |       | 622   |    
|                                              |         | Selling, general and administrative                                                                                           |                                                |       | 1,758              |     |                  |       | 1,688 |     |       |       | 3,516 |     |       |       | 3,202 |    
|                                              |         | Software development and technical support                                                                                    |                                                |       | 362                |     |                  |       | 401   |     |       |       | 703   |     |       |       | 876   |    
|                                              |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|Operating expenses before amounts capitalized |         |                                                                                                                               | 3,184                                          |       |                    |     | 3,208            |       |       |     | 6,409 |       |       |     | 6,330 |      
|                                              |         | Less capitalized portion                                                                                                      |                                                |       | (123               | )   |                  |       | (123  | )   |       |       | (187  | )   |       |       | (283  | )  
|                                              |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|Net operating expenses                        |         |                                                                                                                               | 3,061                                          |       |                    |     | 3,085            |       |       |     | 6,222 |       |       |     | 6,047 |      
|                                              |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|Operating income                              |         |                                                                                                                               | 232                                            |       |                    |     | 8                |       |       |     | 356   |       |       |     | 101   |      
|Other expense:                                |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|                                              |         | Interest expense                                                                                                              |                                                |       | (64                | )   |                  |       | (344  | )   |       |       | (145  | )   |       |       | (679  | )  
|                                              |         | Other, net                                                                                                                    |                                                |       | 7                  |     |                  |       | (39   | )   |       |       | 36    |     |       |       | (42   | )  
|                                              |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|Total other expense                           |         |                                                                                                                               | (57                                            | )     |                    |     | (383             | )     |       |     | (109  | )     |       |     | (721  | )    
|                                              |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|Net income (loss)                             |         | $                                                                                                                             | 175                                            |       |                    | $   | (375             | )     |       | $   | 247   |       |       | $   | (620  | )    
|                                              |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|Average common shares outstanding:            |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|                                              | Basic   |                                                                                                                               |                                                | 5,780 |                    |     |                  | 6,437 |       |     |       | 5,788 |       |     |       | 6,383 |      
|                                              | Diluted |                                                                                                                               |                                                | 6,039 |                    |     |                  | 6,437 |       |     |       | 6,047 |       |     |       | 6,383 |      
|Net income (loss) per share:                  |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|                                              | Basic   |                                                                                                                               | $                                              | 0.03  |                    |     | $                | (0.06 | )     |     | $     | 0.04  |       |     | $     | (0.10 | )    
|                                              |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      
|                                              | Diluted |                                                                                                                               | $                                              | 0.03  |                    |     | $                | (0.06 | )     |     | $     | 0.04  |       |     | $     | (0.10 | )    
|                                              |         |                                                                                                                               |                                                |       |                    |     |                  |       |       |     |       |       |       |     |       |      

See notes to unaudited condensed financial statements.



| | * |  | Includes amortization of software products of $445, $445, $888 and $864
and excludes other depreciation and amortization shown separately
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------

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ARI Network Services, Inc.
Statements of Cash Flows(In thousands)
(Unaudited)

|                                                         |                                                                                          |                                                                                                                     |       |                  |      |      |       |      |      |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ----- | ---------------- | ---- | ---- | ----- | ---- | ---- | -
|                                                         |                                                                                          |                                                                                                                     |       | Six months ended
|                                                         |                                                                                          |                                                                                                                     |       | January 31      
|                                                         |                                                                                          |                                                                                                                     |       |                 
|                                                         |                                                                                          |                                                                                                                     |       | 2004             |      | 2003
|                                                         |                                                                                          |                                                                                                                     |       |                  |      |     
|Operating activities                                     |                                                                                          |                                                                                                                     |       |                  |      |      |       |     
|                                                         | Net income (loss)                                                                        |                                                                                                                     | $     | 247              |      |      | $     | (620 | )   
|                                                         | Adjustments to reconcile net income (loss) to net cash provided
by operating activities: |                                                                                                                     |       |                  |      |      |       |      |     
|                                                         |                                                                                          | Amortization of software products                                                                                   |       |                  | 888  |      |       |      | 864  |  
|                                                         |                                                                                          | Amortization of deferred financing costs, debt discount and
excess carrying value over face amount of notes payable |       |                  | (29  | )    |       |      | 510  |  
|                                                         |                                                                                          | Depreciation and other amortization                                                                                 |       |                  | 72   |      |       |      | 112  |  
|                                                         |                                                                                          | Stock issued as contribution to 401(k) plan                                                                         |       |                  | 37   |      |       |      |     |  
|                                                         |                                                                                          | Net change in receivables, prepaid expenses and other
current assets                                                |       |                  | 487  |      |       |      | 77   |  
|                                                         |                                                                                          | Net change in accounts payable, deferred revenue,
accrued liabilities and other long term liabilities               |       |                  | (445 | )    |       |      | (215 | )
|                                                         |                                                                                          |                                                                                                                     |       |                  |      |      |       |     
|                                                         | Net cash provided by operating activities                                                |                                                                                                                     |       | 1,257            |      |      |       | 728  |     
|Investing activities                                     |                                                                                          |                                                                                                                     |       |                  |      |      |       |     
|                                                         | Purchase of equipment and leasehold improvements                                         |                                                                                                                     |       | (77              | )    |      |       | (3   | )   
|                                                         | Purchase of assets related to acquisitions                                               |                                                                                                                     |       | (108             | )    |      |       |     |     
|                                                         | Software product costs capitalized                                                       |                                                                                                                     |       | (187             | )    |      |       | (283 | )   
|                                                         |                                                                                          |                                                                                                                     |       |                  |      |      |       |     
|                                                         | Net cash used in investing activities                                                    |                                                                                                                     |       | (372             | )    |      |       | (286 | )   
|Financing activities                                     |                                                                                          |                                                                                                                     |       |                  |      |      |       |     
|                                                         | Borrowings under notes payable                                                           |                                                                                                                     |       |                 |      |      |       | 58   |     
|                                                         | Payments under notes payable                                                             |                                                                                                                     |       | (250             | )    |      |       | (103 | )   
|                                                         | Payments of capital lease obligations                                                    |                                                                                                                     |       | (16              | )    |      |       | (88  | )   
|                                                         | Debt issuance costs incurred                                                             |                                                                                                                     |       | (20              | )    |      |       |     |     
|                                                         | Proceeds from issuance of common stock                                                   |                                                                                                                     |       | 4                |      |      |       | 44   |     
|                                                         |                                                                                          |                                                                                                                     |       |                  |      |      |       |     
|                                                         | Net cash used in financing activities                                                    |                                                                                                                     |       | (282             | )    |      |       | (89  | )   
|                                                         |                                                                                          |                                                                                                                     |       |                  |      |      |       |     
|Net increase in cash                                     |                                                                                          |                                                                                                                     | 603   |                  |      |      | 353   |     
|Cash at beginning of period                              |                                                                                          |                                                                                                                     | 2,120 |                  |      |      | 879   |     
|                                                         |                                                                                          |                                                                                                                     |       |                  |      |      |       |     
|Cash at end of period                                    |                                                                                          | $                                                                                                                   | 2,723 |                  |      | $    | 1,232 |     
|                                                         |                                                                                          |                                                                                                                     |       |                  |      |      |       |     
|Cash paid for interest                                   |                                                                                          | $                                                                                                                   | 112   |                  |      | $    | 104   |     
|                                                         |                                                                                          |                                                                                                                     |       |                  |      |      |       |     
|Noncash investing and financing activities               |                                                                                          |                                                                                                                     |       |                  |      |      |       |     
|Issuance of common stock in connection with acquisitions |                                                                                          | $                                                                                                                   | 37    |                  |      | $    |      |     
|Exchange of equity to debt                               |                                                                                          |                                                                                                                     | 1,000 |                  |      |      |      |     

See notes to unaudited condensed financial statements.

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Notes to Condensed Financial Statements
(Unaudited)
January 31, 2004



|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 months ended January 31, 2004 are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 31, 2004. 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, 2003.



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

Basic net income(loss) per common share is computed by dividing net
income(loss) by the weighted average number of common shares outstanding during
the period. Diluted net income per common share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period and reflects the potential dilution that could occur if all of the
Companys outstanding stock options and warrants that are in the money were
exercised (calculated using the treasury stock method). The effect of dilutive
stock options and warrants on net loss per common share is antidilutive and
therefore not computed. The following table is a reconciliation of the
weighted average number of common shares and equivalents outstanding in the
calculation of basic and diluted net income(loss) per common share (in
thousands) for the periods indicated.

|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |  |  |  |       | 
|-------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|                                                   |  | Three months ended |       | Six months ended
|                                                   |  | January 31         |       | January 31      
|                                                   |  |                    |       |                 
|                                                   |  | 2004               |       | 2003             |  | 2004 |       | 2003
|                                                   |  |                    |       |                  |  |      |       |     
|Weighted average common shares outstanding         |  |                    | 5,780 |                  |  |      | 6,437 |      |  |  | 5,788 |  |  |  | 6,383 | 
|Dilutive effect of stock options and warrants      |  |                    | 259   |                  |  |      |      |      |  |  | 259   |  |  |  |      | 
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |  |  |  |       | 
|Diluted weighted average common shares outstanding |  |                    | 6,039 |                  |  |      | 6,437 |      |  |  | 6,047 |  |  |  | 6,383 | 



|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 (in thousands, except per
share data) 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 |      | Six months ended
|                                                     |                       |   | January 31         |      | January 31      
|                                                     |                       |   |                    |      |                 
|                                                     |                       |   | 2003               |      | 2002             |   | 2004 |       | 2003
|                                                     |                       |   |                    |      |                  |   |      |       |     
|Net income (loss), as reported                       |                       | $ | 175                |      |                  | $ | (375 | )     |      | $ | 247 |      |  | $ | (620 | )    
|Stock-based compensation using the
fair value method |                       |   | (20                | )    |                  |   | (20  | )     |      |   | (40 | )    |  |   | (38  | )    
|                                                     |                       |   |                    |      |                  |   |      |       |      |   |     |      |  |   |      |      
|Pro forma net income (loss)                          |                       | $ | 155                |      |                  | $ | (395 | )     |      | $ | 207 |      |  | $ | (658 | )    
|Net income (loss) per share                          |                       |   |                    |      |                  |   |      |       |      |   |     |      |  |   |      |      
|                                                     | Basic - as reported   |   | $                  | 0.03 |                  |   | $    | (0.06 | )    |   | $   | 0.04 |  |   | $    | (0.10 | )
|                                                     | Basic - pro forma     |   | $                  | 0.03 |                  |   | $    | (0.06 | )    |   | $   | 0.04 |  |   | $    | (0.10 | )
|                                                     | Diluted - as reported |   | $                  | 0.03 |                  |   | $    | (0.06 | )    |   | $   | 0.04 |  |   | $    | (0.10 | )
|                                                     | Diluted - pro forma   |   | $                  | 0.03 |                  |   | $    | (0.06 | )    |   | $   | 0.03 |  |   | $    | (0.10 | )



|4. |  | 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).

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

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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 the
prime interest rate 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 using a Black Scholes valuation model to have a value of
$2,354,000, and the New Warrants were 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, which was originally 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.

On August 7, 2003, the Company purchased from WITECH Corporation 1,025,308
shares of the Companys common stock, 30,000 common stock warrants and 20,350
shares of series A Preferred Stock for $200,000 at closing and an $800,000
promissory note which is payable quarterly through September 30, 2007, at the
prime interest rate plus 2%.



|5. |  | SHAREHOLDER RIGHTS PLAN
|-- |  | -----------------------

On August 7, 2003, the Company adopted a Shareholder Rights Plan designed to
protect the interests of common shareholders from an inadequate or unfair
takeover, but not affect a takeover proposal which the Board of Directors
believes is fair to all shareholders. Under the Shareholder Rights Plan
adopted by the Board of Directors, all shareholders of record on August 18,
2003 received one Preferred Share Purchase Right for each share of common stock
they owned. These Rights trade in tandem with the common stock until and
unless they are triggered. Should a person or group acquire more than 10% of
ARIs common stock (or if an existing holder of 10% or more of the common stock
were to increase its position by more than 1%), the Rights would become
exercisable for every shareholder except the acquirer that triggered the
exercise. The Rights, if triggered, would give the rest of the shareholders
the ability to purchase additional stock of ARI at a substantial discount. The
rights will expire on August 18, 2013, and can be redeemed by the Company for
$0.01 per Right at any time prior to a person or group becoming a 10%
shareholder.

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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 January 31, 2004 increased $200,000 or 6%
compared to the same period last year, primarily due to an increase in
recurring revenues from the Companys catalog products in the Equipment
Industry. Earnings increased from a net loss of $375,000, or $0.06 per share
for the quarter ended January 31, 2003 to net income of $175,000 or $0.03 per
share for the quarter ended January 31, 2004. Management believes that the
Company will have modest revenue growth and continue to be profitable for the
remainder of 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 collectibility. 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.

Debt Instruments

The Company valued debt discounts for Common Stock Warrants and Options granted
in consideration for Notes Payable 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.

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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.

Stock-Based Compensation

The Company accounts for its employee stock option plans under the recognition
and measurement principles of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related Interpretations.
Under APB Opinion No. 25, no stock-based compensation is reflected in net
income (loss), as all options granted under the plans had an exercise price
equal to the market value of the underlying common stock on the date of grant
and the related number of shares granted is fixed at that point in time.

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 75 catalogs of manufactured
equipment for 56 manufacturers to over 23,000 dealers in more than 100
countries in 12 segments of the worldwide manufactured equipment market
including outdoor power, power sports, recreation vehicles, auto and truck
parts aftermarket, marine, construction, floor maintenance and others.
Collectively, dealers and distributors have over 84,000 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 subscriptions are 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 January 31, 2004)

|                         |       |  |          |    |               |  |               |    |             |  |             |        |              |  |          |     |          |  |        |        | 
|------------------------ | ----- |  | -------- | -- | ------------- |  | ------------- | -- | ----------- |  | ----------- | ------ | ------------ |  | -------- | --- | -------- |  | ------ | ------ | 
|                         |       |  |          |    |               |  |               |    |             |  |             |        |              |  | Distinct |     | Distinct
|                         |       |  |          |    |               |  | Distinct      |    |             |  |             |        | Distributors |  | Dealers 
|                         |       |  | Catalogs |    | Manufacturers |  | Subscriptions |    | (Estimated) |  | (Estimated)
|                         |       |  |          |    |               |  |               |    |             |  |            
|North American           |       |  | 68       |    |               |  | 48            |    |             |  | 68,182      |        |              |  | 117      |     |          |  | 18,386 |       
|Non-North American       |       |  | 70       |    |               |  | 8             |    |             |  | 16,233      |        |              |  | 17       |     |          |  | 5,337  |       
|Included in both Regions |       |  | (63      | )  |               |  |              |    |             |  |            |        |              |  |         |     |          |  |       |       
|                         |       |  |          |    |               |  |               |    |             |  |             |        |              |  |          |     |          |  |        |       
|                         | Total |  |          | 75 |               |  |               | 56 |             |  |             | 84,415 |              |  |          | 134 |          |  |        | 23,723 | 

|                        |  |   |  |                                                                                                                                                                                                   
|----------------------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 subscribe to more than one catalog.                                                                 
|Distinct Distributor  |  | = |  | A single independent distributor, not owned by
another distributor, served by ARI. A
distributor generally buys from manufacturers and sells to dealers.                                          
|Distinct Dealer       |  | = |  | A single independent servicing dealer, not owned by
another dealer, served by ARI.                                                                                                                

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, the percentage of revenues coming from the non-equipment
industry is expected to continue to decline during fiscal 2004.

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 |        |         |       |            |       | Six months ended |        |     |    |  
|                       |                          |               |          |       | January 31         |        | Percent |       | January 31 |       | Percent         
|Industry Sector:       |                          | 2004          |          | 2003  |                    | Change |         | 2004  |            | 2003  |                  | Change
|                       |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |    |  
|Equipment Industry     |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |    |   |       |       |       |   |       |       |       |  |     
|                       | North American           |               |          |       |                    |        |         |       |            |       |                  |        |     |    |   |       |       |       |   |       |       |       |  |      |    
|                       |                          | Recurring     |          | $     | 2,428              |        |         | $     | 2,147      |       |                  |        | 13  | %  |   | $     | 4,783 |       |   | $     | 4,085 |       |  |      | 17  | % 
|                       |                          | Non-recurring |          |       | 369                |        |         |       | 365        |       |                  |        | 1   | %  |   |       | 735   |       |   |       | 813   |       |  |      | (10 | %)
|                       |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |    |   |       |       |       |   |       |       |       |  |     
|                       |                          |               | Subtotal |       |                    | 2,797  |         |       |            | 2,512 |                  |        |     | 11 | % |       |       | 5,518 |   |       |       | 4,898 |  |      |     | 13 | %
|                       | Non-North American       |               |          |       |                    |        |         |       |            |       |                  |        |     |    |   |       |       |       |   |       |       |       |  |      |    
|                       |                          | Recurring     |          |       | 289                |        |         |       | 211        |       |                  |        | 37  | %  |   |       | 584   |       |   |       | 484   |       |  |      | 21  | % 
|                       |                          | Non-recurring |          |       | 66                 |        |         |       | 104        |       |                  |        | (37 | %) |   |       | 134   |       |   |       | 151   |       |  |      | (11 | %)
|                       |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |    |   |       |       |       |   |       |       |       |  |     
|                       |                          |               | Subtotal |       |                    | 355    |         |       |            | 315   |                  |        |     | 13 | % |       |       | 718   |   |       |       | 635   |  |      |     | 13 | %
|                       | Total Equipment Industry |               |          |       |                    |        |         |       |            |       |                  |        |     |    |   |       |       |       |   |       |       |       |  |      |    
|                       |                          | Recurring     |          |       | 2,717              |        |         |       | 2,358      |       |                  |        | 15  | %  |   |       | 5,367 |       |   |       | 4,569 |       |  |      | 17  | % 
|                       |                          | Non-recurring |          |       | 435                |        |         |       | 469        |       |                  |        | (7  | %) |   |       | 869   |       |   |       | 964   |       |  |      | (10 | %)
|                       |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |    |   |       |       |       |   |       |       |       |  |     
|                       |                          |               | Subtotal |       |                    | 3,152  |         |       |            | 2,827 |                  |        |     | 11 | % |       |       | 6,236 |   |       |       | 5,533 |  |      |     | 13 | %
|Non-equipment Industry |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |    |   |       |       |       |   |       |       |       |  |     
|                       | Recurring                |               |          | 141   |                    |        |         | 230   |            |       |                  | (39    | %)  |    |   | 342   |       |       |   | 579   |       |       |  | (41  | %) 
|                       | Non-recurring            |               |          |      |                    |        |         | 36    |            |       |                  | (100   | %)  |    |   |      |       |       |   | 36    |       |       |  | (100 | %) 
|                       |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |    |   |       |       |       |   |       |       |       |  |     
|                       | Subtotal                 |               |          | 141   |                    |        |         | 266   |            |       |                  | (47    | %)  |    |   | 342   |       |       |   | 615   |       |       |  | (44  | %) 
|Total Revenue          |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |    |   |       |       |       |   |       |       |       |  |     
|                       | Recurring                |               |          | 2,858 |                    |        |         | 2,588 |            |       |                  | 10     | %   |    |   | 5,709 |       |       |   | 5,148 |       |       |  | 11   | %  
|                       | Non-recurring            |               |          | 435   |                    |        |         | 505   |            |       |                  | (14    | %)  |    |   | 869   |       |       |   | 1,000 |       |       |  | (13  | %) 
|                       |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |    |   |       |       |       |   |       |       |       |  |     
|                       | Grand Total              |               | $        | 3,293 |                    |        | $       | 3,093 |            |       |                  | 6      | %   |    | $ | 6,578 |       |       | $ | 6,148 |       |       |  | 7    | %  
|                       |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |    |   |       |       |       |   |       |       |       |  |     

Revenue by Product in the Equipment Industry
(In thousands)

|                   |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |     |    |       |       |       |   |       |       |       |  |    |     |    |  
|------------------ | ------------------------ | ------------- | -------- | ----- | ------------------ | ------ | ------- | ----- | ---------- | ----- | ---------------- | ------ | --- | --- | -- | ----- | ----- | ----- | - | ----- | ----- | ----- |  | -- | --- | -- | -
|                   |                          |               |          |       | Three months ended |        |         |       |            |       | Six months ended |        |     |     |   
|                   |                          |               |          |       | January 31         |        | Percent |       | January 31 |       | Percent         
|Product:           |                          | 2004          |          | 2003  |                    | Change |         | 2004  |            | 2003  |                  | Change
|                   |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |     |   
|Equipment Industry |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |     |    |       |       |       |   |       |       |       |  |   
|                   | Catalog and related      |               |          |       |                    |        |         |       |            |       |                  |        |     |     |    |       |       |       |   |       |       |       |  |    |    
|                   |                          | Recurring     |          | $     | 2,603              |        |         | $     | 2,230      |       |                  |        | 17  | %   |    | $     | 5,120 |       |   | $     | 4,344 |       |  |    | 18  | % 
|                   |                          | Non-recurring |          |       | 434                |        |         |       | 467        |       |                  |        | (7  | %)  |    |       | 862   |       |   |       | 952   |       |  |    | (9  | %)
|                   |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |     |    |       |       |       |   |       |       |       |  |   
|                   |                          |               | Subtotal |       |                    | 3,037  |         |       |            | 2,697 |                  |        |     | 13  | %  |       |       | 5,982 |   |       |       | 5,296 |  |    |     | 13 | %
|                   | Communications           |               |          |       |                    |        |         |       |            |       |                  |        |     |     |    |       |       |       |   |       |       |       |  |    |    
|                   |                          | Recurring     |          |       | 114                |        |         |       | 128        |       |                  |        | (11 | %)  |    |       | 247   |       |   |       | 225   |       |  |    | 10  | % 
|                   |                          | Non-recurring |          |       | 1                  |        |         |       | 2          |       |                  |        | (50 | %)  |    |       | 7     |       |   |       | 12    |       |  |    | (42 | %)
|                   |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |     |    |       |       |       |   |       |       |       |  |   
|                   |                          |               | Subtotal |       |                    | 115    |         |       |            | 130   |                  |        |     | (12 | %) |       |       | 254   |   |       |       | 237   |  |    |     | 7  | %
|                   |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |     |    |       |       |       |   |       |       |       |  |   
|                   | Total Equipment Industry |               | $        | 3,152 |                    |        | $       | 2,827 |            |       |                  | 11     | %   |     | $  | 6,236 |       |       | $ | 5,533 |       |       |  | 13 | %  
|                   |                          |               |          |       |                    |        |         |       |            |       |                  |        |     |     |    |       |       |       |   |       |       |       |  |   

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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 87% for the six months ended January 31, 2004 compared to 84% 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 recurring revenue may be slightly lower, 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, power sports, motorcycles, recreation vehicles, auto and truck
parts after-market, farm equipment, marine, construction, 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 90% for
the six months ended January 31, 2003 to 95% for the six months ended January
31, 2004.



| |  | North American                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Recurring revenues in the North American Equipment Industry increased for the
three and six month periods ended January 31, 2004, 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 remained relatively the
same for the three month period ended January 31, 2004, compared to the same
period last year. Non-recurring revenues in the North American Equipment
Industry decreased for the six month period ended January 31, 2004, compared
to the same period last year, primarily due to fewer new customer contracts
and customization projects because of the 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 six month periods ended January 31, 2004, compared to the same
periods last year, primarily due to an increase in USD revenue because of the
euro exchange rate. Non-recurring revenues in the non-North American
Equipment Industry decreased for the three and six month periods ended
January 31, 2004, compared to the same periods last year, primarily due to
less 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 six month periods ended
January 31, 2004, compared to the same periods last year, primarily due to an
increase in the Companys base revenue from 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 2004, as the Company continues to focus attention and
resources on its catalog products, but 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
month period ended January 31, 2004 and increased for the six month period
ended, compared to the same periods last year, primarily due to fluctuations
in network traffic revenues. The Company has 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 2004.                                                                                                                                                                                                                                                                                                          

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. Revenues in this business have decreased for the three and
six month periods ended January 31, 2004, compared to the same periods last
year because an industry association introduced a competitive offering to our
database management services. As a result, many of the agricultural inputs
industry participants did not renew their contracts for database management
services, which were approximately $500,000 on an annual basis and expire each
December. The Company continues to provide electronic communication services
to the agricultural inputs industry, but management expects these revenues, as
a percentage of total revenues, to continue to decline for the remainder of
fiscal 2004.

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##### Table of Contents



Cost of Products and Services Sold

The following table sets forth, for the periods indicated, certain information
regarding revenue and cost of products and services sold which is 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 |       |         |  |            |       | Six months ended |  |      |     |       
|                                               |                                         |  | January 31         |       | Percent |  | January 31 |       | Percent         
|                                               |                                         |  | 2004               |       | 2003    |  | Change     |       | 2004             |  | 2003 |     | Change
|                                               |                                         |  |                    |       |         |  |            |       |                  |  |      |     |       
|Subscriptions, support and other services fees |                                         |  |                    |       |         |  |            |       |                  |  |      |     |        |  |   |       |   |  |   |       |   |  |  |    
|                                               | Revenue                                 |  | $                  | 2,260 |         |  | $          | 2,040 |                  |  |      | 11  | %      |  | $ | 4,549 |   |  | $ | 4,031 |   |  |  | 13  | % 
|                                               | Cost of revenue                         |  |                    | 129   |         |  |            | 112   |                  |  |      | 15  | %      |  |   | 284   |   |  |   | 301   |   |  |  | (6  | %)
|                                               | Cost of revenue as a percent of revenue |  |                    | 6     | %       |  |            | 5     | %                |  |      |     |        |  |   | 6     | % |  |   | 7     | % |  |  |     |   
|Software licenses and renewals                 |                                         |  |                    |       |         |  |            |       |                  |  |      |     |        |  |   |       |   |  |   |       |   |  |  |    
|                                               | Revenue                                 |  |                    | 604   |         |  |            | 548   |                  |  |      | 10  | %      |  |   | 1,193 |   |  |   | 1,105 |   |  |  | 8   | % 
|                                               | Cost of revenue                         |  |                    | 458   |         |  |            | 448   |                  |  |      | 2   | %      |  |   | 920   |   |  |   | 873   |   |  |  | 5   | % 
|                                               | Cost of revenue as a percent of revenue |  |                    | 76    | %       |  |            | 82    | %                |  |      |     |        |  |   | 77    | % |  |   | 79    | % |  |  |     |   
|Professional services                          |                                         |  |                    |       |         |  |            |       |                  |  |      |     |        |  |   |       |   |  |   |       |   |  |  |    
|                                               | Revenue                                 |  |                    | 429   |         |  |            | 505   |                  |  |      | (15 | %)     |  |   | 836   |   |  |   | 1,012 |   |  |  | (17 | %)
|                                               | Cost of revenue                         |  |                    | 149   |         |  |            | 194   |                  |  |      | (23 | %)     |  |   | 340   |   |  |   | 344   |   |  |  | (1  | %)
|                                               | Cost of revenue as a percent of revenue |  |                    | 35    | %       |  |            | 38    | %                |  |      |     |        |  |   | 41    | % |  |   | 34    | % |  |  |     |   
|Total                                          |                                         |  |                    |       |         |  |            |       |                  |  |      |     |        |  |   |       |   |  |   |       |   |  |  |    
|                                               | Revenue                                 |  | $                  | 3,293 |         |  | $          | 3,093 |                  |  |      | 6   | %      |  | $ | 6,578 |   |  | $ | 6,148 |   |  |  | 7   | % 
|                                               | Cost of revenue                         |  |                    | 736   |         |  |            | 754   |                  |  |      | (2  | %)     |  |   | 1,544 |   |  |   | 1,518 |   |  |  | 2   | % 
|                                               | Cost of revenue as a percent of revenue |  |                    | 22    | %       |  |            | 24    | %                |  |      |     |        |  |   | 23    | % |  |   | 25    | % |  |  |     |   

Cost of subscriptions, support and other services fees consists primarily of
telecommunications and catalog replication and distribution costs. Cost of
subscriptions, support and other services fees as a percentage of revenue
increased slightly for the three month period ended January 31, 2004, compared
to the same period last year primarily due to increased distribution costs
related to shipping updated catalog subscriptions. Cost of subscriptions,
support and other services fees as a percentage of revenue decreased slightly
for the six month period ended January 31, 2004, compared to the same period
last year primarily due to decreased telecommunications costs and distribution
costs related to shipping updated catalog subscriptions in the first three
months of the fiscal year. Management expects gross margins, as a percent of
revenue from subscriptions, support and other services fees, to vary slightly
from quarter to quarter, depending on the timing of catalog update shipments.

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 decreased for the three and six
month periods ended January 31, 2004, compared to the same periods last year,
primarily due to higher revenues from software licenses and renewals while
software amortization costs remained relatively the same. 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. Management expects software amortization costs to decrease
significantly in the fourth quarter, as the software product cost of PartSmart
acquired in fiscal 1999, becomes fully amortized.

Cost of professional services consists of customization and catalog production
labor. Cost of professional services as a percentage of revenue decreased
slightly for the three month period ended January 31, 2004, compared to the
same period last year, but increased for the six month period ended January 31,
2004, compared to the same period last year, primarily due to the reversal of
an accrual for contracted project work in excess of the contract amount in the
first quarter of fiscal 2003. 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 |       |         |   |            |       | Six months ended |  |      |    |       
|                                           |                        |   | January 31         |       | Percent |   | January 31 |       | Percent         
|                                           |                        |   | 2004               |       | 2003    |   | Change     |       | 2004             |  | 2003 |    | Change
|                                           |                        |   |                    |       |         |   |            |       |                  |  |      |    |       
|Cost of products and services sold         |                        | $ | 736                |       |         | $ | 754        |       |                  |  | (2   | %) |        | $ | 1,544 |       |  | $ | 1,518 |       |  |  | 2   | % 
|Customer operations and support            |                        |   | 291                |       |         |   | 312        |       |                  |  | (7   | %) |        |   | 574   |       |  |   | 622   |       |  |  | (8  | %)
|Selling, general and administrative        |                        |   | 1,758              |       |         |   | 1,688      |       |                  |  | 4    | %  |        |   | 3,516 |       |  |   | 3,202 |       |  |  | 10  | % 
|Software development and technical support |                        |   | 362                |       |         |   | 401        |       |                  |  | (10  | %) |        |   | 703   |       |  |   | 876   |       |  |  | (20 | %)
|Less capitalized portion                   |                        |   | (123               | )     |         |   | (123       | )     |                  |  |     |    |        |   | (187  | )     |  |   | (283  | )     |  |  | (44 | %)
|Depreciation and amortization              |                        |   | 37                 |       |         |   | 53         |       |                  |  | (30  | %) |        |   | 72    |       |  |   | 112   |       |  |  | (36 | %)
|                                           |                        |   |                    |       |         |   |            |       |                  |  |      |    |        |   |       |       |  |   |       |       |  |  |     |   
|                                           | Net operating expenses |   | $                  | 3,061 |         |   | $          | 3,085 |                  |  |      | (1 | %)     |   | $     | 6,222 |  |   | $     | 6,047 |  |  |     | 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 for the three
and six month periods ended January 31, 2004, compared to the same periods last
year primarily due to reduced server room and software maintenance costs.
Management expects customer operations and support costs to continue at
relatively the same level for the remainder of fiscal 2004.

Selling, general and administrative expenses (SG&A) increased for the three
month period ended January 31, 2004, compared to the same period last year,
primarily due to increased payroll expense, market research and utilities
costs. SG&A increased for the six month period ended January 31, 2004,
compared to the same period last year, primarily due to increased legal fees in
the first quarter of fiscal 2004 related to the Companys lawsuit to enforce
the buy-back agreement (which had not yet commenced in the first quarter of
last year), the option exchange program and the WITECH equity buy-back
agreement. SG&A, as a percentage of revenue, increased slightly from 52% for
the six month period ended January 31, 2003 to 53% for the six month period
ended January 31, 2004. Management expects SG&A costs as a percentage of
revenue to decline for the remainder of fiscal 2004 due to a reduction in legal
fees.

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 six month periods ended January 31, 2004, compared to the same
periods last year, primarily due to temporarily open positions. Management
expects software development and technical support costs to increase slightly
for the remainder of fiscal 2004.

Capitalized software product costs represented 27% of software development and
technical support for the six month period ended January 31, 2004, compared to
32% for the same period last year. Capitalized software product costs
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. Management expects that capitalized software product costs
will increase for the remainder of fiscal 2004, because of planned product
development investments.

Depreciation and amortization expense decreased for the three and six month
periods ended January 31, 2004, compared to the same periods last year as some
computer equipment became fully depreciated. Management expects depreciation
and amortization to continue at relatively the same level for the remainder of
fiscal 2004.

Other Items

Earnings increased from a net loss of $620,000 for the six month period ended
January 31, 2003, to net income of $247,000 for the six month period ended
January 31, 2004. The increase in earnings is primarily due to the increase in
revenues and the decrease in interest expense. Management expects to continue
to generate positive earnings and cash flows for the remainder of fiscal 2004,
although there can be no assurance that this will occur.

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##### Table of Contents



Interest expense includes both cash and non-cash interest. Interest paid or
accrued for payment was approximately $174,000 and $169,000 for the six month
periods ended January 31, 2004 and 2003, respectively. In addition,
approximately $29,000 of excess debt principal was amortized to offset interest
expense for the six month period ended January 31, 2004 and approximately
$510,000 of non-cash interest expense was incurred for the six month period
ended January 31, 2003 due to amortization of debt discount related to the
Debenture and shareholder note.

On November 19, 2003, pursuant to its option exchange program, the Company
accepted for cancellation old options to purchase 319,186 shares of common
stock, representing approximately 29% of the shares of common stock underlying
all old options that were eligible for exchange in the offer. Subject to and
in accordance with the terms of the offer, the Company will issue, on the new
option grant date (on or about May 20, 2004), new options to purchase 245,936
shares of the Companys common stock in exchange for the old options cancelled
in the offer.

Acquisitions

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, five acquisitions have been
completed, four of which were fully integrated into the Companys operations
prior to fiscal year 2000.

On October 27, 2003, the Company acquired the technology and customer base of
VertX Commerce Corporation (VertX). ARI had previously been reselling the
VertX software under the brand name WebsiteSmart. The acquisition did not
have a material impact on the Companys financial statements for the three
months ended January 31, 2004. The Company expects to realize modest synergies
in both revenues and costs during the remainder of fiscal 2004.

The business development program is still an important component of the
Companys long-term growth strategy and the Company expects to continue to
pursue it aggressively.

Liquidity and Capital Resources

The following table sets forth, for the periods indicated, certain information
reconciling earn/burn rate to the Companys unaudited financial statements.

Earn/Burn Rate(In thousands)

|                                                                                      |                |   |                    |     |         |   |            |     |                  |  |      |    |        |   |       |     |  |   |      |     |  |  |      |    |  
|------------------------------------------------------------------------------------- | -------------- | - | ------------------ | --- | ------- | - | ---------- | --- | ---------------- |  | ---- | -- | ------ | - | ----- | --- |  | - | ---- | --- |  |  | ---- | -- | -
|                                                                                      |                |   | Three months ended |     |         |   |            |     | Six months ended |  |      |    |       
|                                                                                      |                |   | January 31         |     | Percent |   | January 31 |     | Percent         
|                                                                                      |                |   | 2004               |     | 2003    |   | Change     |     | 2004             |  | 2003 |    | Change
|                                                                                      |                |   |                    |     |         |   |            |     |                  |  |      |    |       
|Net cash provided by operating activities                                             |                | $ | 1,189              |     |         | $ | 495        |     |                  |  | 140  | %  |        | $ | 1,257 |     |  | $ | 728  |     |  |  | 73   | % 
|Net increase (decrease) in receivables, prepaid expenses
and other current assets     |                |   | (338               | )   |         |   | 56         |     |                  |  | (704 | %) |        |   | (487  | )   |  |   | (77  | )   |  |  | (532 | %)
|Net (increase) decrease in accounts payable, deferred revenue
and accrued liabilities |                |   | (208               | )   |         |   | (155       | )   |                  |  | (34  | %) |        |   | 445   |     |  |   | 215  |     |  |  | 107  | % 
|                                                                                      |                |   |                    |     |         |   |            |     |                  |  |      |    |        |   |       |     |  |   |      |     |  |  |      |   
|Net cash provided by operating activities
before changes in working capital           |                |   | 643                |     |         |   | 396        |     |                  |  | 62   | %  |        |   | 1,215 |     |  |   | 866  |     |  |  | 40   | % 
|Net cash used in investing activities                                                 |                |   | (183               | )   |         |   | (123       | )   |                  |  | 49   | %  |        |   | (372  | )   |  |   | (286 | )   |  |  | 30   | % 
|                                                                                      |                |   |                    |     |         |   |            |     |                  |  |      |    |        |   |       |     |  |   |      |     |  |  |      |   
|                                                                                      | Earn/burn rate |   | $                  | 460 |         |   | $          | 273 |                  |  |      | 66 | %      |   | $     | 843 |  |   | $    | 580 |  |  |      | 45 | %
|                                                                                      |                |   |                    |     |         |   |            |     |                  |  |      |    |        |   |       |     |  |   |      |     |  |  |      |   

Net cash provided by operating activities increased for the six month period
ended January 31, 2004, compared to the same period last year, due to the
increase in earnings and in components of working capital. Net cash used in
investing activities increased for the six month period ended January 31, 2004,
compared to the same periods last year, due to the software purchased in the
Companys acquisition, offset in part by 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 cash
provided by operating activities net of investing activities before changes in
working capital (earn/burn rate) to be positive for the remainder of fiscal
2004, although there can be no assurance that this result will be ultimately
achieved.

At January 31, 2004, the Company had cash of approximately $2,723,000 compared
to approximately $2,120,000 at July 31, 2003.

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)

|                                     |                                                          |                                                  |                                                      |       |             |       |           |       |        |       |      |      |   |     |  
|------------------------------------ | -------------------------------------------------------- | ------------------------------------------------ | ---------------------------------------------------- | ----- | ----------- | ----- | --------- | ----- | ------ | ----- | ---- | ---- | - | --- | -
|                                     |                                                          |                                                  |                                                      |       | January 31  |       | July 31   |       |        |       |     
|                                     |                                                          |                                                  |                                                      |       | 2004        |       | 2003      |       | Net   
|                                     |                                                          |                                                  |                                                      |       | (Unaudited) |       | (Audited) |       | Change
|                                     |                                                          |                                                  |                                                      |       |             |       |           |       |       
|Note payable to WITECH:              |                                                          |                                                  |                                                      |       |             |       |           |       |        |       |      |     
|                                     | Current portion of note payable                          |                                                  |                                                      | 200   |             |       |           |      |        |       |      | 200  |  
|                                     | Long term portion of note payable                        |                                                  |                                                      | 550   |             |       |           |      |        |       |      | 550  |  
|                                     |                                                          |                                                  |                                                      |       |             |       |           |       |        |       |      |     
|                                     |                                                          |                                                  | Total note payable to WITECH                         |       |             | 750   |           |       |        |      |      |      |   | 750 |  
|Notes payable to new holders:        |                                                          |                                                  |                                                      |       |             |       |           |       |        |       |      |     
|                                     | Current portion of notes payable                         |                                                  |                                                      | 800   |             |       |           | 400   |        |       |      | 400  |  
|                                     | Long term portion of notes payable                       |                                                  |                                                      | 3,100 |             |       |           | 3,500 |        |       |      | (400 | )
|                                     |                                                          |                                                  |                                                      |       |             |       |           |       |        |       |      |     
|                                     |                                                          | Total face value of notes payable to new holders |                                                      |       | 3,900       |       |           |       | 3,900  |       |      |      |  |    
|                                     | Carrying value in excess of face amount of notes payable |                                                  |                                                      | 267   |             |       |           | 302   |        |       |      | (35  | )
|                                     | Debt discount (common stock warrants and options)        |                                                  |                                                      | (29   | )           |       |           | (33   | )      |       |      | 4    |  
|                                     |                                                          |                                                  |                                                      |       |             |       |           |       |        |       |      |     
|                                     |                                                          |                                                  | Total carrying value of notes payable to new holders |       |             | 4,138 |           |       |        | 4,169 |      |      |   | (31 | )
|Receivables financing                |                                                          |                                                  |                                                     |       |             |       | 346       |       |        |       | (346 | )   
|                                     |                                                          |                                                  |                                                      |       |             |       |           |       |        |       |      |     
|Total debt and receivables financing |                                                          | $                                                | 4,888                                                |       |             | $     | 4,515     |       |        | $     | 373  |     
|                                     |                                                          |                                                  |                                                      |       |             |       |           |       |        |       |      |     

On August 8, 2003, the Company repurchased from WITECH Corporation 1,025,308
shares of Common Stock, a warrant to purchase 30,000 shares of Common Stock at
$.24 per share, and 20,350 shares of Series A Preferred Stock with an
approximate face value plus accrued and undeclared dividends of $3.5 million.
The Company paid $200,000 in cash and issued a four-year note for $800,000,
payable in quarterly installments of $50,000 and bearing interest at prime plus
2%. The note does not contain any financial covenants.

On April 24, 2003, the Company restructured previously outstanding securities
which were then held by new holders. The interest rate on the new notes is
prime plus 2%. Collectively, 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.

On September 28, 1999, ARI and RFC Capital Corporation (RFC) executed a
Receivables Sales Agreement (the Sale Agreement). The initial three-year
Sale Agreement allowed RFC to purchase up to $3.0 million of ARIs accounts
receivable. Under the Sale Agreement, RFC purchased 90% of eligible
receivables. The Sale Agreement expired on November 28, 2003 and was not
renewed. Management does not believe this will materially impact its ability
to fund operations in fiscal 2004.

Management believes that funds generated from operations will be adequate to
fund the Companys operations, investments and debt payments through fiscal
2004.

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
(in thousands)

|                                                               |                |                                     |     |                    |     |         |      |            |     |                  |     |      |     |        |       |     |     |   |       |     |     |  |     |     |     |   
|-------------------------------------------------------------- | -------------- | ----------------------------------- | --- | ------------------ | --- | ------- | ---- | ---------- | --- | ---------------- | --- | ---- | --- | ------ | ----- | --- | --- | - | ----- | --- | --- |  | --- | --- | --- | --
|                                                               |                |                                     |     | Three months ended |     |         |      |            |     | Six months ended |     |      |     |       
|                                                               |                |                                     |     | January 31         |     | Percent |      | January 31 |     | Percent         
|                                                               |                |                                     |     | 2004               |     | 2003    |      | Change     |     | 2004             |     | 2003 |     | Change
|                                                               |                |                                     |     |                    |     |         |      |            |     |                  |     |      |     |       
|Net income (loss)                                              |                | $                                   | 175 |                    |     | $       | (375 | )          |     |                  | 147 | %    |     | $      | 247   |     |     | $ | (620  | )   |     |  | 140 | %  
|                                                               | Plus: Interest |                                     |     | 64                 |     |         |      | 344        |     |                  |     | (81  | %)  |        |       | 145 |     |   |       | 679 |     |  |     | (79 | %) 
|                                                               |                | Amortization of software products   |     |                    | 445 |         |      |            | 445 |                  |     |      |    |        |       |     | 888 |   |       |     | 864 |  |     |     | 3   | % 
|                                                               |                | Other depreciation and amortization |     |                    | 37  |         |      |            | 53  |                  |     |      | (30 | %)     |       |     | 72  |   |       |     | 112 |  |     |     | (36 | %)
|                                                               |                |                                     |     |                    |     |         |      |            |     |                  |     |      |     |        |       |     |     |   |       |     |     |  |     |    
|Earnings before interest, taxes, depreciation and
amortization |                | $                                   | 721 |                    |     | $       | 467  |            |     |                  | 54  | %    |     | $      | 1,352 |     |     | $ | 1,035 |     |     |  | 31  | %  
|                                                               |                |                                     |     |                    |     |         |      |            |     |                  |     |      |     |        |       |     |     |   |       |     |     |  |     |    

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Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased for the three and six month periods ended January 31, 2004, compared
to the same periods last year, primarily due to the increase in revenue.
Management believes that EBITDA will continue to increase for the remainder of
fiscal 2004, although there can be no assurance that this will occur.

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 certain 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 for 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-QSB are forward looking statements
including 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, 2003, 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. CONTROLS AND PROCEDURES

ARI maintains a set of disclosure controls and procedures that are designed to
ensure that information required to be disclosed by it in the reports filed by
it under the Securities Exchange Act of 1934, as amended (Exchange Act) is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. ARI carried out an evaluation, under the
supervision and with the participation of its management, including its Chief
Executive Officer and its Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures pursuant to Rule
13a-15 of the Exchange Act. Based on that evaluation, ARIs Chief Executive
Officer and its Chief Financial Officer concluded that ARIs disclosure
controls and procedures are effective as of January 31, 2004.

There have been no changes in ARIs internal control over financial reporting
identified in connection with the evaluation discussed above that occurred
during the fiscal quarter ended January 31, 2004 that have materially affected,
or are reasonably likely to materially affect, ARIs internal control over
financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On August 28, 2002, RGC International Investors, LDC (RGC), the original
holders of the Companys $4 million Subordinated Debenture (the Debenture),
orally offered to enter into a buy-back agreement with the Company under which
RGC would exchange the Debenture and all other securities sold to RGC for an
immediate payment of $500,000 by the Company and an additional payment of $1
million at any time during the next eight months. To give the Company time to
acquire the funds, RGC agreed not to exercise any claimed acceleration rights
under the Debenture. 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 buy-back agreement and that it had transferred the
Debenture and other securities to a group of investors (the Transferees).

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 buy-back agreement. RGC denied
that any such agreement existed, 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.

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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 sought specific performance and injunctive relief enjoining
the Company from maintaining and prosecuting the Wisconsin Lawsuit. In
addition, RGC sought damages in an unspecified amount for alleged breach of
contract and breach of the duty of good faith and fair dealing. The Company
vigorously denied these allegations.

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 alleged, 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.

On August 25, 2003, the Milwaukee County Circuit Court dismissed the Wisconsin
Lawsuit without prejudice to the Companys ability to pursue claims in the
Delaware Lawsuit. On August 22, 2003, the Company asserted counterclaims
against RGC in Delaware, alleging the same direct claims and cross-claims
asserted in the Wisconsin Lawsuit. On August 29, 2003, RGC moved for summary
judgment on its claims and seeking dismissal of the Companys counterclaims.
On September 24, 2003, RGC filed a motion to dismiss the Taglich counterclaims
which are also the focus of its motion for summary judgment.

On January 22, 2004, the court for the Delaware Lawsuit granted RGCs motion
for summary judgement with respect to the Companys counterclaims and dismissed
RGCs claims as moot. Neither the Company nor RGC appealed the decision. As a
result, the litigation between the Company and RGC is now completely
terminated.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



|(a) |  | ARI held its 2003 Annual Meeting of Shareholders on December 11, 2003.                                                           
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Votes cast for the election of Gordon J. Bridge to serve as director
until the 2006 Annual Shareholders Meeting were as follows:

|                               |  |  |           | 
|------------------------------ |  |  | --------- | 
|For                            |  |  | 5,269,793 | 
|Withheld authority to vote for |  |  | 37,027    | 



|(c) |  | Votes cast for the election of Ted C. Feierstein to serve as director
until the 2006 Annual Shareholders Meeting were as follows:
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

|                               |  |  |           | 
|------------------------------ |  |  | --------- | 
|For                            |  |  | 5,260,743 | 
|Withheld authority to vote for |  |  | 46,077    | 



|(d) |  | Votes cast to ratify the appointment of Wipfli Ullrich Bertelson LLP as
ARIs auditors for the year ending July 31, 2004 were as follows:
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|          |  |  |           | 
|--------- |  |  | --------- | 
|For       |  |  | 5,261,584 | 
|Against   |  |  | 22,457    | 
|Abstained |  |  | 22,779    | 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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

|     |  |                                                                                   
|---- |  | ----------------------------------------------------------------------------------
|10.1 |  | Letter agreement dated June 25, 2003 between the Company and Ascent
Partners, Inc.
|31.1 |  | Section 302 Certification of Chief Executive Officer.                             
|31.2 |  | Section 302 Certification of Chief Financial Officer.                             
|32.1 |  | Section 906 Certification of Chief Executive Officer.                             
|32.2 |  | Section 906 Certification of Chief Financial Officer.                             



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



| |  |  | On December 4, 2003, ARI furnished a Form 8-K (dated December 4, 2003) with
respect to Item 12.
| |  |  | -----------------------------------------------------------------------------------------------

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|      |  |                                         |  |                                                                    
|----- |  | --------------------------------------- |  | -------------------------------------------------------------------
|      |  | ARI Network Services, Inc.
(Registrant) |  |                                                                    
|      |  |                                         |  |                                                                    
|Date: |  | March 16, 2004                          |  | /s/Brian E. Dearing                                                
|      |  |                                         |  |                                                                    
|      |  |                                         |  | Brian E. Dearing, Chairman of the Board and Chief Executive Officer
|      |  |                                         |  |                                                                    
|      |  |                                         |  | /s/ Timothy Sherlock                                               
|      |  |                                         |  |                                                                    
|      |  |                                         |  | Timothy Sherlock, Chief Financial Officer                          

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EXHIBIT INDEX

|               |  |                                                                                   
|-------------- |  | ----------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                       
|               |  |                                                                                   
|10.1           |  | Letter agreement dated June 25, 2003 between the Company and Ascent
Partners, Inc.
|               |  |                                                                                   
|31.1           |  | Section 302 Certification of Chief Executive Officer.                             
|               |  |                                                                                   
|31.2           |  | Section 302 Certification of Chief Financial Officer.                             
|               |  |                                                                                   
|32.1           |  | Section 906 Certification of Chief Executive Officer.                             
|               |  |                                                                                   
|32.2           |  | Section 906 Certification of Chief Financial Officer.                             

20