UNITED
STATES
 
 SECURITIES
AND EXCHANGE COMMISSION
 
 WASHINGTON,
D.C.  20549
 
 FORM
10-Q
 
 
 (Mark
One)
 
 T
              QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 
 For the
quarterly period ended April 30, 2008
 
 
 £
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
  ACT
 
 
 For the
transition period from ________________________ to
________________________
 
 Commission
file number 000-19608
 
 ARI
Network Services, Inc.
 
 (Exact
name of small business issuer as specified in its charter)
 
 
 WISCONSIN
              
              39-1388360(State
      or other jurisdiction of incorporation or organization)
              
              (IRS
      Employer Identification No.)
 
 
 11425 W. Lake Park Drive,
Milwaukee, Wisconsin  53224
 (Address
of principal executive offices)
 
 
 Issuer's
telephone number (414) 973-4300
 
 
 Indicate
by check mark whether the registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 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 90 days.
 YES R                      NO
£
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):
 
 Large
      accelerated filer £
              Accelerated
      filer £
              Non-accelerated
      filer £
              Smaller
      reporting company R
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 YES£                      NO
R
 
 As of
June 7, 2008 there were 6,659,427 shares of the registrant’s common stock
outstanding.
  
 1
  ARINetwork Services, Inc.
 
 FORM
10-Q
 
 FOR THE
NINE MONTHS ENDED APRIL 30, 2008
 
 INDEX
 
 
 PART
      I - FINANCIAL INFORMATIONPageItem
      1
              
              Financial statementsCondensed consolidated balance sheets – April 30, 2008
      (unaudited) and July 31, 2007.
              
              3-4Condensed consolidated statements of operations (unaudited)
      for the three and nine months ended April 30, 2008 and
      2007
              
              5Condensed consolidated statements of cash flows (unaudited)
      for the nine months ended April 30, 2008 and 2007
              
              6Notes to unaudited condensed consolidated financial
      statements
              
              7-15Item
      2
              
              Management's discussion and analysis of financial condition and
      results of operations
              
              16-24Item
      3
              
              Quantitative and qualitative disclosures about market
      risk
              
              24Item
      4T
              
              Controls and procedures
              
              24PART
      II - OTHER INFORMATIONItem
      1
              
              Legal proceedings
              
              25Item
      2
              
              Unregistered sales of equity securities and use of
      proceeds
              
              25Item
      3
              
              Defaults upon senior securities
              
              25Item
      4
              
              Submission of matters to a vote of security
      holders
              
              25Item
      5
              
              Other information
              
              25Item
      6
              
              Exhibits
              
              25Signatures
              
              26
  2
 Index
  ITEM1. FINANCIAL
STATEMENTS
 
 ARINetwork Services, Inc.
 Consolidated
Balance Sheets
 (In
thousands, except  share and per share data)
 
 (Unaudited)ASSETS
              
              April
      30
              
              
              July
      312008
              
              
              2007Current
      assets:Cash
      and cash equivalents
              
              $
              1,244
              
              
              $
              1,050Trade
      receivables, less allowance for doubtful accounts of $154 and $148 at
      April 30, 2008 and July 31, 2007, respectively
              
              
              1,258
              
              
              
              1,302Work
      in Process
              
              
              236
              
              
              
              223Prepaid
      expenses and other
              
              
              334
              
              
              
              291Current
      portion of deferred income taxes
              
              
              555
              
              
              
              555Total
      Current Assets
              
              
              3,627
              
              
              
              3,421Equipment
      and leasehold improvements:Computer
      equipment
              
              
              5,370
              
              
              
              5,324Leasehold
      improvements
              
              
              128
              
              
              
              128Furniture
      and equipment
              
              
              2,810
              
              
              
              2,7498,308
              
              
              
              8,201Less
      accumulated depreciation and amortization
              
              
              7,394
              
              
              
              6,991Net
      equipment and leasehold improvements
              
              
              914
              
              
              
              1,210Long
      term portion of deferred income taxes
              
              
              1,539
              
              
              
              1,539Goodwill
              
              
              1,079
              
              
              
              1,079Other
      assets
              
              
              893
              
              
              
              1,072Capitalized
      software product costs
              
              
              12,820
              
              
              
              12,455Less
      accumulated amortization
              
              
              11,417
              
              
              
              10,849Net
      capitalized software product costs
              
              
              1,403
              
              
              
              1,606Total
      Assets
              
              $
              9,455
              
              
              $
              9,927
  3
 Index
  ARI
Network Services, Inc.
 Consolidated
Balance Sheets
 (In
thousands, except share and per share data)
 
 (Unaudited)LIABILITIES
      AND SHAREHOLDERS’ EQUITY
              
              April
      30
              
              
              July
      312008
              
              
              2007Current
      liabilities:Current
      portion of notes payable
              
              $
              233
              
              
              $
              1,023Accounts
      payable
              
              
              393
              
              
              
              703Deferred
      revenue
              
              
              4,967
              
              
              
              5,619Accrued
      payroll and related liabilities
              
              
              1,087
              
              
              
              962Accrued
      sales, use and income taxes
              
              
              66
              
              
              
              28Accrued
      vendor specific liabilities
              
              
              219
              
              
              
              175Other
      accrued liabilities
              
              
              262
              
              
              
              124Current
      portion of capital lease obligations
              
              
              11
              
              
              
              8Total
      Current Liabilities
              
              
              7,238
              
              
              
              8,642Long
      term liabilities:Notes
      payable (net of discount)
              
              
              314
              
              
              
              479Long
      term payroll related
              
              
              77
              
              
              
              55Other
      long term liabilities
              
              
              10
              
              
              
              28Capital
      lease obligations
              
              
              8
              
              
              
              5Total
      Long Term Liabilities
              
              
              409
              
              
              
              567Shareholders'
      equity:Cumulative
      preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0
      shares issued and outstanding at April 30, 2008 and July 31,
      2007
              
              
              -
              
              
              
              -Common
      stock, par value $.001 per share, 25,000,000 shares authorized; 6,659,427
      and 6,623,605 shares issued and outstanding at April 30, 2008 and July 31,
      2007, respectively
              
              
              7
              
              
              
              7Common
      stock warrants and options
              
              
              260
              
              
              
              195Additional
      paid-in-capital
              
              
              94,679
              
              
              
              94,627Accumulated
      deficit
              
              
              (93,086
              )
              
              
              (94,091
              )Other
      accumulated comprehensive income (loss)
              
              
              (52
              )
              
              
              (20
              )Total
      Shareholders' Equity
              
              
              1,808
              
              
              
              718Total
      Liabilities and Shareholders' Equity
              
              $
              9,455
              
              
              $
              9,927
  See
notes to unaudited condensed consolidated financial statements.
 
 
 Note:  The
balance sheet at July 31, 2007 has been derived from the audited balance sheet
at that date but does not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements.
  4
 Index
  ARINetwork Services, Inc.
 Consolidated
Statements of Operations
 (In
thousands, except per share data)
 (Unaudited)
 
 
 Three
      months ended
              
              
              Nine
      months endedApril
      30
              
              
              April
      302008
              
              
              2007
              
              
              2008
              
              
              2007Net
      revenues:Subscriptions,
      support and other services fees
              
              $
              2,906
              
              
              $
              2,916
              
              
              $
              8,863
              
              
              $
              8,333Software
      licenses and renewals
              
              
              549
              
              
              
              547
              
              
              
              1,598
              
              
              
              1,665Professional
      services
              
              
              703
              
              
              
              638
              
              
              
              2,143
              
              
              
              1,2974,158
              
              
              
              4,101
              
              
              
              12,604
              
              
              
              11,295Cost
      of products and services sold:Subscriptions,
      support and other services fees
              
              
              222
              
              
              
              282
              
              
              
              816
              
              
              
              888Software
      licenses and renewals *
              
              
              197
              
              
              
              253
              
              
              
              595
              
              
              
              655Professional
      services
              
              
              255
              
              
              
              296
              
              
              
              790
              
              
              
              418674
              
              
              
              831
              
              
              
              2,201
              
              
              
              1,961Gross
      Margin
              
              
              3,484
              
              
              
              3,270
              
              
              
              10,403
              
              
              
              9,334Operating
      expenses:Depreciation
      and amortization (exclusive ofamortization of software products
      included in costof products and services sold)
              
              
              180
              
              
              
              203
              
              
              
              561
              
              
              
              419Customer
      operations and support
              
              
              252
              
              
              
              298
              
              
              
              788
              
              
              
              842Selling,
      general and administrative
              
              
              2,292
              
              
              
              2,491
              
              
              
              6,976
              
              
              
              6,577Software
      development and technical support
              
              
              333
              
              
              
              450
              
              
              
              1,021
              
              
              
              1,178Net
      operating expenses
              
              
              3,057
              
              
              
              3,442
              
              
              
              9,346
              
              
              
              9,016Operating
      income
              
              
              427
              
              
              
              (172
              )
              
              
              1,057
              
              
              
              318Other
      income (expense):Interest
      expense
              
              
              (14
              )
              
              
              (40
              )
              
              
              (75
              )
              
              
              (110
              )Other,
      net
              
              
              5
              
              
              
              16
              
              
              
              15
              
              
              
              77Total
      other expense
              
              
              (9
              )
              
              
              (24
              )
              
              
              (60
              )
              
              
              (33
              )Income
      before provision for income taxes
              
              
              418
              
              
              
              (196
              )
              
              
              997
              
              
              
              285Income
      tax benefit (provision)
              
              
              9
              
              
              
              (9
              )
              
              
              8
              
              
              
              (17
              )Net
      income
              
              $
              427
              
              
              $
              (205
              )
              
              $
              1,005
              
              
              $
              268Average
      common shares outstanding:Basic
              
              
              6,659
              
              
              
              6,444
              
              
              
              6,650
              
              
              
              6,320Diluted
              
              
              7,069
              
              
              
              6,844
              
              
              
              7,060
              
              
              
              6,720Basic
      and diluted net income per share:Basic
              
              $
              0.06
              
              
              $
              (0.03
              )
              
              $
              0.15
              
              
              $
              0.04Diluted
              
              $
              0.06
              
              
              $
              (0.03
              )
              
              $
              0.14
              
              
              $
              0.04
  See
notes to unaudited condensed consolidated financial statements.
 
 
 *
              Includes amortization of software
      products of $187, $213, $568 and $598, respectively and excludes other
      depreciation and amortization, which is shown
      separately
  5
 Index
  ARINetwork Services, Inc.
 Consolidated
Statements of Cash Flows
 (In
thousands)
 (Unaudited)
 
 Nine
      months endedApril
      302008
              
              
              2007Operating
      activitiesNet
      income
              
              $
              1,005
              
              
              $
              268Adjustments
      to reconcile net income to net cash providedby operating
      activities:Amortization
      of software products
              
              
              568
              
              
              
              598Amortization
      of deferred financing costs, debt discount andexcess carrying
      value over face amount of notes payable
              
              
              22
              
              
              
              (22
              )Depreciation
      and other amortization
              
              
              561
              
              
              
              419Stock
      based compensation related to stock options
              
              
              65
              
              
              
              109Stock
      issued as contribution to 401(k) plan
              
              
              37
              
              
              
              42Net
      change in receivables, prepaid expenses and othercurrent
      assets
              
              
              -
              
              
              
              (428
              )Net
      change in accounts payable, deferred revenue,Accrued liabilities
      and long term liabilities
              
              
              (683
              )
              
              
              61Net
      cash provided by operating activities
              
              
              1,575
              
              
              
              1,047Investing
      activitiesPurchase
      of equipment and leasehold improvements
              
              
              (63
              )
              
              
              (629
              )Purchase
      of assets related to acquisition
              
              
              -
              
              
              
              (1,179
              )Software
      product costs capitalized
              
              
              (365
              )
              
              
              (247
              )Net
      cash used in investing activities
              
              
              (428
              )
              
              
              (2,055
              )Financing
      activitiesPayments
      under notes payable
              
              
              (977
              )
              
              
              (1,145
              )Payments
      of capital lease obligations
              
              
              (4
              )
              
              
              -Proceeds
      from issuance of common stock
              
              
              15
              
              
              
              37Net
      cash used in financing activities
              
              
              (966
              )
              
              
              (1,108
              )Effect
      of foreign currency exchange rate changes
              
              
              13
              
              
              
              -Net
      increase (decrease) in cash and cash equivalents
              
              
              194
              
              
              
              (2,116
              )Balance
      at beginning of period
              
              
              1,050
              
              
              
              3,584Balance
      at end of period
              
              $
              1,244
              
              
              $
              1,468Cash
      paid for interest
              
              $
              88
              
              
              $
              137Cash
      paid for income taxes
              
              $
              3
              
              
              $
              20Noncash
      investing and financing activitiesIssuance
      of common stock in connection with acquisition
              
              $
              -
              
              
              $
              707Capital
      lease obligations incurred for computer equipment
              
              
              10
              
              
              
              -Debt
      issued in connection with acquisitions
              
              
              -
              
              
              
              700Debt
      assumed in connection with acquisition
              
              
              -
              
              
              
              37Accrued
      liabilities related to acquisition
              
              
              -
              
              
              
              175Stock
      based compensation related to stock options
              
              
              65
              
              
              
              109
  See
notes to unaudited condensed consolidated financial statements.
  6
 Index
  Notesto Condensed Consolidated Financial Statements
 (Unaudited)
 April
30, 2008
 
 1.
              BASIS OF
      PRESENTATION
 
 The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information.  Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for fiscal year end financial
statements.  In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.  Operating results for the three and nine months ended
April 30, 2008 are not necessarily indicative of the results that may be
expected for the fiscal year ending July 31, 2008.  For further
information, refer to the financial statements and footnotes thereto included in
the Company's annual report on Form 10-KSB for the fiscal year ended July 31,
2007.
 
 The
financial statements include the accounts of ARI Network Services, Inc. (the
“Company”) and its wholly owned subsidiaries, ARI Europe B. V.  and
ARI Outsourced F&I Center, LLC. All inter-company transactions and balances
have been eliminated.
 
 The
Company’s outsourced F&I center was suspended in December, 2007, although
the LLC remains in place and the Company may re-initiate operations at a future
date.  The Company incurred no significant costs associated with the
closing of this office, and expects to incur no additional costs related to this
operation for the remainder of fiscal 2008.
 
 The
functional currency of the Company’s subsidiary in the Netherlands is the Euro;
accordingly, monetary assets and liabilities are translated into United States
dollars at the rate of exchange existing at the end of the period, and
non-monetary assets and liabilities are translated into United States dollars at
historical exchange rates.  Income and expense amounts, except for
those related to assets translated at historical rates, are translated at the
average exchange rates during the period.  Adjustments resulting from
the remeasurement of the financial statements into the functional currency are
charged or credited to comprehensive income.
 
 
 2.
              BASIC AND DILUTED NET INCOME
      PER SHARE
 
 Basic net
income per common share is computed by dividing net income by the basic 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 following
table is a reconciliation of basic and diluted net income per common share for
the periods indicated (in thousands, except per share data):
 
 Three
      months ended
              
              
              Nine
      months endedApril
      30
              
              
              April
      302008
              
              
              2007
              
              
              2008
              
              
              2007Net
      income (loss)
              
              $
              427
              
              
              $
              (205
              )
              
              $
              1,005
              
              
              $
              268Weighted
      average common shares outstanding
              
              
              6,659
              
              
              
              6,444
              
              
              
              6,650
              
              
              
              6,320Dilutive
      effect of stock options and warrants
              
              
              410
              
              
              
              400
              
              
              
              410
              
              
              
              400Diluted
      weighted average common shares outstanding
              
              
              7,069
              
              
              
              6,844
              
              
              
              7,060
              
              
              
              6,720Net
      income (loss) per share:Basic
              
              $
              0.06
              
              
              $
              (0.03
              )
              
              $
              0.15
              
              
              $
              0.04Diluted
              
              $
              0.06
              
              
              $
              (0.03
              )
              
              $
              0.14
              
              
              $
              0.04
 
 Shares
attributable to outstanding stock options that were excluded from the
calculation of diluted earnings per share because their  inclusion
would have been anti-dilutive were 677,753 and 319,437 for the three and nine
month periods ended April 30, 2008 and 2007, respectively.
   3.
              STOCK-BASED
      COMPENSATION
 
 Effective
August 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standard No. 123R, Share-Based Payment (“SFAS 123R”),
for its stock option and stock purchase plans. The Company previously accounted
for these plans under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations and disclosure requirements established by Statement
of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”), as amended by Statement of Financial Accounting
Standard No. 148, Accounting for Stock-Based Compensation – Transition and
Disclosure.
  The
Company adopted SFAS 123R using the modified prospective method. Under this
transition method, compensation cost recognized in fiscal 2007 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of August 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123 and (b) compensation cost
for all share-based payments granted subsequent to August 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.
Results for prior periods have not been restated.  Compensation cost
for options will be recognized in earnings, net of estimated forfeitures, on a
straight-line basis over the requisite service period. There were no capitalized
stock-based compensation costs at April 30, 2008.  Total stock
compensation expense recognized by the Company during the three month periods
ended April 30, 2008 and 2007 was approximately $19,000 and
$41,000.  For the nine month periods ended April 30, 2008 and 2007 the
expense was $65,000 and $109,000.  As of April 30, 2008 and 2007 there
was approximately $96,000 and $196,000 of total unrecognized compensation cost
related to nonvested options granted under the plans.
  7
 Index
  The
Company used the Black-Scholes model to value stock options granted. Expected
volatility is based on historical volatility of the Company’s stock. The
expected life of options granted represents the period of time that options
granted are expected to be outstanding. The risk-free rate for periods within
the contractual term of the options is based on the U.S. Treasury yields in
effect at the time of grant.
  As
stock-based compensation expense recognized in our results for the three and
nine months ended April 30, 2008 is based on awards ultimately expected to vest,
the amount has been reduced for estimated forfeitures. SFAS 123R requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based on our historical experience. Prior to fiscal
year 2007, we accounted for forfeitures as they occurred for the purposes of our
pro forma information under SFAS 123.
 
 The fair
value of each option grant is estimated using the assumptions in the following
table:
 
 
 Three
      months ended
                April
      30,
              Nine
      months ended
                April
      30,2008
              2007
              2008
              2007Expected
      life (years)
              10
      years
              10
      years
              10
      years
              10
      yearsRisk-free
      interest rate
              4.88%
              4.88%
              4.88%
              4.88%Expected
      volatility
              102%
              124%
              102%
              124%Expected
      dividend yield
              0%
              0%
              0%
              0%
  Employee Stock Purchase
Plans
 
 The
Company’s 1992 Employee Stock Purchase Plan had 62,500 shares of common stock
reserved for issuance, and all 62,500 shares have been issued. The Company’s
2000 Employee Stock Purchase Plan has 175,000 shares of common stock reserved
for issuance, and 154,322 of the shares have been issued as of April 30, 2008.
All employees of the Company, other than executive officers, with six months of
service are eligible to participate. Shares may be purchased at the end of a
specified period at the lower of 85% of the market value at the beginning or end
of the specified period through accumulation of payroll deductions, not to
exceed 5,000 shares per employee per year.
  1991 Stock Option
Plan
 
 The
Company’s 1991 Stock Option Plan was terminated August 14, 2001, except as
to outstanding options. Options granted under the 1991 Plan may be either:
(a) options intended to qualify as incentive stock options under Section
422 of the Internal Revenue Code of 1986, as amended (the Code), or
(b) nonqualified stock options.
 
 Any
incentive stock option that was granted under the 1991 Plan could not be granted
at a price less than the fair market value of the stock on the date of grant (or
less than 110% of the fair market value in the case of holders of 10% or more of
the voting stock of the Company). Nonqualified stock options were allowed to be
granted at the exercise price established by the Compensation Committee, which
could be less than, equal to or greater than the fair market value of the stock
on the date of grant.
 
 Each
option granted under the 1991 Plan is exercisable for a period of ten years from
the date of grant (five years in the case of a holder of more than 10% of the
voting stock of the Company) or such shorter period as determined by the
Compensation Committee and shall lapse upon the expiration of said period, or
earlier upon termination of the participant’s employment with the
Company.
 
 At its
discretion, the Compensation Committee may require a participant to be employed
by the Company for a designated number of years prior to exercising any options.
The Committee may also require a participant to meet certain performance
criteria, or that the Company meets certain targets or goals, prior to
exercising any options.
  8
 Index
  Changes
in option shares under the 1991 Plan during the:
 
 Three
      months ended
                April
      30, 2008
              
              
              Three
      months ended
                April
      30, 2007Options
              
              
              Wt-Avg
                Exercise
      Price
              
              
              Wt-Avg
                Remaining
                Contractual
                Period
              
              
              Aggregate
      Intrinsic Value
              
              
              Options
              
              
              Wt-Avg
                Exercise
      Price
              
              
              Wt-Avg
                Remaining
                Contractual
                Period
              
              
              Aggregate
      Intrinsic
                ValueOutstanding
      at beginning of period
              
              
              125,186
              
              
              $
              2.30
              
              
              
              1.39
              
              
              
              -
              
              
              
              145,686
              
              
              $
              2.27
              
              
              
              2.34
              
              
              $
              13,125Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Outstanding
      at end of period
              
              
              125,186
              
              
              $
              2.30
              
              
              
              1.14
              
              
              
              -
              
              
              
              145,686
              
              
              $
              2.27
              
              
              
              2.09
              
              
              $
              13,125Exercisable
      at end of period
              
              
              125,186
              
              
              $
              2.30
              
              
              
              1.14
              
              
              
              -
              
              
              
              145,686
              
              
              $
              2.27
              
              
              
              2.09
              
              
              $
              13,125
 
 Nine
      months ended
                April
      30, 2008
              
              
              Nine
      months ended
                April
      30, 2007Options
              
              
              Wt-Avg
                Exercise
      Price
              
              
              Wt-Avg
                Remaining
                Contractual
                Period
              
              
              Aggregate
      Intrinsic Value
              
              
              Options
              
              
              Wt-Avg
                Exercise
      Price
              
              
              Wt-Avg
                Remaining
                Contractual
                Period
              
              
              Aggregate
      Intrinsic
                ValueOutstanding
      at beginning of period
              
              
              125,686
              
              
              $
              2.30
              
              
              
              1.89
              
              
              
              -
              
              
              
              146,686
              
              
              $
              2.28
              
              
              
              2.85
              
              
              $
              13,125Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Forfeited
              
              
              (500
              )
              
              $
              4.06
              
              
              
              -
              
              
              
              -
              
              
              
              (1,000
              )
              
              $
              3.25
              
              
              
              -
              
              
              
              -Outstanding
      at end of period
              
              
              125,186
              
              
              $
              2.30
              
              
              
              1.14
              
              
              
              -
              
              
              
              145,686
              
              
              $
              2.27
              
              
              
              2.09
              
              
              $
              13,125Exercisable
      at end of period
              
              
              125,186
              
              
              $
              2.30
              
              
              
              1.14
              
              
              
              -
              
              
              
              145,686
              
              
              $
              2.27
              
              
              
              2.09
              
              
              $
              13,125
 
 The range
of exercise prices for options outstanding at April 30, 2008 and 2007 was $2.06
to $9.06 and $2.00 to $9.06, respectively.
 
 1993 Director Stock Option
Plan
 
 The
Company’s 1993 Director Stock Option Plan (“Director Plan”) has expired and is
terminated except for outstanding options. The Director Plan originally had
150,000 shares of common stock reserved for issuance to nonemployee directors.
Options under the Director Plan were granted at the fair market value of the
stock on the grant date.
 
 Each
option granted under the Director Plan is exercisable one year after the date of
grant and cannot be exercised later than ten years from the date of
grant.
  9
 Index
  Changes
in option shares under the Director Plan during the:
 
 Three
      months ended
                April
      30, 2008
              
              
              Three
      months ended
                April
      30, 2007Options
              
              
              Wt-Avg
                Exercise
      Price
              
              
              Wt-Avg
                Remaining
                Contractual
                Period
              
              
              Aggregate
      Intrinsic Value
              
              
              Options
              
              
              Wt-Avg
                Exercise
      Price
              
              
              Wt-Avg
                Remaining
                Contractual
                Period
              
              
              Aggregate
      Intrinsic
                ValueOutstanding
      at beginning of period
              
              
              1,313
              
              
              $
              2.65
              
              
              
              2.47
              
              
              
              -
              
              
              
              1,313
              
              
              $
              2.65
              
              
              
              3.72
              
              
              $
              152Granted
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -Outstanding
      at end of period
              
              
              1,313
              
              
              $
              2.65
              
              
              
              2.22
              
              
              
              -
              
              
              
              1,313
              
              
              $
              2.65
              
              
              
              3.22
              
              
              
              -Exercisable
      at end of period
              
              
              1,313
              
              
              $
              2.65
              
              
              
              2.22
              
              
              
              -
              
              
              
              1,313
              
              
              $
              2.65
              
              
              
              3.22
              
              
              $
              152
 
 Nine
      months ended
                April
      30, 2008
              
              
              Nine
      months ended
                April
      30, 2007Options
              
              
              Wt-Avg
                Exercise
      Price
              
              
              Wt-Avg
                Remaining
                Contractual
                Period
              
              
              Aggregate
      Intrinsic Value
              
              
              Options
              
              
              Wt-Avg
                Exercise
      Price
              
              
              Wt-Avg
                Remaining
                Contractual
                Period
              
              
              Aggregate
      Intrinsic
                ValueOutstanding
      at beginning of period
              
              
              1,313
              
              
              $
              2.65
              
              
              
              2.97
              
              
              
              -
              
              
              
              1,313
              
              
              $
              2.65
              
              
              
              3.97
              
              
              $
              152Granted
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -Outstanding
      at end of period
              
              
              1,313
              
              
              $
              2.65
              
              
              
              2.22
              
              
              
              -
              
              
              
              1,313
              
              
              $
              2.65
              
              
              
              3.22Exercisable
      at end of period
              
              
              1,313
              
              
              $
              2.65
              
              
              
              2.22
              
              
              
              -
              
              
              
              1,313
              
              
              $
              2.65
              
              
              
              3.22
              
              
              $
              152
 
 The range
of exercise prices for options outstanding at April 30, 2008 and 2007 was $2.00
to $3.56.
 
 2000 Stock Option
Plan
 
 The
Company’s 2000 Stock Option Plan (“2000 Plan”) has 1,950,000 shares of common
stock authorized for issuance. Options granted under the 2000 Plan may be
either: (a) options intended to qualify as incentive stock options under
Section 422 of the Code, or (b) nonqualified stock
options.
 
 Any
incentive stock option that is granted under the 2000 Plan may not be granted at
a price less than the fair market value of the stock on the date of the grant
(or less than 110% of the fair market value in the case of a participant who is
a 10% shareholder of the Company within the meaning of Section 422 of the
Code). Nonqualified stock options may be granted at the exercise price
established by the Compensation Committee.
 
 Each
incentive stock option granted under the 2000 Plan is exercisable for a period
of not more than ten years from the date of grant (five years in the case of a
participant who is 10% shareholder of the Company). Nonqualified stock options
do not have this restriction.
 
 Eligible
participants include current and prospective employees, nonemployee directors,
consultants or other persons who provide services to the Company and whose
performance, in the judgment of the Compensation Committee or management of the
Company, can have a significant effect on the success of the
Company.
  10
 Index
  Changes
in option shares under the 2000 Plan during the:
 
 Three
      months ended
                April
      30, 2008
              
              
              Three
      months ended
                April
      30, 2007Options
              
              
              Wt-Avg
                Exercise
      Price
              
              
              Wt-Avg
                Remaining
                Contractual
                Period
              
              
              Aggregate
      Intrinsic Value
              
              
              Options
              
              
              Wt-Avg
                Exercise
      Price
              
              
              Wt-Avg
                Remaining
                Contractual
                Period
              
              
              Aggregate
      Intrinsic
                ValueOutstanding
      at beginning of period
              
              
              890,975
              
              
              $
              1.52
              
              
              
              6.43
              
              
              $
              289,823
              
              
              
              1,082,850
              
              
              $
              1.43
              
              
              
              7.10
              
              
              $
              688,028Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              750
              
              
              $
              1.53
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (13,750
              )
              
              $
              .75
              
              
              
              -
              
              
              
              -Forfeited
              
              
              (8,500
              )
              
              $
              2.00
              
              
              
              -
              
              
              
              -
              
              
              
              (25,374
              )
              
              $
              1.38
              
              
              
              -
              
              
              
              -Outstanding
      at end of period
              
              
              882,475
              
              
              $
              1.51
              
              
              
              6.16
              
              
              $
              167,802
              
              
              
              1,044,476
              
              
              $
              1.44
              
              
              
              6.85
              
              
              $
              654,011Exercisable
      at end of period
              
              
              730,329
              
              
              $
              1.45
              
              
              
              5.71
              
              
              $
              166,124
              
              
              
              802,080
              
              
              $
              1.34
              
              
              
              6.32
              
              
              $
              588,159
 
 Nine
      months ended
                April
      30, 2008
              
              
              Nine
      months ended
                April
      30, 2007Options
              
              
              Wt-Avg
                Exercise
      Price
              
              
              Wt-Avg
                Remaining
                Contractual
                Period
              
              
              Aggregate
      Intrinsic Value
              
              
              Options
              
              
              Wt-Avg
                Exercise
      Price
              
              
              Wt-Avg
                Remaining
                Contractual
                Period
              
              
              Aggregate
      Intrinsic
                ValueOutstanding
      at beginning of period
              
              
              1,013,100
              
              
              $
              1.45
              
              
              
              6.61
              
              
              $
              320,062
              
              
              
              1,054,350
              
              
              $
              1.35
              
              
              
              7.27
              
              
              $
              814,975Granted
              
              
              35,500
              
              
              $
              1.63
              
              
              
              -
              
              
              
              -
              
              
              
              111,000
              
              
              $
              2.02
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (34,126
              )
              
              $
              .48
              
              
              
              -
              
              
              
              -Forfeited
              
              
              (166,125
              )
              
              $
              1.15
              
              
              
              -
              
              
              
              -
              
              
              
              (86,748
              )
              
              $
              1.43
              
              
              
              -
              
              
              
              -Outstanding
      at end of period
              
              
              882,475
              
              
              $
              1.51
              
              
              
              6.16
              
              
              $
              167,802
              
              
              
              1,044,476
              
              
              $
              1.44
              
              
              
              6.85
              
              
              $
              654,011Exercisable
      at end of period
              
              
              730,329
              
              
              $
              1.45
              
              
              
              5.71
              
              
              $
              166,124
              
              
              
              802,080
              
              
              $
              1.34
              
              
              
              6.32
              
              
              $
              588,159
 
 Changes
in non-vested option shares under the 2000 Plan during the:
 
 Three
      months ended
                April
      30, 2008
              
              
              Three
      months ended
                April
      30, 2007Options
              
              
              Wt-Avg
      Grant Date Fair Value
              
              
              Options
              
              
              Wt-Avg
      Grant Date Fair ValueNon-vested
      at beginning of period
              
              
              158,364
              
              
              $
              1.80
              
              
              
              265,238
              
              
              $
              1.74Granted
              
              
              -
              
              
              
              -
              
              
              
              750
              
              
              $
              1.96Vested
              
              
              -
              
              
              
              -
              
              
              
              -Forfeited
              
              
              (6,218
              )
              
              $
              2.00
              
              
              
              (23,592
              )
              
              $
              1.27Non-vested
      at end of period
              
              
              152,146
              
              
              $
              1.79
              
              
              
              242,396
              
              
              $
              1.79
 
 Nine
      months ended
                April
      30, 2008
              
              
              Nine
      months ended
                April
      30, 2007Options
              
              
              Wt-Avg
      Grant Date Fair Value
              
              
              Options
              
              
              Wt-Avg
      Grant Date Fair ValueNon-vested
      at beginning of period
              
              
              137,675
              
              
              $
              1.79
              
              
              
              188,799
              
              
              $
              1.59Granted
              
              
              35,500
              
              
              $
              1.63
              
              
              
              111,000
              
              
              $
              2.02Vested
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Forfeited
              
              
              (21,029
              )
              
              $
              1.50
              
              
              
              (57,403
              )
              
              $
              1.60Non-vested
      at end of period
              
              
              152,146
              
              
              $
              1.79
              
              
              
              242,396
              
              
              $
              1.79
 
 The range of exercise prices for
options outstanding at April 30, 2008and 2007 was $0.15 to
$2.735.
  11
 Index
  4.
              ACQUISITIONS
 
 On
January 26, 2007, the Company purchased all of the outstanding stock of OC-NET,
Inc. (“OC-NET”).  OC-NET, a privately held corporation in Cypress, CA,
provided website development and hosting services to the Power Sports market
(which includes motorcycles, All Terrain Vehicles, snowmobiles and personal
watercraft), as well as certain customers outside the Power Sports market.
 Consideration for the acquisition included approximately $1.1 million in
cash, 350,000 shares of the Company’s common stock, $700,000 in debt to the
sellers and future contingent payments totaling up to $400,000.
 
 The
purchase price of this acquisition has been allocated to specific assets and
liabilities acquired based on the fair value of those identified tangible and
intangible assets and liabilities as determined by an independent
valuation.  These include capitalized software to be amortized over 4
years and intangibles related to customer relationships and  assembled
and trained workforce to be amortized over 5 years as well as
goodwill.  In addition, the final purchase price will be determined
upon the settlement of the contingencies outlined in the Stock Purchase
Agreement relating to the transaction.  As noted above, a total of
$400,000 of the total purchase price was subject to contingencies, of which
$250,000 was paid in February 2008. It was determined that it was more likely
than not that the contingencies associated with the remaining $150,000 would be
resolved such that the Company would owe this amount.  Accordingly,
this amount has been recorded as a liability.
 
 In
connection with the acquisition of OC-Net, the Company entered into an
employment agreement with Robert Hipp (the “Employment Agreement”) to serve as a
Marketing/Business Development Manager for the Company.  The term of the
Employment Agreement is two years.
 
 The
foregoing description of the Stock Purchase Agreement and the transactions
contemplated thereby is qualified in its entirety by reference to the Stock
Purchase Agreement, attached as Exhibit 2.1 of Form 8-K, dated January 29,
2007 and Form 8-K/A dated April 13, 2007, and incorporated herein by
reference.  The acquisition was accounted for under the purchase
method; accordingly, its results are included in the financial statements of the
Company from the date of acquisition.
 
 The
following table shows actual results of operations for the three and nine month
periods ended April 30, 2008 and unaudited pro forma results of operations for
the three and nine months ended April 30, 2007, which assumes the acquisition of
the OC-Net business occurred at the beginning of those periods:
 
 
 Pro
      Forma Results(in
      thousands, except per share data)Three
      months ended
              
              
              Nine
      months endedApril
      30
              
              
              April
      302008
              
              
              2007
              
              
              2008
              
              
              2007Actual
              
              
              Pro
      Forma
              
              
              Actual
              
              
              Pro
      FormaRevenues
              
              $
              4,158
              
              
              $
              4,101
              
              
              $
              12,604
              
              
              $
              11,954Net
      income
              
              $
              428
              
              
              $
              (205
              )
              
              $
              1,005
              
              
              $
              20Earnings
      per share
              
              $
              0.06
              
              
              $
              (0.03
              )
              
              $
              0.15
              
              
              $
              0.00Earnings
      per diluted share
              
              $
              0.06
              
              
              $
              (0.03
              )
              
              $
              0.14
              
              
              $
              0.00
 
 
 The
actual and pro forma information are the same for the three months ended April
30, 2007, as the acquisition of the OC-Net business occurred prior to this
period.  The pro forma information for the nine months ended April 30,
2007 does not purport to be indicative of the results that actually would have
been obtained if the combined operations had been conducted during the periods
presented and is not intended to be a projection of future
results.
  12
 Index
  5.
              NOTES
      PAYABLE
 
 The
following table sets forth, for the periods indicated, certain information
related to the Company’s debt derived from the Company’s unaudited financial
statements.
 
 Debt
Schedule
 (In
thousands)
 
 
 April
      30
              
              
              July
      312008
              
              
              2007
              
              
              Net(Unaudited)
              
              
              (Audited)
              
              
              ChangeNote
      payable to WITECH:Current
      portion of note payable
              
              $
              -
              
              
              $
              50
              
              
              $
              (50
              )Long
      term portion of note payable
              
              
              -
              
              
              
              -
              
              
              
              -Total
      note payable to WITECH
              
              
              -
              
              
              
              50
              
              
              
              (50
              )Notes
      payable to New Holders:Current
      portion of notes payable
              
              
              -
              
              
              
              500
              
              
              
              (500
              )Long
      term portion of notes payable
              
              
              -
              
              
              
              -
              
              
              
              -Total
      face value of notes payable to New Holders
              
              
              -
              
              
              
              500
              
              
              
              (500
              )Carrying
      value in excess of face value of notes payable
              
              
              -
              
              
              
              4
              
              
              
              (4
              )Debt
      discount (common stock warrants and options)
              
              
              -
              
              
              
              (3
              )
              
              
              3Total
      carrying value of notes payable to New Holders
              
              
              -
              
              
              
              501
              
              
              
              (501
              )Debt
      related to acquisition of OC-Net:Current
      portion of notes payable
              
              
              233
              
              
              
              233
              
              
              
              -Long
      term portion of notes payable
              
              
              173
              
              
              
              350
              
              
              
              (177
              )Total
      notes payable
              
              
              406
              
              
              
              583
              
              
              
              (177
              )Current
      cash earn out
              
              
              -
              
              
              
              250
              
              
              
              (250
              )Long
      term cash holdback
              
              
              150
              
              
              
              150
              
              
              
              -Imputed
      interest on cash earn out/holdback
              
              
              (9
              )
              
              
              (32
              )
              
              
              23Total
      debt related to acquisition of OC-Net
              
              
              547
              
              
              
              951
              
              
              
              (404
              )Total
      debt
              
              $
              547
              
              
              $
              1,502
              
              
              $
              (955
              )
 
 On April
24, 2003, the Company restructured its debt.  In exchange for
previously outstanding securities, the Company issued to a group of investors
(collectively, the “New Holders”), in aggregate, $500,000 in cash, new unsecured
notes in the amount of $3.9 million (the “New Notes”) and new warrants for
250,000 common shares, exercisable at $1.00 per share (the “New
Warrants”).  The interest rate on the New Notes was prime plus 2%,
adjusted quarterly.  The New Notes were payable in $200,000 quarterly
installments commencing March 31, 2004 through December 31, 2005 and $300,000
quarterly installments commencing March 31, 2006 at the prime interest rate plus
2%.  The New Notes were paid in full on December 31,
2007.
 
 In
accordance with SFAS No. 15, “Accounting by Debtors and Creditors for Troubled
Debt Restructurings,” the exchange of the previously outstanding securities 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
approximately $322,000, was 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
was payable in $50,000 quarterly installments through September 30, 2007 at the
prime interest rate plus 2%, adjusted quarterly.  The note was paid in
full on September 28, 2007.
 
 The
Company issued $700,000 of notes and $400,000 of future contingent payments in
connection with the OC-Net acquisition.  The interest rate on the
notes is prime plus 2%, adjusted quarterly (effective rate of 8.00% as of April
30, 2008).  The notes are payable in quarterly principal installments
of $58,333, commencing March 31, 2007 through April 30, 2010.  The
notes do not contain any financial covenants.  The Company paid
$250,000 of the future contingent payments in February, 2008, and the remaining
$150,000 is due in January, 2009.
   6.
              LINE OF
      CREDIT
 
 On July
9, 2004, the Company entered into a line of credit with JPMorgan Chase, N.A.
which, as since amended, permits the Company to borrow an amount equal to 80% of
the book value of all eligible accounts receivable plus 45% of the value of all
eligible open renewal orders (provided the renewal rate is at least 85%) minus
$75,000, up to $1,000,000, and bears interest at prime rate.  Eligible
accounts include certain non-foreign accounts receivable which are less than 90
days from the invoice date.  The line of credit terminates July 9,
2008, and is secured by substantially all of the Company’s
assets.  The line of credit limits repurchases of common stock, the
payment of dividends, liens on assets and new indebtedness.  As of
April 30, 2008, there were no borrowings on the line of credit.
  13
 Index
  7.
              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 (a “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 the
Company’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 other shareholders the
ability to purchase additional stock of the Company 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.
 
 
 8.
              INCOME
    TAXES
 
 The
provision for income taxes is composed of the following (in
thousands):
 
 Three
      months ended
              
              
              Nine
      months endedApril
      30
              
              
              April
      302008
              
              
              2007
              
              
              2008
              
              
              2007Current:Federal
              
              $
              164
              
              
              $
              140
              
              
              $
              193
              
              
              $
              323State
              
              
              45
              
              
              
              32
              
              
              
              53
              
              
              
              83Deferred
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Generation
      / (utilization) of net operating loss carry-forwards, net of change in
      valuation allowance
              
              
              (200
              )
              
              
              (163
              )
              
              
              (238
              )
              
              
              (389
              )Income
      tax provision
              
              $
              9
              
              
              $
              9
              
              
              $
              8
              
              
              $
              17
 
 
 Provision
for income taxes is an estimate based on taxes payable under currently enacted
tax laws and an analysis of temporary differences between the book and tax bases
of our assets and liabilities, including various accruals, allowances,
depreciation and amortization and does not represent current taxes
due.  The tax effect of these temporary differences and the estimated
tax benefit from tax net operating losses are reported as deferred tax assets
and liabilities in the balance sheet.  An assessment of the likelihood
that net deferred tax assets will be realized from future taxable income is
performed on a quarterly basis.  To the extent that management
believes it is more likely than not that some portion, or all, of the deferred
tax asset will not be realized, a valuation allowance is
established.  Because the ultimate realizability of deferred tax
assets is highly subject to the outcome of future events, the amount established
as a valuation allowance is a significant estimate that is subject to change in
the near future.  The change in the valuation allowance during a
period is reflected with a corresponding increase or decrease in the tax
provision in the statement of operations.  Because of the uncertainty
of long-term future economic conditions, the estimated future utilization of
deferred net tax assets is based on twelve quarters of
projections.  The Company made no change in its estimated valuation
allowance this quarter.
 
 The
Company adopted the provisions of Financial Accounting Standards Board, or FASB,
Interpretation No. 48, "Accounting for  Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), on August 1, 2007. The
implementation of FIN 48 did not have a significant impact on our results of
operations or financial position and therefore no amounts were reserved for
uncertain tax positions as of April 30, 2008.
 
 
 9.
              BUSINESS
      SEGMENTS
 
 The
Company’s business segments are internally organized primarily by geographic
location of the operating facilities.  In accordance with SFAS
No. 131, “Disclosures about Segments of an Enterprise and Related
Information”, the Company has segregated the Netherlands operation and the US
operations into separate reportable segments. (Refer to Note 1, “Description of
Business and Significant Accounting Policies” to the financial statements
included in the Company’s annual report on Form 10-KSB for the fiscal year ended
July 31, 2007, for a description of segment operations and the accounting
policies for each of the segments.) We evaluate the performance of and allocate
resources to each of the segments based on their operating results excluding
interest and taxes.
  14
 Index
  Information
concerning the Company’s operating business segments for fiscal 2008 and 2007 is
as follows:
   Business
Segment Information
 (In
Thousands)
 
 
 Three
      months ended
              
              
              
              
              
              Nine
      months endedApril
      30
              
              
              Percent
              
              
              April
      30
              
              
              Percent2008
              
              
              2007
              
              
              Change
              
              
              2008
              
              
              2007
              
              
              ChangeRevenueNetherlands
              
              $
              189
              
              
              $
              181
              
              
              
              4
              %
              
              $
              527
              
              
              $
              510
              
              
              
              3
              %United
      States
              
              
              3,969
              
              
              
              3,920
              
              
              
              1
              %
              
              
              12,077
              
              
              
              10,785
              
              
              
              12
              %Consolidated
              
              
              4,158
              
              
              
              4,101
              
              
              
              1
              %
              
              
              12,604
              
              
              
              11,295
              
              
              
              12
              %Earnings
      (loss)Netherlands
              
              $
              (107
              )
              
              $
              (206
              )
              
              
              (48
              %)
              
              $
              (283
              )
              
              $
              (518
              )
              
              
              (45
              %)United
      States
              
              
              534
              
              
              
              1
              
              
              
              51,463
              %
              
              
              1,288
              
              
              
              786
              
              
              
              64
              %Consolidated
              
              
              427
              
              
              
              (205
              )
              
              
              (308
              %)
              
              
              1,005
              
              
              
              268
              
              
              
              275
              %April
      30
              
              
              July
      31
              
              
              Percent2008
              
              
              2007
              
              
              ChangeTotal
      AssetsNetherlands
              
              $
              224
              
              
              $
              309
              
              
              
              (28
              %)United
      States
              
              
              9,231
              
              
              
              9,618
              
              
              
              (4
              %)Consolidated
              
              
              9,455
              
              
              
              9,927
              
              
              
              (5
              %)
  15
 Index
 
 ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
 
 Results
of Operations
 
 Total
revenue for the three and nine month periods ended April 30, 2008 increased
$57,000 or 1% and $1,309,000 or 12%, respectively, compared to the same periods
last year, primarily due to an increase in revenues from the Company’s marketing
services.  All of the three month growth and approximately 50% of the
nine month growth was organic.  Approximately half of the nine month
growth was from the OC-Net acquisition.  Operating income increased
$599,000 or 348% for the three months ended April 30, 2008, primarily due to an
overall decrease in spending and $739,000 or 232% for the nine months ended
April 30, 2008, compared to the same periods last year, primarily due to an
increase in revenue.  Over $300,000 of the reduced spending was due to
non-recurring expenses incurred in fiscal 2007 for distribution, development and
support costs associated with fixing a major new release of the Company’s
catalog product, non-capitalized merger and acquisition costs and severance for
management that was not replaced.  Net income increased $632,000 or
$0.10 per basic share for the three months ended April 30, 2008 and $737,000 or
$0.11 per basic share for the nine months ended April 30, 2008, compared to the
same periods last year.  Essentially all of the growth in net income
was organic, as pro forma net income, taking into account the OC-Net acquisition
for the three and nine month periods ended April 30, 2007, would have been less
than reported net income for the period.  Management expects earnings
to continue to increase over the prior fiscal year for the remainder of fiscal
2008.
 
 
 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.  Revenue under arrangements that include acceptance terms
beyond the Company’s standard terms is 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 under 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.  Amounts invoiced to customers prior to recognition as
revenue as discussed above are reflected in the accompanying balance sheets as
deferred revenue.
 
 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.
  16
 Index
  Legal
Provisions
 
 The
Company is periodically involved in legal proceedings arising from contracts,
patents or other matters in the normal course of business.  The
Company reserves for any material estimated losses if the outcome is reasonably
certain, in accordance with the provisions of SFAS No. 5 “Accounting for
Contingencies”.
  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.
 
 Cash
and Cash Equivalents
 
 The
Company’s investment policy, as approved by the Board of Directors, is designed
to provide preservation of capital, adequate liquidity to meet projected cash
requirements, optimum yields in relationship to risk, market conditions and tax
considerations and minimum risk of principal loss through diversified short and
medium term investments.  Eligible investments included direct
obligations of the U.S. Treasury, obligations issued or guaranteed by the U.S.
government, certain time deposits, certificates of deposits issued by commercial
banks, money market mutual funds, asset backed securities and municipal
bonds.  The Company’s current investments include commercial paper and
money market funds with terms not exceeding ninety days.
 
 Debt
Instruments
 
 The
Company valued debt discounts for warrants for shares of the Company’s common
stock 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.
 
 Deferred
Tax Asset
 
 The tax
effect of the temporary differences between the book and tax bases of assets and
liabilities and the estimated tax benefit from tax net operating losses are
reported as deferred tax assets and liabilities in the balance
sheet.  An assessment of the likelihood that net deferred tax assets
will be realized from future taxable income is performed. Because the ultimate
realizability of deferred tax assets is highly subject to the outcome of future
events, the amount established as valuation allowances is considered to be a
significant estimate that is subject to change in the near term.  To
the extent a valuation allowance is established or there is a change in the
allowance during a period, the change is reflected with a corresponding increase
or decrease in the tax provision in the statement of operations.
 
 Stock-Based
Compensation
 
 Effective
August 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standard No. 123R, Share-Based Payment – an Amendment
of FASB Statement Nos. 123 and 95, for its stock option and stock purchase
plans. The Company previously accounted for these plans under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations and
disclosure requirements established by Statement of Financial Accounting
Standard No. 123, Accounting for Stock-Based Compensation, as amended by
Statement of Financial Accounting Standard No. 148, Accounting for
Stock-Based Compensation – Transition and Disclosure.
   Revenues
 
 The
Company is a leading provider of electronic parts catalogs and related
technology and services to increase sales and profits for dealers, distributors
and manufacturers in the manufactured equipment market.  The Company
currently provides 97 catalogs of manufactured equipment from 76 manufacturers
via CD-Rom to approximately 20,000 dealers (and to others via the worldwide web)
in approximately 89 countries in 12 segments of the worldwide manufactured
equipment market including outdoor power, power sports, motorcycles,
agricultural equipment, marine, recreation vehicles (“RV”), floor maintenance,
auto and truck parts after-market, construction, and others primarily in the
U.S., Canada, Europe and Australia.  Collectively, dealers and
distributors have approximately 70,000 CD catalog subscriptions and there are
many others who use our web products to view their data.  The Company
supplies three types of software and services: (1) robust Web and CD-ROM
interactive electronic parts catalogs, (2) marketing services including
custom and template-based website services and technology-enabled direct mail
services and e-mail marketing services and (3) communication or transaction
services.
  17
 Index
  The
following table shows the products and services that the Company offers, a brief
description of them and the industries where they are currently in
use.
 
 Electronic
      Catalog Products And Related ServicesProduct
      or Service
              Description
              Primary
      Industry/MarketPartSmart
      ClassicÔ
              Electronic
      parts catalog for equipment dealers, formerly PartSmart Version
      6
              Equipment-
      all sub-markets except RVPartSmart®
              Electronic
      parts catalog for equipment dealers
              Equipment-
      all sub-markets except RVPartSmart
      WebÔ
              Web
      based electronic parts catalog, formerly EMPARTweb
              Equipment
      - all sub-marketsLookupparts.com
              PartSmart
      Web-based lookup service offered to dealers on a subscription
      basis
              Equipment
      - all sub-markets except RVPartSmart
      WebÔ
      ASP
              Electronic
      parts catalog viewing software offered as a hosted service for individual
      distributors and manufacturers, formerly EMPARTweb ASP
              Equipment
      - all sub-marketsPartSmart
      CartÔ
              Add-on
      product to PartSmart Web that facilitates order taking from the
      catalog
              Equipment
      - all sub-marketsPartSmart
      Data ManagerTM
              Electronic
      parts catalog creation software used to produce catalogs for viewing on
      PartSmart Classic, PartSmart 8, and PartSmart Web
              Equipment
      - all sub-marketsPartSmart
      Data PublisherTM
              Add-on
      product to PartSmart Data Manager that facilitates the creation of a file
      of parts and related information for use in PartSmart PDF Catalog Composer
      Module
              Equipment
      – all sub-marketsPartSmart
      PDF Catalog ComposerTM Module
              Add-on
      product to PartSmart Data Manager that facilitates the creation of a parts
      manual, price sheet or other parts-related publications in the Adobe
      Acrobat format for printing, electronic distribution or online
      display
              Equipment
      – all sub-marketsElectronic
      publishing services
              Project
      management, data conversion, editing, production, and distribution
      services for manufacturers who wish to outsource catalog production
      operations
              Equipment
      - all sub-marketsEMPARTviewerTM
              Electronic
      parts catalog viewing software
              Equipment
      - RVWarrantySmartTM
              Web-based
      end-to-end warranty claims processing system that enables dealers,
      distributors and manufacturers to streamline product registration and
      warranty claim submission and processing, as well as check claim status
      online
              Equipment
      – all sub-marketsProfessional
      services
              Project
      management, software customization, data conversion, back-end system
      integration, roll-out management, and help desk support
      services
              Equipment
      - all sub-markets
 
 
 MARKETING
      SERVICESProduct
      or Service
              Description
              Primary
      Industry/MarketWebsiteSmart
      ProTM
              Software
      to create customized websites and conduct business electronically,
      including optional shopping cart, superseding WebsiteSmart
              Equipment
      – primarily outdoor power,
                power
      sportsWebsiteSmartTM
              Software
      to create customized websites and conduct business electronically,
      including optional shopping cart
              Equipment
      – primarily outdoor power,
                power
      sportsProfessional
      Services
              Large-scale
      website creation, hosting  and maintenance
    services
              Equipment
      – all sub-marketsARI
      MailSmartTM
              Direct
      mail solution that enables users to cost-effectively and efficiently reach
      customers and prospects with customized messages
              Equipment
      – all sub-marketseMailSmartTM
              Email
      solution that enables users to stay in touch with customers through
      special offers and a quarterly newsletter
              Equipment
      – all sub-marketsContent
      Management Services
              Add-on
      solution to WebsiteSmart and Website Smart Pro that automatically updates
      a website with Weather Alerts, promotions based on customer seasonality
      and supplier promotions
              Equipment
      – all sub-markets
  18
 Index
 
 eCommERCE
      Products and ServicesProduct
      or Service
              Description
              Primary
      Industry/MarketTradeRoute®
              Document
      handling and communications for product ordering, warranty claims and
      other business documents
              Equipment
      - Outdoor power and RV
 
 As part
of its historical business practice, the Company continues to provide electronic
transaction services to the North American agribusiness industry, representing
approximately 4% of total revenue for the nine months ended April 30,
2008.
 
 
 The
following table sets forth, for the periods indicated, certain revenue
information derived from the Company's unaudited financial
statements.  In the table below, revenue is categorized by customer
location, rather than by ARI subsidiary.  Since some non-North
American customers are billed from the US subsidiary, the presentation is
different from the segment reporting in Note 9 above.
 
 Revenue
by Location and Service
 (In
Thousands)
 
 
 Three
      months ended
              
              
              
              
              
              Nine
      months endedApril
      30
              
              
              Percent
              
              
              April
      30
              
              
              Percent2008
              
              
              2007
              
              
              Change
              
              
              2008
              
              
              2007
              
              
              ChangeNorth
      AmericanCatalog
      subscriptions
              
              $
              2,435
              
              
              $
              2,503
              
              
              
              (3
              %)
              
              $
              7,464
              
              
              $
              7,711
              
              
              
              (3
              %)Catalog
      professional services
              
              
              311
              
              
              
              329
              
              
              
              (5
              %)
              
              
              920
              
              
              
              923
              
              
              
              0
              %Marketing
      services
              
              
              588
              
              
              
              536
              
              
              
              10
              %
              
              
              1,705
              
              
              
              1,047
              
              
              
              63
              %Marketing
      professional services
              
              
              373
              
              
              
              230
              
              
              
              62
              %
              
              
              1,201
              
              
              
              230
              
              
              
              422
              %Dealer
      & distributor communications
              
              
              181
              
              
              
              165
              
              
              
              10
              %
              
              
              496
              
              
              
              512
              
              
              
              (3
              %)Subtotal
              
              
              3,888
              
              
              
              3,763
              
              
              
              3
              %
              
              
              11,786
              
              
              
              10,423
              
              
              
              13
              %Rest
      of the WorldCatalog
      subscriptions
              
              
              268
              
              
              
              257
              
              
              
              4
              %
              
              
              813
              
              
              
              727
              
              
              
              12
              %Catalog
      professional services
              
              
              2
              
              
              
              81
              
              
              
              (98
              %)
              
              
              5
              
              
              
              145
              
              
              
              (97
              %)Subtotal
              
              
              270
              
              
              
              338
              
              
              
              (20
              )%
              
              
              818
              
              
              
              872
              
              
              
              (6
              %)Total
      RevenueCatalog
      subscriptions
              
              
              2,703
              
              
              
              2,760
              
              
              
              (2
              %)
              
              
              8,277
              
              
              
              8,438
              
              
              
              (2
              %)Catalog
      professional services
              
              
              313
              
              
              
              410
              
              
              
              (24
              %)
              
              
              925
              
              
              
              1,068
              
              
              
              (13
              %)Marketing
      services
              
              
              588
              
              
              
              536
              
              
              
              10
              %
              
              
              1,705
              
              
              
              1,047
              
              
              
              63
              %Marketing
      professional services
              
              
              373
              
              
              
              230
              
              
              
              62
              %
              
              
              1,201
              
              
              
              230
              
              
              
              422
              %Dealer
      & distributor communications
              
              
              181
              
              
              
              165
              
              
              
              10
              %
              
              
              496
              
              
              
              512
              
              
              
              (3
              %)Total
              
              $
              4,158
              
              
              $
              4,101
              
              
              
              1
              %
              
              $
              12,604
              
              
              $
              11,295
              
              
              
              12
              %
  North
America
 
 Catalog
Subscriptions
 
 North
American catalog subscription revenues are derived from software license fees,
license renewal fees, software maintenance and support fees, catalog
subscription fees, hosting and other miscellaneous subscription fees charged to
dealers, distributors and manufacturers for the use of the Company’s catalog
products in the United States and Canada.  Catalog subscription
revenues decreased for the three and nine month periods ended April 30, 2008,
compared to the same periods last year, primarily due to the non-renewal of two
significant OEM customers, who subscribed in bulk on behalf of their
dealers.  Catalog subscription renewals from the Company’s North
American dealers were approximately 89% for the nine months ended April 30,
2008.  Management expects revenues from catalog subscriptions in North
America to decline for the remainder of fiscal 2008 compared to the prior year
due to these lost bulk subscriptions.
  19
 Index
  Catalog
Professional Services
 
 Revenues
from the Company’s North American catalog professional services are derived from
software customization labor, data conversion labor, data conversion replication
fees, travel and shipping fees primarily charged to manufacturers in the United
States and Canada.  Revenues from catalog professional services in
North America decreased slightly for the three and nine month periods ended
April 30, 2008, compared to the same periods last year, primarily due to less
professional services revenue for catalog updates.  Management expects
revenues from catalog professional services in North America to decrease
somewhat for the remainder of fiscal 2008 compared to the prior year as the
Company focuses more of its sales efforts in marketing services.
 
 Marketing
Services
 
 Revenues
from the Company’s North American marketing service subscriptions are derived
from set-up, postage, hosting, access fees and commissions for on-line sales
charged to dealers, distributors and manufacturers in the United States and
Canada for the Company’s website products and services.  Revenues from
marketing services in North America increased for the three and nine month
periods ended April 30, 2008, compared to the same periods last year, primarily
due to increased sales of the Company’s Website Smart ProTM (acquired as part of
the OC-Net transaction) as a result of the Company’s investments in sales and
marketing for the marketing services business.  Revenues from Website
Smart ProTM are included in Marketing services beginning January 27,
2007.  Management expects revenues from marketing services in North
America to continue to increase for the remainder of fiscal 2008, compared to
the prior year, due to new sales as the Company continues to focus its resources
in this market.
 
 Marketing
Professional Services
 
 Revenues
from the Company’s North American marketing professional services are derived
from website customization labor primarily charged to manufacturers,
distributors and other customers in the United States.  Revenues from
marketing services in North America increased primarily from customization of
websites related to contracts acquired with OC-Net.  Management
believes that this area represents an opportunity for growth in the future
through selling new contracts.
 
 Dealer
and Distributor Communications
 
 Revenues
from dealer and distributor communications are derived from license renewal
fees, software maintenance, customization labor and other communication fees
charged for dealers and distributors to communicate with manufacturers in the
manufactured equipment industry and the agricultural inputs
industry.  Dealer and distributor communication revenues increased for
the three month period ended April 30, 2008 primarily due to the settlement of a
previously uncollectible receivable but decreased for the nine month period
ended April 30, 2008, compared to the same periods last year, primarily due to a
decline in the base of customers as the Company focused the business primarily
on its catalog products in the equipment industry.  Management expects
revenues from dealer and distributor communication products will be a declining
percentage of total revenue for the remainder of fiscal 2008, compared to the
prior year.
  
 Rest
of the World
 
 Catalog
Subscriptions
 
 Catalog
subscription revenues from the rest of the world are derived from software
license fees, license renewal fees, software maintenance and support fees,
catalog subscription fees, and other miscellaneous subscription fees charged to
dealers, distributors and manufacturers outside of North America for the use of
the Company’s catalog products.  Catalog subscription revenues for the
rest of the world increased for the three and nine month periods ended April 30,
2008, compared to the same periods last year, primarily due to delays in fiscal
2007 of two manufacturer renewals.  These manufacturers canceled, then
re-subscribed, resulting in the associated revenues not being recorded last year
and retroactive revenues being recorded this year.  Management expects
catalog subscription revenues from the rest of the world to continue to increase
for the remainder of fiscal 2008, compared to the prior year, due to the timing
of renewals.
  Catalog
Professional Services
 
 Revenues
from the Company’s rest of the world catalog professional services are derived
from software customization labor, data conversion labor, data conversion
replication fees, travel and shipping fees primarily charged to manufacturers
that do not reside in North America.  Revenues from catalog
professional services in the rest of the world has decreased significantly for
the three and nine month periods ended April 30, 2008, compared to the same
periods last year, primarily due to the lack of sales to manufacturers.
Management expects revenues from catalog professional services in the rest of
the world to continue at approximately the current rate for the remainder of
fiscal 2008 unless a new manufacturer sale is completed.
  20
 Index
  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
              
              
              Nine
      months endedApril
      30
              
              
              April
      302008
              
              
              2007
              
              
              %
      Chg
              
              
              2008
              
              
              2007
              
              
              %
      ChgCatalog
      subscriptionsRevenue
              
              $
              2,703
              
              
              $
              2,760
              
              
              
              (2
              %)
              
              $
              8,277
              
              
              $
              8,438
              
              
              
              (2
              %)Cost
      of revenue
              
              
              265
              
              
              
              286
              
              
              
              (7
              %)
              
              
              923
              
              
              
              859
              
              
              
              7
              %Cost
      of revenue as a percent of revenue
              
              
              10
              %
              
              
              10
              %
              
              
              
              
              
              
              11
              %
              
              
              10
              %Catalog
      professional servicesRevenue
              
              
              313
              
              
              
              410
              
              
              
              (24
              %)
              
              
              925
              
              
              
              1,068
              
              
              
              (13
              %)Cost
      of revenue
              
              
              138
              
              
              
              210
              
              
              
              (34
              %)
              
              
              389
              
              
              
              448
              
              
              
              (13
              %)Cost
      of revenue as a percent of revenue
              
              
              44
              %
              
              
              51
              %
              
              
              
              
              
              
              42
              %
              
              
              42
              %Marketing
      services subscriptionsRevenue
              
              
              588
              
              
              
              536
              
              
              
              10
              %
              
              
              1,705
              
              
              
              1,047
              
              
              
              63
              %Cost
      of revenue
              
              
              139
              
              
              
              244
              
              
              
              (43
              %)
              
              
              487
              
              
              
              511
              
              
              
              (5
              %)Cost
      of revenue as a percent of revenue
              
              
              24
              %
              
              
              46
              %
              
              
              
              
              
              
              29
              %
              
              
              49
              %Marketing
      professional servicesRevenue
              
              
              373
              
              
              
              230
              
              
              
              62
              %
              
              
              1,201
              
              
              
              230
              
              
              
              422
              %Cost
      of revenue
              
              
              129
              
              
              
              75
              
              
              
              72
              %
              
              
              391
              
              
              
              75
              
              
              
              421
              %Cost
      of revenue as a percent of revenue
              
              
              35
              %
              
              
              33
              %
              
              
              
              
              
              
              33
              %
              
              
              33
              %Dealer
      and distributor communicationsRevenue
              
              
              181
              
              
              
              165
              
              
              
              10
              %
              
              
              496
              
              
              
              512
              
              
              
              (3
              %)Cost
      of revenue
              
              
              4
              
              
              
              16
              
              
              
              (75
              %)
              
              
              10
              
              
              
              68
              
              
              
              (85
              %)Cost
      of revenue as a percent of revenue
              
              
              2
              %
              
              
              10
              %
              
              
              
              
              
              
              2
              %
              
              
              13
              %TotalRevenue
              
              $
              4,158
              
              
              $
              4,101
              
              
              
              1
              %
              
              $
              12,604
              
              
              $
              11,295
              
              
              
              12
              %Cost
      of revenue
              
              $
              674
              
              
              
              831
              
              
              
              (19
              %)
              
              
              2,201
              
              
              
              1,961
              
              
              
              12
              %Cost
      of revenue as a percent of revenue
              
              
              16
              %
              
              
              20
              %
              
              
              
              
              
              
              17
              %
              
              
              17
              %
 
 
 Cost of
catalog subscriptions consists primarily of reseller fees, software amortization
costs, catalog replication and distribution costs.  Cost of catalog
subscriptions as a percentage of revenue remained relatively the same for the
three and nine month periods ended April 30, 2008, compared to the same periods
last year.  Management expects gross margins may, as a percent of
revenue from catalog subscriptions, vary slightly from quarter to quarter due to
the timing of data shipments and to variations in the recognition of revenue
which does not directly correlate to software amortization expense, which is
generally on a straight-line basis.
 
 Cost of
catalog professional services consists of customization and catalog production
labor. Cost of professional services as a percentage of revenue decreased for
the three month period ended April 30, 2008, compared to the same period last
year, primarily due to an increase in non-billable catalog production costs in
the third quarter of fiscal 2008.  Cost of professional services as a
percentage of revenue remained relatively the same for the nine month period
ended April 30, 2008, compared to the same period last
year.  Management expects cost of catalog professional services to
fluctuate from year to year depending on the mix of services sold, the portion
of customizations which are billable and on the Company’s performance towards
the contracted amount for customization projects.
  21
 Index
  Cost of
revenue for marketing service subscriptions consists primarily of website setup
labor, software amortization costs, postcards, printing and distribution costs.
Cost of marketing services as a percentage of revenue decreased for the three
and nine month periods ended April 30, 2008, compared to the same periods last
year, primarily due to increased revenue from the Company’s Website products,
which have a higher margin than the Company’s MailSmartTM
products.  Management expects gross margins, as a percent of revenue
from marketing services, to increase over the prior year for the remainder of
fiscal 2008, as customers renew their Website products, without incurring
one-time start-up costs which are charged in the first year of
sale.
 
 Cost of
revenues for marketing professional services consists of website customization
labor associated primarily with new contracts acquired with OC-Net in January
2007.  Cost of revenues for marketing professional services as a
percentage of revenue remained relatively the same for the three and nine month
periods ended April 30, 2008, compared to the same periods last
year.  Management expects cost of marketing professional services to
fluctuate from year to year depending on the Company’s performance towards the
contracted amount for customization projects and the actual labor rates
negotiated in customer contracts.
 
 Cost of
dealer and distributor communications revenue consists primarily of
telecommunication costs, royalties and software customization
labor.  Cost of dealer and distributor communications as a percentage
of revenue decreased significantly for the three and nine month periods ended
April 30, 2008, compared to the same periods last year, primarily due to a
decrease in telecommunication costs and software customization
labor.  Management expects gross margins, as a percent of revenue from
dealer and distributor communications, to remain relatively the same as the
current quarter for the remainder of fiscal 2008.
 
 
 Operating
Expenses
 
 The
following table sets forth, for the periods indicated, certain operating expense
information derived from the Company's unaudited financial
statements.
 
 Operating
Expenses
 (In
thousands)
 
 
 Three
      months ended
              
              
              Nine
      months endedApril
      30
              
              
              April
      302008
              
              
              2007
              
              
              %
      Chg
              
              
              2008
              
              
              2007
              
              
              %
      ChgCustomer
      operations and support
              
              $
              252
              
              
              $
              298
              
              
              
              (15
              %)
              
              $
              788
              
              
              $
              842
              
              
              
              (6
              %)Selling,
      general and administrative
              
              
              2,292
              
              
              
              2,491
              
              
              
              (8
              %)
              
              
              6,976
              
              
              
              6,577
              
              
              
              6
              %Software
      development and technical support
              
              
              333
              
              
              
              450
              
              
              
              (26
              %)
              
              
              1,021
              
              
              
              1,178
              
              
              
              (13
              %)Depreciation
      and amortization
              
              
              180
              
              
              
              203
              
              
              
              (11
              %)
              
              
              561
              
              
              
              419
              
              
              
              34
              %Net
      operating expenses
              
              $
              3,057
              
              
              $
              3,442
              
              
              
              (11
              %)
              
              $
              9,346
              
              
              $
              9,016
              
              
              
              4
              %
 
 
 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 nine month periods ended April 30, 2008, compared to the same periods last
year, primarily due to a decrease in temporary help used to support the
Company’s products.  Management expects customer operations and
support costs to continue to be lower than the previous year for the remainder
of fiscal 2008, due to the use of temporary help to support a new release of the
Company’s catalog software in fiscal 2007.
 
 Selling,
general and administrative expenses (“SG&A”) decreased for the three month
period ended April 30, 2008, compared to the same period last year, as the
Company reduced its expenses in the Netherlands office.  SG&A
increased for the nine month period ended April 30, 2008, compared to the same
period last year, as a result of the Company’s investment in the outsourced
finance & insurance (“F&I”) sales initiative in the North American
market and operating costs for the California location in the first half of
fiscal 2008.  The California location was added to the Company with
the OC-Net acquisition and provides website development, customization and
support for the Company’s new WebsiteSmart ProTM product. SG&A, as a
percentage of revenue, decreased from 58% for the nine month period ended April
30, 2007 to 55% for the same period this year, as the growth in revenue more
than offset the increase in costs.  The Company discontinued the
F&I operation in December, 2007 but incurred no significant costs associated
with the closing, and expects to incur no addition costs related to this
operation for the remainder of fiscal 2008.  Management expects
SG&A costs as a percentage of revenue to be lower than the previous year for
the remainder of fiscal 2008, as the operating costs of the OC-Net acquisition
will be included in both years and due to the discontinuation of the F&I
initiative.  An acquisition, if one were to occur, could have a
material impact on these results.
 
 The
Company’s technical staff (in-house and contracted) performs software
development, technical support, software customization and data conversion
services for customer applications.  Software development and
technical support costs decreased for the three and nine month periods ended
April 30, 2008, compared to the same periods last year, primarily due to an
increase in the allocation to cost of sales for professional services revenue
driven, in turn, by demand for marketing professional
services.  Management expects fluctuations from quarter to quarter, as
the mix of development and customization activities will change based on
customer requirements even if the total technical staff cost remains relatively
constant.
  22
 Index
  Depreciation
and amortization expense decreased for the three month period ended April 30,
2008, compared to the same period last year, primarily due to software and
equipment purchased in previous years becoming fully
amortized.  Depreciation and amortization expense increased for the
nine month period ended April 30, 2008, compared to the same period last year,
primarily due to the amortization of intangible assets associated with the
OC-Net acquisition.  Management expects depreciation and other
amortization to remain relatively the same as last year for the remainder of
fiscal 2008.
 
 
 Other
Items
 
 Interest
expense includes both cash and non-cash interest.  Interest paid was
approximately $14,000 and $88,000 for the three and nine month periods ended
April 30, 2008, and $45,000 and $137,000 for the three and nine month periods
ended April 30, 2007, respectively.  In addition, excess debt
principal was amortized to offset interest expense by approximately $4,000 and
$22,000 for the three and nine month periods ended April 30, 2008 and $11,000
and ($22,000) for the three and nine month periods ended April 30, 2007,
respectively.
 
 Net
income increased from a loss of $205,000 for the three month period ended April
30, 2007, to net income of $427,000 for the three month period ended April 30,
2008 and from net income of $268,000 for the nine month period ended April 30,
2007, to $1,005,000 for the nine month period ended April 30, 2008 primarily due
to the increase in revenue,
offset in part, by increased overhead.Management expects earnings to
continue to increase over the prior year for the remainder of fiscal
2008.
 
 
 Liquidity
and Capital Resources
 
 The
following table sets forth, for the periods indicated, certain cash flow
information derived from the Company’s unaudited financial
statements.
 
 Cash
Flow Information
 (In
thousands)
 
 Three
      months ended
              
              
              Nine
      months endedApril
      30
              
              
              April
      302008
              
              
              2007
              
              
              %
      Chg
              
              
              2008
              
              
              2007
              
              
              %
      ChgNet
      income
              
              $
              427
              
              
              $
              (205
              )
              
              
              308
              %
              
              $
              1,005
              
              
              $
              268
              
              
              
              275
              %Amortization
      of software products
              
              
              187
              
              
              
              213
              
              
              
              (12
              %)
              
              
              568
              
              
              
              598
              
              
              
              (5
              %)Amortization
      of deferred finance costs and debt discount
              
              
              4
              
              
              
              11
              
              
              
              (64
              %)
              
              
              22
              
              
              
              (22
              )
              
              
              200
              %Depreciation
      and other amortization
              
              
              159
              
              
              
              203
              
              
              
              (22
              %)
              
              
              561
              
              
              
              419
              
              
              
              34
              %Stock
      based compensation related to stock options
              
              
              19
              
              
              
              41
              
              
              
              (54
              %)
              
              
              65
              
              
              
              109
              
              
              
              (40
              %)Stock
      issued as contribution to 401(k) plan
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              37
              
              
              
              42
              
              
              
              (12
              %)Net
      change in working capital
              
              
              165
              
              
              
              506
              
              
              
              (67
              %)
              
              
              (683
              )
              
              
              (367
              )
              
              
              (86
              %)Net
      cash provided by operating activities
              
              
              961
              
              
              
              769
              
              
              
              25
              %
              
              
              1,575
              
              
              
              1,047
              
              
              
              50
              %Net
      cash used in investing activities
              
              
              (173
              )
              
              
              (501
              )
              
              
              65
              %
              
              
              (428
              )
              
              
              (2,055
              )
              
              
              79
              %Net
      cash used in financing activities
              
              
              (311
              )
              
              
              (439
              )
              
              
              29
              %
              
              
              (966
              )
              
              
              (1,108
              )
              
              
              13
              %Effect
      of foreign currency exchange rate change on cash
              
              
              6
              
              
              
              -
              
              
              
              100
              %
              
              
              13
              
              
              
              -
              
              
              
              100
              %Net
      change in cash
              
              $
              483
              
              
              $
              (
      171
              )
              
              
              382
              %
              
              $
              194
              
              
              $
              (
      2,116
              )
              
              
              109
              %
 
 
 Net cash
provided by operating activities increased for the three month period ended
April 30, 2008, compared to the same period last year, primarily due to the
increase in net income, offset in part by changes in working
capital.  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.  Net cash
provided by operating activities increased for the nine month period ended April
30, 2008, compared to the same period last year, primarily due to the increase
in net income.  Management expects net cash provided by operating
activities to continue to increase over the prior year for the remainder of
fiscal 2008.
 
 Net cash
used in investing activities decreased for the three and nine month periods
ended April 30, 2008, compared to the same periods last year, primarily due to
the acquisition of OC-Net in January, 2007 and the decrease in equipment
expenditures in fiscal 2008.  Cash used in investing activities may
fluctuate from quarter to quarter, depending on the timing of capital
expenditures and acquisitions.
 
 Net cash
used in financing activities decreased for the three and nine month periods
ended April 30, 2008, compared to the same periods last year, primarily due to
the decrease in debt, as described in Note 5 to the financial
statements.  Management believes that funds generated from operations
will be adequate to fund the Company’s operations, investments and debt payments
for the foreseeable future, although additional financing may be necessary if
the Company were to complete a material acquisition or to make a large
investment in its business.
  23
 Index
  At April
30, 2008, the Company had cash and cash equivalents of approximately $1,244,000
compared to approximately $1,050,000 at July 31, 2007.
 
 
 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, six business acquisitions
and one software asset acquisition have been completed, all of which have been
fully integrated into the Company’s operations as of April 30,
2008.
 
 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.
 
  Off-Balance
Sheet Arrangements
 
 The
Company had no off-balance sheet arrangements as of June 7, 2008.
 
 
 Forward
Looking Statements
 
 Certain
statements contained in this Form 10-Q 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-KSB for the
year ended July 31, 2007, 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.
  
 ITEM3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK– Not Applicable.
 
 
 ITEM4T.  CONTROLS AND PROCEDURES
 
 The
Company 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.  The Company carried out an evaluation,
under the supervision and with the participation of its management, including
its Chief Executive Officer and acting 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, the Company’s Chief Executive Officer and acting Chief Financial
Officer concluded that the Company’s disclosure controls and procedures are
effective as of April 30, 2008.
 
 There
have been no changes in the Company’s  internal control over financial
reporting identified in connection with the evaluation discussed above that
occurred during the quarter ended April 30, 2008 that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
  24
 Index
  PART II - OTHER
INFORMATION
 
 
 ITEM1.  LEGAL PROCEEDINGS
 
 From time
to time, the Company may be involved in litigation relating to claims arising
out of our operations in the usual course of business.  The Company
had no litigation relating to claims arising out of its operations in the usual
course of business for the nine month period ended April 30, 2008.
   ITEM2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS
 
 During
the quarter ended April 30, 2008, the Company did not sell any equity securities
which were not registered under the Securities Act or repurchase any of its
equity securities.
   ITEM3.  DEFAULTS UPON SENIOR SECURITIES –
None.
 
  ITEM4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
– None.
   ITEM5.  OTHER INFORMATION – None.
  
 ITEM6.  EXHIBITS
 
 10.1
              2000
      Stock Option Plan, as amended.
 31.1
              Section
      302 Certification of Chief Executive
Officer.
 31.2
              Section
      302 Certification of Acting Chief Financial
  Officer.
 32.1
              Section
      906 Certification of Chief Executive
Officer.
 32.2
              Section
      906 Certification of Acting Chief Financial
  Officer.
  25
 Index
  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:
              
              June
      16, 2008
              
              /s/ Roy W. OlivierRoy
      W. Olivier, Chief Executive Officer/s/ Brian E. DearingBrian
      E. Dearing, Chairman of the Board and Acting Chief Financial
      Officer




26