UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION





WASHINGTON,
D.C.  20549





FORM
10-Q








(Mark
One)





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




For the
quarterly period ended January 31, 2009




£
            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    
RNO     £





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


(Do not
check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


YES    
£NOR





As of
February 23, 2009, there were 7,078,125 shares of the registrant’s common stock
outstanding.












ARI
Network Services, Inc.





FORM
10-Q





FOR THE
THREE AND SIX MONTHS ENDED JANUARY 31, 2009





INDEX







PART
      I - FINANCIAL INFORMATIONPageItem
      1
                                                  Financial
      statementsConsolidated
      balance sheets – January 31, 2009 (unaudited) andJuly
      31, 2008.
                                                  3Consolidated statements of income (unaudited) for the three and
      six months ended January 31, 2009 and 2008
                                                  4Consolidated statements of cash flows (unaudited) for the six
      months ended January 31, 2009 and 2008
                                                  5Notes to unaudited consolidated financial
      statements
                                                  6-13Item
      2
                                                  Management's discussion and analysis of financial condition
      and results of     operations
                                                  13-22Item
      3
                                                  Quantitative and qualitative disclosures about market
      risk
                                                  22Item
      4T
                                                  Controls and procedures
                                                  22PART
      II - OTHER INFORMATIONItem
      1
                                                  Legal proceedings
                                                  23Item
      2
                                                  Unregistered sales of equity securities and use of
      proceeds
                                                  23Item
      3
                                                  Defaults upon senior securities
                                                  23Item
      4
                                                  Submission of matters to a vote of security
      holders
                                                  23Item
      5
                                                  Other information
                                                  23Item
      6
                                                  Exhibits
                                                  23Signatures
                                                  
                                                  24




Index


ITEM 1. FINANCIAL
STATEMENTS





ARI
Network Services, Inc.


Consolidated Balance Sheets


(Dollars
in Thousands, Except Per Share Data)





(Unaudited)
                            
                            
                            (Audited)January
      31
                            
                            
                            July
      312009
                            
                            
                            2008ASSETSCurrent
      Assets:Cash
                            
                            $
                            1,138
                            
                            
                            $
                            1,086Trade
      receivables, less allowance for doubtful accounts of $203 and $175 at
      January 31, 2009 and July 31, 2008, respectively
                            
                            
                            993
                            
                            
                            
                            1,304Work
      in Process
                            
                            
                            131
                            
                            
                            
                            264Prepaid
      expenses and other
                            
                            
                            252
                            
                            
                            
                            392Deferred
      income taxes
                            
                            
                            -
                            
                            
                            
                            330Total
      Current Assets
                            
                            
                            2,514
                            
                            
                            
                            3,376Equipment
      and leasehold improvements:Computer
      equipment
                            
                            
                            5,785
                            
                            
                            
                            5,647Leasehold
      improvements
                            
                            
                            305
                            
                            
                            
                            198Furniture
      and equipment
                            
                            
                            2,886
                            
                            
                            
                            2,8428,976
                            
                            
                            
                            8,687Less
      accumulated depreciation and amortization
                            
                            
                            7,756
                            
                            
                            
                            7,523Net
      equipment and leasehold improvements
                            
                            
                            1,220
                            
                            
                            
                            1,164Deferred
      income taxes
                            
                            
                            2,525
                            
                            
                            
                            2,412Goodwill
                            
                            
                            2,196
                            
                            
                            
                            2,196Other
      intangible assets
                            
                            
                            1,205
                            
                            
                            
                            1,396Other
      long term assets
                            
                            
                            57
                            
                            
                            
                            53Capitalized
      software product costs:Amounts
      capitalized for software product costs
                            
                            
                            13,554
                            
                            
                            
                            13,209Less
      accumulated amortization
                            
                            
                            12,032
                            
                            
                            
                            11,613Net
      capitalized software product costs
                            
                            
                            1,522
                            
                            
                            
                            1,596Total
      Assets
                            
                            $
                            11,239
                            
                            
                            $
                            12,193LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Current
      borrowings on line of credit
                            
                            $
                            500
                            
                            
                            $
                            700Current
      portion of notes payable
                            
                            
                            434
                            
                            
                            
                            676Accounts
      payable
                            
                            
                            126
                            
                            
                            
                            408Deferred
      revenue
                            
                            
                            4,609
                            
                            
                            
                            5,071Accrued
      payroll and related liabilities
                            
                            
                            972
                            
                            
                            
                            922Accrued
      sales, use and income taxes
                            
                            
                            44
                            
                            
                            
                            80Accrued
      vendor specific liabilities
                            
                            
                            320
                            
                            
                            
                            284Other
      accrued liabilities
                            
                            
                            405
                            
                            
                            
                            615Current
      portion of capital lease obligations
                            
                            
                            95
                            
                            
                            
                            95Total
      Current Liabilities
                            
                            
                            7,505
                            
                            
                            
                            8,851Non-current
      liabilitiesNotes
      payable
                            
                            
                            -
                            
                            
                            
                            116Long-term
      portion of accrued compensation
                            
                            
                            53
                            
                            
                            
                            97Capital
      lease obligations
                            
                            
                            191
                            
                            
                            
                            233Total
      Non-current Liabilities
                            
                            
                            244
                            
                            
                            
                            446Shareholders'
      equity:Cumulative
      preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0
      shares issued and outstanding at January 31, 2009 and July 31, 2008,
      respectivelyJunior
      preferred stock, par value $.001 per share, 100,000 shares authorized; 0
      shares issued and outstanding at January 31, 2009 and July 31, 2008,
      respectivelyCommon
      stock, par value $.001 per share, 25,000,000 shares authorized; 7,078,125
      and 6,971,927 shares issued and outstanding at January 31, 2009 and July
      31, 2008
                            
                            
                            7
                            
                            
                            
                            7Common
      stock warrants and options
                            
                            
                            662
                            
                            
                            
                            501Additional
      paid-in-capital
                            
                            
                            95,220
                            
                            
                            
                            95,148Accumulated
      deficit
                            
                            
                            (92,396
                            )
                            
                            
                            (92,708
                            )Other
      accumulated comprehensive (loss)
                            
                            
                            (3
                            )
                            
                            
                            (52
                            )Total
      Shareholders' Equity
                            
                            
                            3,490
                            
                            
                            
                            2,896Total
      Liabilities and Shareholders' Equity
                            
                            $
                            11,239
                            
                            
                            $
                            12,193





See
accompanying notes





Note:  The
balance sheet at July 31, 2008 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.


3
 Index




ARI
      Network Services, Inc.Consolidated Statements of Income -
  Unaudited(Amounts
      in Thousands, Except Per Share
Data)





(Unaudited)
                      
                      
                      (Unaudited)Three
      months ended
                      
                      
                      Six
      months endedJanuary
      31
                      
                      
                      January
      312009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Revenue
                      
                      $
                      3,955
                      
                      
                      $
                      4,222
                      
                      
                      $
                      8,124
                      
                      
                      $
                      8,446Cost
      of products and services sold*
                      
                      
                      732
                      
                      
                      
                      780
                      
                      
                      
                      1,461
                      
                      
                      
                      1,527Gross
      Margin
                      
                      
                      3,223
                      
                      
                      
                      3,442
                      
                      
                      
                      6,663
                      
                      
                      
                      6,919Operating
      expenses:Depreciation
      and amortization+
                      
                      
                      229
                      
                      
                      
                      186
                      
                      
                      
                      458
                      
                      
                      
                      381Customer
      operations and support
                      
                      
                      226
                      
                      
                      
                      256
                      
                      
                      
                      531
                      
                      
                      
                      536Selling,
      general and administrative
                      
                      
                      2,146
                      
                      
                      
                      2,304
                      
                      
                      
                      4,304
                      
                      
                      
                      4,684Software
      development and technical support
                      
                      
                      319
                      
                      
                      
                      339
                      
                      
                      
                      776
                      
                      
                      
                      688Net
      operating expenses
                      
                      
                      2,920
                      
                      
                      
                      3,085
                      
                      
                      
                      6,069
                      
                      
                      
                      6,289Operating
      income
                      
                      
                      303
                      
                      
                      
                      357
                      
                      
                      
                      594
                      
                      
                      
                      630Other
      income (expense)
                      
                      
                      (30
                      )
                      
                      
                      (27
                      )
                      
                      
                      (65
                      )
                      
                      
                      (51
                      )Income
      before provision for income taxes
                      
                      
                      273
                      
                      
                      
                      330
                      
                      
                      
                      529
                      
                      
                      
                      579Income
      tax benefit (expense)
                      
                      
                      (217
                      )
                      
                      
                      5
                      
                      
                      
                      (217
                      )
                      
                      
                      (1
                      )Net
      income
                      
                      $
                      56
                      
                      
                      $
                      335
                      
                      
                      $
                      312
                      
                      
                      $
                      578Average
      common shares outstanding:Basic
                      
                      
                      7,049
                      
                      
                      
                      6,656
                      
                      
                      
                      7,011
                      
                      
                      
                      6,645Diluted
                      
                      
                      7,065
                      
                      
                      
                      7,000
                      
                      
                      
                      7,027
                      
                      
                      
                      6,989Net
      income per share:Basic
                      
                      $
                      0.01
                      
                      
                      $
                      0.05
                      
                      
                      $
                      0.04
                      
                      
                      $
                      0.09Diluted
                      
                      $
                      0.01
                      
                      
                      $
                      0.05
                      
                      
                      $
                      0.04
                      
                      
                      $
                      0.08





*
            includes
      amortization of software products of $204, $187, $419 and $381,
      respectively andexcludes
      other depreciation and amortization included in operating
      expenses




+
            exclusive
      of amortization of software products included in cost of
    sales




See
accompanying notes


4
 Index





ARI
      Network Services, Inc.Consolidated Statements of Cash Flows(Dollars
      in Thousands)





(Unaudited)Six
      months endedJanuary
      312009
                                
                                
                                2008Operating
      activitiesNet
      income
                                
                                $
                                312
                                
                                
                                $
                                578Adjustments
      to reconcile net income to net cash provided by operating
      activities:Amortization
      of software products
                                
                                
                                419
                                
                                
                                
                                381Amortization
      of deferred financing costs, debt discount and excess carrying value over
      face amount of notes payable
                                
                                
                                8
                                
                                
                                
                                18Depreciation
      and other amortization
                                
                                
                                424
                                
                                
                                
                                402Deferred
      income taxes
                                
                                
                                217
                                
                                
                                
                                -Stock
      based compensation related to stock options
                                
                                
                                161
                                
                                
                                
                                46Stock
      issued as contribution to 401(k) plan
                                
                                
                                45
                                
                                
                                
                                37Net
      change in assets and liabilities:Trade
      receivables, net
                                
                                
                                327
                                
                                
                                
                                272Work
      in process
                                
                                
                                133
                                
                                
                                
                                (15
                                )Prepaid
      expenses and other
                                
                                
                                142
                                
                                
                                
                                36Other
      long term assets
                                
                                
                                (4
                                )
                                
                                
                                -Accounts
      payable
                                
                                
                                (282
                                )
                                
                                
                                (496
                                )Deferred
      revenue
                                
                                
                                (462
                                )
                                
                                
                                (810
                                )Accrued
      payroll related liabilities
                                
                                
                                11
                                
                                
                                
                                (14
                                )Accrued
      sales, use and income taxes
                                
                                
                                (36
                                )
                                
                                
                                16Accrued
      vendor specific liabilities
                                
                                
                                36
                                
                                
                                
                                -Other
      accrued liabilities
                                
                                
                                (210
                                )
                                
                                
                                163Net
      cash provided by operating activities
                                
                                
                                1,241
                                
                                
                                
                                614Investing
      activitiesPurchase
      of equipment, software and leasehold improvements
                                
                                
                                (244
                                )
                                
                                
                                (61
                                )Software
      product costs capitalized
                                
                                
                                (345
                                )
                                
                                
                                (194
                                )Net
      cash used in investing activities
                                
                                
                                (589
                                )
                                
                                
                                (255
                                )Financing
      activitiesRepayments
      under line of credit
                                
                                
                                (200
                                )
                                
                                
                                -Payments
      under notes payable
                                
                                
                                (366
                                )
                                
                                
                                (668
                                )Payments
      of capital lease obligations
                                
                                
                                (42
                                )
                                
                                
                                (2
                                )Proceeds
      from issuance of common stock
                                
                                
                                19
                                
                                
                                
                                15Net
      cash used in financing activities
                                
                                
                                (589
                                )
                                
                                
                                (655
                                )Effect
      of foreign currency exchange rate changes on cash
                                
                                
                                (11
                                )
                                
                                
                                7Net
      change in cash
                                
                                
                                52
                                
                                
                                
                                (289
                                )Cash
      at beginning of period
                                
                                
                                1,086
                                
                                
                                
                                1,050Cash
      at end of period
                                
                                $
                                1,138
                                
                                
                                $
                                761Cash
      paid for interest
                                
                                $
                                47
                                
                                
                                $
                                74Cash
      paid for income taxes
                                
                                $
                                28
                                
                                
                                $
                                10





See
accompanying notes


5
 Index


Notes to  Consolidated Financial
Statements


(Unaudited)


January
31, 2009





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 six months ended
January 31, 2009 are not necessarily indicative of the results to be expected
for any other interim period or the full fiscal year ending July 31,
2009.  For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended July 31, 2008.





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 (“OFIC”). All inter-company transactions and
balances have been eliminated.  Operations of OFIC were suspended in
December, 2007, although the LLC remains in place and the Company may
re-initiate operations at a future date.





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.





Beginning
in fiscal 2009, the Company reports revenue in total on the income statement
rather than by service type, as has been done historically.  The fiscal
2008 financial statements have been restated to conform to the fiscal 2009
presentation.  For more revenue details, refer to Item 2, Management’s
discussion and analysis of financial condition and results of
operations.








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
                                
                                
                                Six
      months endedJanuary
      31
                                
                                
                                January
      312009
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2008Net
      income
                                
                                $
                                56
                                
                                
                                $
                                335
                                
                                
                                $
                                312
                                
                                
                                $
                                578Weighted-average
      common shares outstanding
                                
                                
                                7,049
                                
                                
                                
                                6,656
                                
                                
                                
                                7,011
                                
                                
                                
                                6,645Effect
      of dilutive stock options and warrants
                                
                                
                                16
                                
                                
                                
                                344
                                
                                
                                
                                16
                                
                                
                                
                                344Diluted
      weighted-average common shares outstanding
                                
                                
                                7,065
                                
                                
                                
                                7,000
                                
                                
                                
                                7,027
                                
                                
                                
                                6,989Net
      income per share:Basic
                                
                                $
                                0.01
                                
                                
                                $
                                0.05
                                
                                
                                $
                                0.04
                                
                                
                                $
                                0.09Diluted
                                
                                $
                                0.01
                                
                                
                                $
                                0.05
                                
                                
                                $
                                0.04
                                
                                
                                $
                                0.08Options
      and warrants that could potentially dilute net income per share in the
      future that are not included in the computation of diluted net income per
      share, as their impact is anti-dilutive
                                
                                
                                1,425
                                
                                
                                
                                989
                                
                                
                                
                                1,425
                                
                                
                                
                                989




3.            STOCK-BASED
COMPENSATION





There
were no capitalized stock-based compensation costs at January 31, 2009 or at
January 31, 2008.  Total stock compensation expense recognized by the
Company was approximately $85,000 and $161,000 during the three and six month
periods ended January 31, 2009 and approximately $37,000 and $46,000 for the
same periods last year.  As of January 31, 2009 and 2008 there was
approximately $385,000 and $137,000 of total unrecognized compensation cost
related to non-vested options granted under its stock option plans.




6
 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 six
months ended January 31, 2009 is based on awards ultimately expected to vest,
the amount has been reduced for estimated forfeitures based on our historical
experience.





The fair
value of each option grant is estimated using the assumptions in the following
table:





Three
      and six months ended January 312009
                    
                    
                    2008Expected
      life (years)
                    
                    10
      years
                    
                    
                    10
      yearsRisk-free
      interest rate
                    
                    
                    2.6
                    %
                    
                    
                    4.9
                    %Expected
      volatility
                    
                    
                    85.0
                    %
                    
                    
                    120.0
                    %Expected
      dividend yield
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %





Employee Stock Purchase
Plans





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 January
31, 2009. 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 of the
Board of Directors, 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.


7
 Index




Changes
in option shares under the 1991 Plan:




Three
      Months ended
                                                              
                                                              
                                                              Three
      Months endedJanuary
      31, 2009
                                                              
                                                              
                                                              January
      31, 2008Options
                                                              
                                                              
                                                              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 the beginning of period
                                                              
                                                              
                                                              63,250
                                                              
                                                              
                                                              $
                                                              2.31
                                                              
                                                              
                                                              
                                                              1.12
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              125,186
                                                              
                                                              
                                                              $
                                                              2.30
                                                              
                                                              
                                                              
                                                              1.64
                                                              
                                                              
                                                              $
                                                              -Granted
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aExercised
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aForfeited
                                                              
                                                              
                                                              (26,250
                                                              )
                                                              
                                                              $
                                                              2.12
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aOutstanding
      at the end of period
                                                              
                                                              
                                                              37,000
                                                              
                                                              
                                                              $
                                                              2.56
                                                              
                                                              
                                                              
                                                              1.57
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              125,186
                                                              
                                                              
                                                              $
                                                              2.30
                                                              
                                                              
                                                              
                                                              1.39
                                                              
                                                              
                                                              $
                                                              -Exercisable
      at the end of period
                                                              
                                                              
                                                              37,000
                                                              
                                                              
                                                              $
                                                              2.56
                                                              
                                                              
                                                              
                                                              1.57
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              125,186
                                                              
                                                              
                                                              $
                                                              2.30
                                                              
                                                              
                                                              
                                                              1.39
                                                              
                                                              
                                                              $
                                                              -Six
      Months ended
                                                              
                                                              
                                                              Six
      Months endedJanuary
      31, 2009
                                                              
                                                              
                                                              January
      31, 2008Options
                                                              
                                                              
                                                              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 the beginning of period
                                                              
                                                              
                                                              93,186
                                                              
                                                              
                                                              $
                                                              2.27
                                                              
                                                              
                                                              
                                                              1.23
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              125,686
                                                              
                                                              
                                                              $
                                                              2.30
                                                              
                                                              
                                                              
                                                              1.89
                                                              
                                                              
                                                              $
                                                              -Granted
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aExercised
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aForfeited
                                                              
                                                              
                                                              (56,186
                                                              )
                                                              
                                                              $
                                                              2.15
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              (500
                                                              )
                                                              
                                                              $
                                                              4.06
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aOutstanding
      at the end of period
                                                              
                                                              
                                                              37,000
                                                              
                                                              
                                                              $
                                                              2.56
                                                              
                                                              
                                                              
                                                              1.57
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              125,186
                                                              
                                                              
                                                              $
                                                              2.30
                                                              
                                                              
                                                              
                                                              1.39
                                                              
                                                              
                                                              $
                                                              -Exercisable
      at the end of period
                                                              
                                                              
                                                              37,000
                                                              
                                                              
                                                              $
                                                              2.56
                                                              
                                                              
                                                              
                                                              1.57
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              125,186
                                                              
                                                              
                                                              $
                                                              2.30
                                                              
                                                              
                                                              
                                                              1.39
                                                              
                                                              
                                                              $
                                                              -




The range
of exercise prices for options outstanding at January 31, 2009 and 2008 was
$2.06 to $9.06.




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.




8
 Index




Changes
in option shares under the Director Plan:




Three
      Months Ended
                                                              
                                                              
                                                              Three
      Months endedJanuary
      31, 2009
                                                              
                                                              
                                                              January
      31, 2008Options
                                                              
                                                              
                                                              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 the beginning of period
                                                              
                                                              
                                                              1,313
                                                              
                                                              
                                                              $
                                                              2.65
                                                              
                                                              
                                                              
                                                              1.72
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              1,313
                                                              
                                                              
                                                              $
                                                              2.65
                                                              
                                                              
                                                              
                                                              2.72
                                                              
                                                              
                                                              $
                                                              -Granted
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aExercised
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aForfeited
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aOutstanding
      at the end of period
                                                              
                                                              
                                                              1,313
                                                              
                                                              
                                                              $
                                                              2.65
                                                              
                                                              
                                                              
                                                              1.47
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              1,313
                                                              
                                                              
                                                              $
                                                              2.65
                                                              
                                                              
                                                              
                                                              2.47
                                                              
                                                              
                                                              $
                                                              -Exercisable
      at the end of period
                                                              
                                                              
                                                              1,313
                                                              
                                                              
                                                              $
                                                              2.65
                                                              
                                                              
                                                              
                                                              1.47
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              1,313
                                                              
                                                              
                                                              $
                                                              2.65
                                                              
                                                              
                                                              
                                                              2.47
                                                              
                                                              
                                                              $
                                                              -Six
      Months Ended
                                                              
                                                              
                                                              Six
      Months endedJanuary
      31, 2009
                                                              
                                                              
                                                              January
      31, 2008Options
                                                              
                                                              
                                                              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 the beginning of period
                                                              
                                                              
                                                              1,313
                                                              
                                                              
                                                              $
                                                              2.65
                                                              
                                                              
                                                              
                                                              1.97
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              1,313
                                                              
                                                              
                                                              $
                                                              2.65
                                                              
                                                              
                                                              
                                                              2.97
                                                              
                                                              
                                                              $
                                                              -Granted
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aExercised
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aForfeited
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aOutstanding
      at the end of period
                                                              
                                                              
                                                              1,313
                                                              
                                                              
                                                              $
                                                              2.65
                                                              
                                                              
                                                              
                                                              1.47
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              1,313
                                                              
                                                              
                                                              $
                                                              2.65
                                                              
                                                              
                                                              
                                                              2.47
                                                              
                                                              
                                                              $
                                                              -Exercisable
      at the end of period
                                                              
                                                              
                                                              1,313
                                                              
                                                              
                                                              $
                                                              2.65
                                                              
                                                              
                                                              
                                                              1.47
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              1,313
                                                              
                                                              
                                                              $
                                                              2.65
                                                              
                                                              
                                                              
                                                              2.47
                                                              
                                                              
                                                              $
                                                              -




The range
of exercise prices for options outstanding at January 31, 2009 and 2008 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, unless the stock options are
nonqualified), 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.




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.




9
 Index


Changes
in option shares under the 2000 Plan during the:





Three
      Months Ended
                                                              
                                                              
                                                              Three
      Months endedJanuary
      31, 2009
                                                              
                                                              
                                                              January
      31, 2008Options
                                                              
                                                              
                                                              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 the beginning of period
                                                              
                                                              
                                                              1,310,100
                                                              
                                                              
                                                              $
                                                              1.52
                                                              
                                                              
                                                              
                                                              7.44
                                                              
                                                              
                                                              $
                                                              70,344
                                                              
                                                              
                                                              
                                                              923,789
                                                              
                                                              
                                                              $
                                                              1.48
                                                              
                                                              
                                                              
                                                              6.42
                                                              
                                                              
                                                              $
                                                              275,417Granted
                                                              
                                                              
                                                              31,000
                                                              
                                                              
                                                              $
                                                              0.84
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              35,500
                                                              
                                                              
                                                              $
                                                              1.63
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Exercised
                                                              
                                                              
                                                              (60,242
                                                              )
                                                              
                                                              $
                                                              0.26
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aForfeited
                                                              
                                                              
                                                              (73,395
                                                              )
                                                              
                                                              $
                                                              1.99
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (68,314
                                                              )
                                                              
                                                              $
                                                              1.14
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Outstanding
      at the end of period
                                                              
                                                              
                                                              1,207,463
                                                              
                                                              
                                                              $
                                                              1.54
                                                              
                                                              
                                                              
                                                              7.51
                                                              
                                                              
                                                              $
                                                              27,807
                                                              
                                                              
                                                              
                                                              890,975
                                                              
                                                              
                                                              $
                                                              1.52
                                                              
                                                              
                                                              
                                                              6.43
                                                              
                                                              
                                                              $
                                                              289,823Exercisable
      at the end of period
                                                              
                                                              
                                                              683,752
                                                              
                                                              
                                                              $
                                                              1.58
                                                              
                                                              
                                                              
                                                              3.49
                                                              
                                                              
                                                              $
                                                              25,957
                                                              
                                                              
                                                              
                                                              732,611
                                                              
                                                              
                                                              $
                                                              1.46
                                                              
                                                              
                                                              
                                                              5.96
                                                              
                                                              
                                                              $
                                                              276,774Six
      Months Ended
                                                              
                                                              
                                                              Six
      Months endedJanuary
      31, 2009
                                                              
                                                              
                                                              January
      31, 2008Options
                                                              
                                                              
                                                              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 the beginning of period
                                                              
                                                              
                                                              1,380,538
                                                              
                                                              
                                                              $
                                                              1.45
                                                              
                                                              
                                                              
                                                              6.61
                                                              
                                                              
                                                              $
                                                              320,062
                                                              
                                                              
                                                              
                                                              1,013,100
                                                              
                                                              
                                                              $
                                                              1.45
                                                              
                                                              
                                                              
                                                              6.61
                                                              
                                                              
                                                              $
                                                              320,062Granted
                                                              
                                                              
                                                              89,000
                                                              
                                                              
                                                              $
                                                              1.12
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              35,500
                                                              
                                                              
                                                              $
                                                              1.63
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Exercised
                                                              
                                                              
                                                              (60,242
                                                              )
                                                              
                                                              $
                                                              0.26
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              
                                                              n/a
                                                              
                                                              
                                                              
                                                              n/aForfeited
                                                              
                                                              
                                                              (201,833
                                                              )
                                                              
                                                              $
                                                              1.51
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (157,625
                                                              )
                                                              
                                                              $
                                                              1.10
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Outstanding
      at the end of period
                                                              
                                                              
                                                              1,207,463
                                                              
                                                              
                                                              $
                                                              1.54
                                                              
                                                              
                                                              
                                                              7.51
                                                              
                                                              
                                                              $
                                                              27,807
                                                              
                                                              
                                                              
                                                              890,975
                                                              
                                                              
                                                              $
                                                              1.52
                                                              
                                                              
                                                              
                                                              6.43
                                                              
                                                              
                                                              $
                                                              289,823Exercisable
      at the end of period
                                                              
                                                              
                                                              683,752
                                                              
                                                              
                                                              $
                                                              1.58
                                                              
                                                              
                                                              
                                                              3.49
                                                              
                                                              
                                                              $
                                                              25,957
                                                              
                                                              
                                                              
                                                              732,611
                                                              
                                                              
                                                              $
                                                              1.46
                                                              
                                                              
                                                              
                                                              5.96
                                                              
                                                              
                                                              $
                                                              276,774






Changes
in non-vested option shares under the 2000 Plan during the:





Three
      Months Ended January 31
                                            
                                            
                                            Six
      Months Ended January 312009
                                            
                                            
                                            2008
                                            
                                            
                                            2009
                                            
                                            
                                            2008Options
                                            
                                            
                                            Wt-Avg
      Exercise Price
                                            
                                            
                                            Options
                                            
                                            
                                            Wt-Avg
      Exercise Price
                                            
                                            
                                            Options
                                            
                                            
                                            Wt-Avg
      Exercise Price
                                            
                                            
                                            Options
                                            
                                            
                                            Wt-Avg
      Exercise PriceNon-vested
      at the beginning of period
                                            
                                            
                                            493,867
                                            
                                            
                                            $
                                            1.53
                                            
                                            
                                            
                                            123,239
                                            
                                            
                                            $
                                            1.85
                                            
                                            
                                            
                                            443,335
                                            
                                            
                                            $
                                            1.76
                                            
                                            
                                            
                                            137,675
                                            
                                            
                                            $
                                            1.79Granted
                                            
                                            
                                            31,000
                                            
                                            
                                            $
                                            0.84
                                            
                                            
                                            
                                            35,500
                                            
                                            
                                            $
                                            1.63
                                            
                                            
                                            
                                            89,000
                                            
                                            
                                            $
                                            1.12
                                            
                                            
                                            
                                            35,500
                                            
                                            
                                            $
                                            1.63Vested
                                            
                                            
                                            -
                                            
                                            
                                            
                                            n/a
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            n/a
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            n/a
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            n/aForfeited
                                            
                                            
                                            (1,156
                                            )
                                            
                                            $
                                            1.74
                                            
                                            
                                            
                                            (375
                                            )
                                            
                                            $
                                            1.80
                                            
                                            
                                            
                                            (8,624
                                            )
                                            
                                            $
                                            1.63
                                            
                                            
                                            
                                            (14,811
                                            )
                                            
                                            $
                                            1.29Non-vested
      at the end of period
                                            
                                            
                                            523,711
                                            
                                            
                                            $
                                            1.49
                                            
                                            
                                            
                                            158,364
                                            
                                            
                                            $
                                            1.80
                                            
                                            
                                            
                                            523,711
                                            
                                            
                                            $
                                            1.49
                                            
                                            
                                            
                                            158,364
                                            
                                            
                                            $
                                            1.80




The range
of exercise prices for options outstanding at January 31, 2009 and 2008 was
$0.15 to $2.735.




10
 Index





4. 
           ACQUISITIONS





On July
1, 2008, the Company acquired all of the assets related to electronic parts
catalogs, electronic commerce and certification testing for service technicians
of Info Access, the micropublishing division of Eye Communication Systems, Inc.
(“ECSI”), of Hartland, WI.  Consideration for the acquisition included
approximately $1.0 million in cash, 312,500 shares of the Company’s common
stock, 125,000 of which is held in escrow based on contingent revenue retention,
and notes payable of $300,000.  It was determined that as of July 31,
2008, it was more likely than not that the contingencies associated with the
shares in escrow would be resolved such that the Company would be obligated to
deliver such escrowed shares to ECSI in October, 2009.  Accordingly,
this amount has been recorded as outstanding stock at July 31, 2008 and January
31, 2009.




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 balance sheet
as of January 31, 2009 and audited balance sheet as of July 31,
2008.





Debt
      Schedule(Dollars
      in thousands)





January
      31
                              
                              
                              July
      31
                              
                              
                              Percent2009
                              
                              
                              2008
                              
                              
                              ChangeDebt
      related to acquisition of OC-Net, Inc.:Current
      portion of notes payable
                              
                              $
                              234
                              
                              
                              $
                              233
                              
                              
                              
                              0.4
                              %Long
      term portion of notes payable
                              
                              
                              -
                              
                              
                              
                              117
                              
                              
                              
                              (100.0
                              )Total
      notes payable
                              
                              
                              234
                              
                              
                              
                              350
                              
                              
                              
                              (33.1
                              )Current
      cash earnout
                              
                              
                              -
                              
                              
                              
                              150
                              
                              
                              
                              (100.0
                              )Imputed
      interest on cash earnout/holdback
                              
                              
                              -
                              
                              
                              
                              (8
                              )
                              
                              
                              (100.0
                              )Total
      debt related to acquisition of OC-Net
                              
                              
                              234
                              
                              
                              
                              492
                              
                              
                              
                              (52.4
                              )Notes
      payable to Eye Communication Systems, Inc. - current
                              
                              
                              200
                              
                              
                              
                              300
                              
                              
                              
                              (33.3
                              )Current
      borrowings on line of credit
                              
                              
                              500
                              
                              
                              
                              700
                              
                              
                              
                              (28.6
                              )Total
      Debt
                              
                              $
                              934
                              
                              
                              $
                              1,492
                              
                              
                              
                              (37.4
                              )
      %





The
Company issued $700,000 of notes and $400,000 of future non-interest bearing
contingent payments in connection with the January 26, 2007 purchase of OC-Net,
Inc.  The interest rate on the notes is prime plus 2%, adjusted
quarterly (effective rate of 5.25% as of January 31, 2009).  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 has paid all of the future contingent
payments.





In 2008,
the Company issued $300,000 of notes payable in connection with the Info Access
acquisition, of which $100,000 was paid on October 1, 2008 and $200,000 is due
on July 1, 2009. The interest rate on the note is 6%.





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 $1,500,000, and bears interest at prime rate.  Eligible
accounts include certain non-foreign accounts receivable which are outstanding
for fewer than 90 days from the invoice date.  The line of credit
terminates July 9, 2009, 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.  The
Company had $500,000 and $700,000 principal outstanding on the line of credit at
January 31, 2009 and July 31, 2008.


11
 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 for each share of common stock they owned.
 These Rights trade in tandem with the common stock until and unless they
are triggered.  Should a person or group acquire more than 10% of ARI’s
common stock (or if an existing holder of 10% or more of the common stock were
to increase its position by more than 1%), the Rights would become exercisable
for every shareholder except the acquirer that triggered the exercise.  The
Rights, if triggered, would give the rest of the shareholders the ability to
purchase additional stock of ARI at a substantial discount.  The rights
will expire on August 18, 2013, and can be redeemed by the Company for $0.01 per
Right at any time prior to a person or group becoming a 10%
shareholder.








8.        
    INCOME
TAXES





The
provision (benefit) for income taxes is composed of the following (in
thousands):





Three
      months ended
                              
                              
                              Six
      months endedJanuary
      31
                              
                              
                              January
      312009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Current:Federal
      - Effect
                              
                              $
                              11
                              
                              
                              $
                              (113
                              )
                              
                              $
                              11
                              
                              
                              $
                              30State
      - Effect
                              
                              
                              2
                              
                              
                              
                              (20
                              )
                              
                              
                              2
                              
                              
                              
                              8Generation
      (utilization) of net operating loss carryforwards
                              
                              
                              (133
                              )
                              
                              
                              128
                              
                              
                              
                              (13
                              )
                              
                              
                              (37
                              )Deferred,
      net
                              
                              
                              337
                              
                              
                              
                              -
                              
                              
                              
                              217
                              
                              
                              
                              -$
                              217
                              
                              
                              $
                              (5
                              )
                              
                              $
                              217
                              
                              
                              $
                              1





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 the Company’s assets and liabilities 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 is performed on a
quarterly basis of the likelihood that net deferred tax assets will be realized
from future taxable income.  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 dependent upon the outcome
of future events, the amount established as a valuation allowance is a
significant estimate that is subject to change quarterly.  The change
in the valuation allowance during a period is reflected with a corresponding
income tax provision increase or decrease in the Consolidated Statements of
Income.  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 had a change in its estimated
valuation allowance during the quarter ended January 31, 2009, primarily due to
a decrease in its projected utilization of its net operating loss carryforwards
from earlier years.  The Company continues to evaluate the
realizability of deferred tax assets on a quarterly basis.





The
Company adopted the provisions of Financial Accounting Standards Board (“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 January 31, 2009 and July 31, 2008.





9.        
    BUSINESS SEGMENTS





The
Company’s business segments are internally organized primarily by geographic
location of the operating facilities.  In accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about
Segments of an Enterprise and Related Information”, the Company has segregated
the Netherlands operation and the U.S. operations into separate reportable
segments.  (Refer to Note 1 to the financial statements, “Description
of Business and Significant Accounting Policies” included in the Company’s
annual report on Form 10-K for the fiscal year ended July 31, 2008, 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 net income.


12
 Index


Information
concerning the Company’s operating business segments for fiscal 2009 and 2008 is
as follows:




Business
      Segment Information(In
      thousands)Three
      months ended
                                                              
                                                              
                                                              Six
      months endedJanuary
      31
                                                              
                                                              
                                                              January
      31Revenue
                                                              
                                                              2009
                                                              
                                                              
                                                              2008
                                                              
                                                              
                                                              2009
                                                              
                                                              
                                                              2008Netherlands
                                                              
                                                              $
                                                              161
                                                              
                                                              
                                                              $
                                                              177
                                                              
                                                              
                                                              $
                                                              333
                                                              
                                                              
                                                              $
                                                              338United
      States
                                                              
                                                              
                                                              3,794
                                                              
                                                              
                                                              
                                                              4,045
                                                              
                                                              
                                                              
                                                              7,791
                                                              
                                                              
                                                              
                                                              8,108Consolidated
                                                              
                                                              $
                                                              3,955
                                                              
                                                              
                                                              $
                                                              4,222
                                                              
                                                              
                                                              $
                                                              8,124
                                                              
                                                              
                                                              $
                                                              8,446Net
      Income (Loss)Netherlands
                                                              
                                                              $
                                                              (19
                                                              )
                                                              
                                                              $
                                                              (108
                                                              )
                                                              
                                                              $
                                                              (55
                                                              )
                                                              
                                                              $
                                                              (177
                                                              )United
      States
                                                              
                                                              
                                                              75
                                                              
                                                              
                                                              
                                                              443
                                                              
                                                              
                                                              
                                                              367
                                                              
                                                              
                                                              
                                                              755Consolidated
                                                              
                                                              $
                                                              56
                                                              
                                                              
                                                              $
                                                              335
                                                              
                                                              
                                                              $
                                                              312
                                                              
                                                              
                                                              $
                                                              578January
      31
                                                              
                                                              
                                                              July
      31Total
      Assets
                                                              
                                                              2009
                                                              
                                                              
                                                              2008Netherlands
                                                              
                                                              $
                                                              1,149
                                                              
                                                              
                                                              $
                                                              1,306United
      States
                                                              
                                                              
                                                              10,090
                                                              
                                                              
                                                              
                                                              10,887Consolidated
                                                              
                                                              $
                                                              11,239
                                                              
                                                              
                                                              $
                                                              12,193




10.          RESTRUCTURING





In July,
2008, the Company announced a restructuring consolidating its data conversion
operations in Virginia into its Wisconsin location and consolidating the
software development operations in Colorado into its California
location.  A charge of $529,000 was taken in the fourth quarter of
fiscal 2008, to reflect the restructuring costs.  The following
represents changes to the restructuring reserve (in thousands):





Balance
                                                            
                                                            
                                                            Payments
                                                            
                                                            
                                                            BalanceJuly
      31
                                                            
                                                            
                                                            August
      2008 -
                                                            
                                                            
                                                            January
      312008
                                                            
                                                            
                                                            January
      2009
                                                            
                                                            
                                                            2009Severance
      and related benefits
                                                            
                                                            $
                                                            292
                                                            
                                                            
                                                            $
                                                            (195
                                                            )
                                                            
                                                            $
                                                            97Net
      future lease costs
                                                            
                                                            
                                                            204
                                                            
                                                            
                                                            
                                                            (73
                                                            )
                                                            
                                                            
                                                            131Equipment
      disposition and other
                                                            
                                                            
                                                            33
                                                            
                                                            
                                                            
                                                            (29
                                                            )
                                                            
                                                            
                                                            4Total
      restructuring costs
                                                            
                                                            $
                                                            529
                                                            
                                                            
                                                            $
                                                            (297
                                                            )
                                                            
                                                            $
                                                            232





ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Summary





The
Company produced net income of $56,000 and $312,000 for the three and six months
ended January 31, 2009, compared to $335,000 and $578,000 for the three and six
months ended January 31, 2008.  The decrease in earnings was primarily
due to income tax expense related to an increase in the valuation allowance to
deferred tax assets and lower revenues.  These effects were partially
offset by lower operating expenses.  Total revenue decreased 6.3% and
3.8% for the three and six month periods ended January 31, 2009, respectively,
compared to the same periods last year, primarily due to a decrease in revenues
from the Company’s catalog and professional services, which was substantially
offset by an increase in marketing services revenue from sales of WebsiteSmart
ProTM and catalog revenue related to the July 1, 2008 Info Access
acquisition.  Management expects revenue to decrease somewhat for the
balance of the fiscal year, compared to the same periods in fiscal
2008.  This expectation of a continued decrease is primarily in its
professional services business, as some customers delay projects due to the
global economic downturn.





Management
is taking prudent steps to timely align to the changing market conditions while
funding the initiatives which position ARI for the future. We anticipate
generating sufficient cash flow from operations to fund the Company’s needs for
the foreseeable future.





For the
six months ended January 31, 2009, the Company repaid $566,000 of funded debt,
invested $589,000 in product development and other capital investments and
increased its cash balance by $52,000.





13
 Index




Current
Global Economic Downturn:




ARI
provides software products, Internet websites and related professional services
to customers at all levels of the value chain including equipment manufacturers,
distributors and retailers.  The primary market verticals served are
outdoor power, power sports, agricultural, marine, appliance and RV, as well as
other equipment.  Industry trade publications are reporting that the
current global economic downturn is having a substantial negative affect on the
revenues, earnings and cash flow of customers within ARI’s primary
markets.  These effects, should they continue, may result in a
reduction in industry size, industry consolidation and a weakening in ARI’s
customers’ ability to timely pay their obligations.  In turn, these
results could negatively affect the base of ARI’s customers and the timing of
its cash flows.





ARI sells
the majority of its products on a subscription basis with terms of one or more
years.  These products are considered essential to enabling more
efficient operations and enhancing the sale of parts, goods and accessories
throughout the channel.  The combination of these factors generally is
expected to moderate the effect of the economic downturn on ARI’s revenue and
earnings when compared to businesses which manufacture or distribute equipment
and other capital goods.





Certain
statements contained herein are forward-looking statements. The Company’s actual
results may differ materially from those contained in the forward looking
statements, particularly in the current weak economic environment, which has and
may continue to adversely affect our operating results.  Recent
turmoil in the capital and credit markets has increased the difficulty and
expense of obtaining financing for many companies.  As a result,
additional financing may not be available to us, and if it is, it may be
dilutive to existing shareholders or may be on terms that are not favorable to
us.  Management has made assumptions in its remarks that the global
credit markets will not deteriorate further and acknowledges the increased
uncertainty caused by the current economic environment.  See “Forward
Looking Statements.”





Critical
Accounting Policies and Estimates





General


Management’s
discussion and analysis of the Company’s 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,
equity, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates,
including, among others, those related to customer contracts, valuation of
intangible assets, 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
significant judgments and estimates used in the preparation of its financial
statements.





Revenue
Recognition


Revenue
for use of the network (including transaction fees) and for information services
is recognized in the period such services are utilized. Revenue from annual or
periodic maintenance fees, hosting 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
collectability 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 beyond 90 days, unless
there is reasonable assurance of collectability. If the financial condition of
the Company’s customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.





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 probable, in accordance with
the provisions of SFAS No. 5 “Accounting for Contingencies”.





Impairment of Long-Lived
Assets


In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal 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.  Such analyses necessarily involve judgment. The Company
evaluated the ongoing value of its long-lived assets as of July 31,
2008.  There have been no impairments of long-lived assets identified
during fiscal 2009 or 2008.





14
 Index




Fair
Value Measurements


SFAS No.
157, Fair Value Measurements ("SFAS 157"), defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value measurements.
  The Company has partially adopted Financial Accounting Standards
Board (FASB) SFAS No. 157, Fair Value Measurements (SFAS 157), pursuant to the
provisions of FSP FAS 157-2, which deferred the effective date of SFAS 157 for
non-financial assets and liabilities.  The provisions of SFAS 157 are
applicable to all of the Company’s financial assets and liabilities that are
measured and recorded at fair value.





SFAS 157
establishes a three-tier fair value hierarchy which prioritizes the inputs used
in measuring fair value as follows:





Level 1.
Observable inputs such as quoted prices in active markets;





Level 2.
Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly; and





Level 3.
Unobservable inputs in which there is little or no market data, which require
the reporting entity to develop its own assumptions.





The
Company does not have any assets or liabilities measured at fair value on a
recurring basis at January 31, 2009. The Company did not have any fair value
adjustments for assets and liabilities measured at fair value on a nonrecurring
basis during the six months ended January 31, 2009.





Goodwill and Other Intangible
Assets


Under
SFAS No. 142, “Goodwill and Other Intangible Assets” goodwill and
intangible assets deemed to have indefinite lives are not amortized, but are
subject to annual impairment tests. Intangible assets with definitive lives
consist primarily of costs of customer relationships, which are amortized over
their estimated useful lives of five years.





The
Company performs impairment tests annually, or more frequently if facts and
circumstances warrant a review. The Company determined that there was a single
reporting unit for the purpose of goodwill impairment tests under SFAS
142.  For purposes of assessing the impairment of goodwill, the
Company estimates the value of the reporting unit using the best evidence
available, which in fiscal 2008 was a discounted cash flow model, consideration
of recent transaction values and market capitalization. This fair value is then
compared with the carrying value of the reporting unit. There has been no
impairment of goodwill identified during fiscal 2009 or 2008.





SFAS No.
142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.  There
have been no impairments of intangible assets with estimable useful lives
identified during fiscal 2009 or 2008.





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 include 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 money market funds.





Debt Instruments


The
Company valued debt discounts for common stock warrants 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 Income
Taxes


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 is
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 allowance 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


On
August 1, 2006, the Company adopted SFAS No. 123(R) (revised
2004), “Share-Based Payment”, to account for its stock option plans. The Company
adopted SFAS No. 123(R) using the modified prospective approach. The cost
for all share-based awards granted subsequent to July 31, 2006, represents the
grant-date fair value that was estimated in accordance with the provisions
of


FAS No. 123(R).
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 January 31, 2009 and July
31, 2008.





15
 Index




Revenues





The
Company provides multi-line, Internet-based and CD-ROM interactive electronic
parts catalogs of manufactured equipment to approximately 24,000 dealers in
approximately 85 countries. It serves dealers in various market segments
including outdoor power, power sports, appliance, agricultural, marine,
recreation vehicles, floor maintenance, auto and construction. The Company also
supplies eCommerce enabled websites, direct mail custom marketing and
technology-related services.


The
following table shows the products and services that the Company offers, a brief
description of them and the industries served.




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
      - outdoor power, power sportsWebsiteSmartTM
                        Software
      to create customized websites and conduct business electronically,
      including optional shopping cart
                        Equipment
      - outdoor power, power sportsContent
      Management Services
                        Add-on
      solution to WebsiteSmartTM and WebsiteSmart ProTM that automatically updates
      a website with weather alerts, promotions based on customer seasonality
      and supplier promotions
                        Equipment
      – all sub-marketsProfessional
      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-markets








Electronic
      Catalog Products And ServicesProduct
      or Service
                                                          Description
                                                          Primary
      Industry/MarketPartSmart®
      ClassicÔ
                                                          Electronic
      parts catalog for equipment dealers, formerly PartSmart Version
      6
                                                          Equipment-
      all sub-marketsPartSmart®
      8Ô
                                                          Electronic
      parts catalog for equipment dealers
                                                          Equipment-
      all sub-marketsPartSmart®
      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-marketsPartSmart®
      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-marketsPartSmart®
      IPLÔ
                                                          Electronic
      parts catalog for equipment dealers
                                                          AppliancePartSmart®
      IPL WebÔ
                                                          Web
      based electronic parts catalog, formerly EMPARTweb
                                                          ApplianceElectronic
      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
      - RVProfessional
      services
                                                          Project
      management, software customization, back-end system integration, roll-out
      management, and help desk support services
                                                          Equipment
      - all
sub-markets





16
 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 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-markets





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 three and six months ended January 31,
2009.





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 U.S. subsidiary, the presentation is
different from the segment reporting in Note 9 above.





Revenue
by Location and Service


(Dollars
in Thousands)





Three
      months ended
                              
                              
                              
                              
                              
                              Six
      months endedJanuary
      31
                              
                              
                              Percent
                              
                              
                              January
      31
                              
                              
                              Percent2009
                              
                              
                              2008
                              
                              
                              Change
                              
                              
                              2009
                              
                              
                              2008
                              
                              
                              ChangeNorth
      AmericaCatalog
      subscriptions
                              
                              $
                              2,512
                              
                              
                              $
                              2,527
                              
                              
                              
                              (0.6
                              )
      %
                              
                              $
                              5,058
                              
                              
                              $
                              5,119
                              
                              
                              
                              (1.2
                              )
      %Catalog
      professional services
                              
                              
                              248
                              
                              
                              
                              320
                              
                              
                              
                              (22.5
                              )
                              
                              
                              503
                              
                              
                              
                              609
                              
                              
                              
                              (17.4
                              )Marketing
      services
                              
                              
                              628
                              
                              
                              
                              581
                              
                              
                              
                              8.1
                              
                              
                              
                              1,278
                              
                              
                              
                              1,117
                              
                              
                              
                              14.4Marketing
      professional services
                              
                              
                              215
                              
                              
                              
                              419
                              
                              
                              
                              (48.7
                              )
                              
                              
                              540
                              
                              
                              
                              828
                              
                              
                              
                              (34.8
                              )Dealer
      & distributor communications
                              
                              
                              157
                              
                              
                              
                              152
                              
                              
                              
                              3.3
                              
                              
                              
                              322
                              
                              
                              
                              315
                              
                              
                              
                              2.2Subtotal
      North America
                              
                              
                              3,760
                              
                              
                              
                              3,999
                              
                              
                              
                              (6.0
                              )
                              
                              
                              7,701
                              
                              
                              
                              7,988
                              
                              
                              
                              (3.6
                              )Rest
      of the WorldCatalog
      subscriptions
                              
                              
                              193
                              
                              
                              
                              220
                              
                              
                              
                              (12.3
                              )
                              
                              
                              409
                              
                              
                              
                              455
                              
                              
                              
                              (10.1
                              )Catalog
      professional services
                              
                              
                              2
                              
                              
                              
                              3
                              
                              
                              
                              (33.3
                              )
                              
                              
                              14
                              
                              
                              
                              3
                              
                              
                              
                              366.7Subtotal
      Rest of the World
                              
                              
                              195
                              
                              
                              
                              223
                              
                              
                              
                              (12.6
                              )
                              
                              
                              423
                              
                              
                              
                              458
                              
                              
                              
                              (7.6
                              )Total
      RevenueCatalog
      subscriptions
                              
                              
                              2,705
                              
                              
                              
                              2,747
                              
                              
                              
                              (1.5
                              )
                              
                              
                              5,467
                              
                              
                              
                              5,574
                              
                              
                              
                              (1.9
                              )Catalog
      professional services
                              
                              
                              250
                              
                              
                              
                              323
                              
                              
                              
                              (22.6
                              )
                              
                              
                              517
                              
                              
                              
                              612
                              
                              
                              
                              (15.5
                              )Marketing
      services
                              
                              
                              628
                              
                              
                              
                              581
                              
                              
                              
                              8.1
                              
                              
                              
                              1,278
                              
                              
                              
                              1,117
                              
                              
                              
                              14.4Marketing
      professional services
                              
                              
                              215
                              
                              
                              
                              419
                              
                              
                              
                              (48.7
                              )
                              
                              
                              540
                              
                              
                              
                              828
                              
                              
                              
                              (34.8
                              )Dealer
      & distributor communications
                              
                              
                              157
                              
                              
                              
                              152
                              
                              
                              
                              3.3
                              
                              
                              
                              322
                              
                              
                              
                              315
                              
                              
                              
                              2.2Total
      Revenue
                              
                              $
                              3,955
                              
                              
                              $
                              4,222
                              
                              
                              
                              (6.3
                              )
      %
                              
                              $
                              8,124
                              
                              
                              $
                              8,446
                              
                              
                              
                              (3.8
                              )
      %





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, 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 remained relatively
the same for the three and six month periods ended January 31, 2009, compared to
the same periods last year.  This result consists of a decline related
to the non-renewal of a significant OEM customer, which subscribed to ARI’s
electronic parts catalog in bulk on behalf of its dealers, which was partially
offset by revenue from this OEM’s dealers which purchased from ARI directly and
from sales to customers related to the Info Access acquisition. Management
expects revenues from catalog subscriptions in North America for the remainder
of fiscal 2009 to decline marginally compared to the prior
year.


17
 Index





Catalog Professional
Services





Revenues
from 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 and distributors in
the United States and Canada. Revenues from catalog professional services in
North America decreased for the three and six month periods ended January 31,
2009, compared to the same periods last year, primarily due to lower
customization labor services for the deployment of new web-based manufacturer
databases.  Management expects revenues from catalog professional
services in North America to continue to be lower than the previous year for the
remainder of fiscal 2009, primarily due to less revenue from new customization
projects as a result of the weakened economy.





Marketing
Services





Revenues
from the Company’s North American marketing service subscriptions are derived
from start-up, hosting and access fees charged to dealers for Website SmartTM and
Website Smart ProTM, commissions on on-line sales through Website Smart ProTM and
set-up and postage fees for ARI MailSmartTM in the United States and
Canada.  Revenues from marketing services in North America increased
for the three and six month periods ended January 31, 2009, compared to the same
periods last year, primarily due to recurring revenue from sales of Website
Smart ProTM.  Management expects revenues from marketing services in
North America to increase for the remainder of fiscal 2009, compared to the
prior year, primarily due to recurring revenue from newly acquired customers and
order renewals from customers who purchased from ARI in previous
years.





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
professional services in North America decreased for the three and six months
ended January 31, 2009, compared to the previous year, primarily due to
reductions by one customer’s web customization expenditures as a result of its
market conditions.  Management expects revenues from marketing
professional services to continue to be lower than the previous year for the
remainder of fiscal 2009.





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 remained relatively the same for the three
and six month periods ended January 31, 2009, compared to the same periods last
year. Management expects revenues from dealer and distributor communication
products will remain stable for the remainder of fiscal 2009.





Rest of the World





Catalog
Subscriptions





Catalog
subscription revenues from the rest of the world are derived from software
license fees, license renewal, 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 decreased for the three and six month periods ended January 31, 2009,
compared to the same periods last year, primarily due to reduced revenue from an
existing OEM contract and revenue from new sales not being sufficient to offset
lost dealer renewals. The Company continues to face challenges in the European
market. Management expects catalog subscription revenues from the rest of the
world to decrease in the remainder of fiscal 2009, compared to the same period
of fiscal 2008.





Catalog Professional
Services





Revenues
from the Company’s rest of the world catalog professional services are derived
from software customization labor, data conversion labor and data conversion
replication fees. Revenues from catalog professional services in the rest of the
world increased to a negligible amount for the six months ended January 31,
2009, compared to the same period last year, due to revenue from conversion
services charged for an update to an existing manufacturer databases. Management
expects catalog professional services revenues from the rest of the world to
remain stable at the current level for the remainder of fiscal 2009, compared to
fiscal 2008.


18
 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.





Gross
Margin by Revenue Type


(Dollars
in thousands)





Three
      months ended
                
                
                
                
                
                Six
      months endedJanuary
      31
                
                
                Percent
                
                
                January
      31
                
                
                Percent2009
                
                
                2008
                
                
                Change
                
                
                2009
                
                
                2008
                
                
                ChangeCatalog
      subscriptionsRevenue
                
                
                2,705
                
                
                
                2,747
                
                
                
                (1.5
                )
      %
                
                
                5,467
                
                
                
                5,574
                
                
                
                (1.9
                )
      %Cost
      of revenue
                
                
                446
                
                
                
                250
                
                
                
                78.4
                
                
                
                861
                
                
                
                574
                
                
                
                50.0Gross
      margin - Catalog subscriptions
                
                
                2,259
                
                
                
                2,497
                
                
                
                (9.5
                )
                
                
                4,606
                
                
                
                5,000
                
                
                
                (7.9
                )Gross
      margin percentage
                
                
                83.5
                %
                
                
                90.9
                %
                
                
                
                
                
                
                84.3
                %
                
                
                89.7
                %Catalog
      professional servicesRevenue
                
                
                250
                
                
                
                323
                
                
                
                (22.6
                )
                
                
                517
                
                
                
                612
                
                
                
                (15.5
                )Cost
      of revenue
                
                
                77
                
                
                
                172
                
                
                
                (55.2
                )
                
                
                179
                
                
                
                337
                
                
                
                (46.9
                )Gross
      margin - Catalog professional services
                
                
                173
                
                
                
                151
                
                
                
                14.6
                
                
                
                338
                
                
                
                275
                
                
                
                22.9Gross
      margin percentage
                
                
                69.2
                %
                
                
                46.7
                %
                
                
                
                
                
                
                65.4
                %
                
                
                44.9
                %Marketing
      servicesRevenue
                
                
                628
                
                
                
                581
                
                
                
                8.1
                
                
                
                1,278
                
                
                
                1,117
                
                
                
                14.4Cost
      of revenue
                
                
                142
                
                
                
                208
                
                
                
                (31.7
                )
                
                
                257
                
                
                
                348
                
                
                
                (26.1
                )Gross
      margin - Marketing services
                
                
                486
                
                
                
                373
                
                
                
                30.3
                
                
                
                1,021
                
                
                
                769
                
                
                
                32.8Gross
      margin percentage
                
                
                77.4
                %
                
                
                64.2
                %
                
                
                
                
                
                
                79.9
                %
                
                
                68.8
                %Marketing
      professional servicesRevenue
                
                
                215
                
                
                
                419
                
                
                
                (48.7
                )
                
                
                540
                
                
                
                828
                
                
                
                (34.8
                )Cost
      of revenue
                
                
                62
                
                
                
                147
                
                
                
                (57.8
                )
                
                
                154
                
                
                
                262
                
                
                
                (41.2
                )Gross
      margin - Marketing professional services
                
                
                153
                
                
                
                272
                
                
                
                (43.8
                )
                
                
                386
                
                
                
                566
                
                
                
                (31.8
                )Gross
      margin percentage
                
                
                71.2
                %
                
                
                64.9
                %
                
                
                
                
                
                
                71.5
                %
                
                
                68.4
                %Dealer
      and distributor communicationsRevenue
                
                
                157
                
                
                
                152
                
                
                
                3.3
                
                
                
                322
                
                
                
                315
                
                
                
                2.2Cost
      of revenue
                
                
                5
                
                
                
                3
                
                
                
                66.7
                
                
                
                10
                
                
                
                6
                
                
                
                66.7Gross
      margin - Dealer and distributor communications
                
                
                152
                
                
                
                149
                
                
                
                2.0
                
                
                
                312
                
                
                
                309
                
                
                
                1.0Gross
      margin percentage
                
                
                96.8
                %
                
                
                98.0
                %
                
                
                
                
                
                
                96.9
                %
                
                
                98.1
                %TotalRevenue
                
                
                3,955
                
                
                
                4,222
                
                
                
                (6.3
                )
                
                
                8,124
                
                
                
                8,446
                
                
                
                (3.8
                )Cost
      of revenue
                
                
                732
                
                
                
                780
                
                
                
                (6.2
                )
                
                
                1,461
                
                
                
                1,527
                
                
                
                (4.3
                )Gross
      margin
                
                
                3,223
                
                
                
                3,442
                
                
                
                (6.4
                )
      %
                
                
                6,663
                
                
                
                6,919
                
                
                
                (3.7
                )
      %Gross
      margin percentage
                
                
                81.5
                %
                
                
                81.5
                %
                
                
                
                
                
                
                82.0
                %
                
                
                81.9
                %




Cost of
catalog subscriptions consists primarily of reseller fees, software amortization
costs, catalog data conversion, replication and distribution costs. Cost of
catalog subscriptions as a percentage of revenue increased slightly for the
three and six month periods ended January 31, 2009, compared to the same periods
last year, primarily due to increased catalog data conversion, replication and
distribution costs. Management expects gross margins, as a percentage of revenue
from catalog subscriptions, to vary slightly from quarter to quarter due to the
timing of data shipments and software amortization, which is expensed on a
straight-line basis rather than varying with the level of revenue.





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 and six months ended January 31, 2009, compared to the same periods
last year, primarily due to less non-billable professional services. Management
expects cost of catalog professional services, as a percentage of revenue from
catalog professional services, to fluctuate from quarter to quarter depending on
the mix of services sold and the portion of customizations which are billable,
and on the Company’s performance towards the contracted amount for customization
projects.


19
 Index


Cost of
revenue for marketing service subscriptions consists primarily of website setup
labor, network communication costs, software amortization costs, postcards,
printing and distribution costs. Cost of marketing services as a percentage of
revenue decreased for the three and six months ended January 31, 2009, compared
to the same periods last year, primarily due to increased sales from the
Company’s Website products, which have a higher margin than MailSmartTM and to
lower network communication costs. Management expects gross margins, as a
percent of revenue from marketing services, to fluctuate from quarter to quarter
depending on the mix of products and services sold.





Cost of
revenues for marketing professional services consists of website customization
labor associated primarily with large contracts. Cost of revenues for marketing
professional services as a percentage of revenue remained relatively the same
for the three and six month periods ended January 31, 2009, compared to the same
periods last year.  Management expects cost of marketing professional
services to fluctuate from quarter to quarter 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 remained
relatively the same for the three and six month periods ended January 31, 2009,
compared to the same periods last year. Management expects gross margins, as a
percent of revenue from dealer and distributor communications, to remain
relatively the same or decrease slightly in fiscal 2009, as there will be
limited new sales of this product.








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(Dollars in
      thousands)





Three
      months ended
                  
                  
                  
                  
                  
                  Six
      months endedJanuary
      31
                  
                  
                  Percent
                  
                  
                  January
      31
                  
                  
                  Percent2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  ChangeCustomer
      operations and support
                  
                  $
                  226
                  
                  
                  $
                  256
                  
                  
                  
                  (11.7
                  )
      %
                  
                  $
                  531
                  
                  
                  $
                  536
                  
                  
                  
                  (0.9
                  )
      %Selling,
      general and administrative
                  
                  
                  2,146
                  
                  
                  
                  2,304
                  
                  
                  
                  (6.9
                  )
                  
                  
                  4,304
                  
                  
                  
                  4,684
                  
                  
                  
                  (8.1
                  )Software
      development and technical support
                  
                  
                  319
                  
                  
                  
                  339
                  
                  
                  
                  (5.9
                  )
                  
                  
                  776
                  
                  
                  
                  688
                  
                  
                  
                  12.8Depreciation
      and amortization (exclusive of amortization of software products included
      in cost of products and services sold)
                  
                  
                  229
                  
                  
                  
                  186
                  
                  
                  
                  23.1
                  
                  
                  
                  458
                  
                  
                  
                  381
                  
                  
                  
                  20.2Net
      operating expenses
                  
                  $
                  2,920
                  
                  
                  $
                  3,085
                  
                  
                  
                  (5.3
                  )
      %
                  
                  $
                  6,069
                  
                  
                  $
                  6,289
                  
                  
                  
                  (3.5
                  )
      %




Net
operating expenses decreased for the three and six month periods ended January
31, 2009, compared to the same periods last year, primarily due to lower
selling, general and administrative expense related to the start-up expenses of
OFIC, the Company’s finance and insurance operation, which was discontinued in
November, 2007 and from the restructuring effort announced in July, 2008, that
was designed to improve efficiency and reduce costs. Management expects net
operating expenses to continue to decline for the remainder of fiscal 2009,
compared to the previous year, due to the restructuring and continued efforts to
streamline operations.





Customer
operations and support consists primarily of server room operations, software
maintenance agreements for the Company’s core network and customer support
costs. Customer operations and support costs decreased for the three and six
month periods ended January 31, 2009, compared to the same periods last year,
primarily due to the cost efficiencies as a result of the
restructuring.  Management expects customer operations and support
costs to continue at a similar level for the remainder of fiscal 2009 compared
to fiscal 2008.





Selling,
general and administrative expenses (“SG&A”) decreased for the three and six
month periods ended January 31, 2009, compared to the same periods last year
primarily due to the aforementioned start-up costs of OFIC in fiscal 2008 and
the Company’s focus on cost savings and efficiency.  SG&A, as a
percentage of revenue, decreased from 55.5% for the six months ended January 31,
2008 to 53.0% for the six months ended January 31, 2009.  Management
expects SG&A costs to continue to be lower than last year for the remainder
of fiscal 2009, as the Company streamlines its operations to adjust to the
challenges in the global economy.





The
Company’s technical staff (in-house and contracted) performs software
development, technical support, software customization and data conversion
services for customer applications. 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. Software development and technical support costs decreased
for the three month period ended January 31, 2009, compared to the same period
last year, primarily due to cost savings as a result of the restructuring.
Software development and technical support costs increased for the six month
period ended January 31, 2009, compared to the same period last year, primarily
due to fewer software customizations, for which the labor is allocated to cost
of sales. Management expects software development and technical support costs to
fluctuate from quarter to quarter as the mix of development, customization and
support labor varies, but that the total technical costs will decrease for the
remainder of fiscal 2009, compared to the prior year.


20
 Index





Depreciation
and amortization expense increased for the three and six month periods ended
January 31, 2009, compared to the same periods last year, primarily due to the
amortization of new software and equipment and the amortization of intangible
assets associated with the Info Access acquisition. Management expects
depreciation and other amortization to continue to be higher in fiscal 2009,
compared to the previous year, due to the amortization of these additional fixed
and intangible assets.




Other
Items





Interest
expense includes both cash and non-cash interest. Interest paid decreased $4,000
and $27,000 for the three and six months ended January 31, 2009, compared to the
same periods last year, due to the decline in the Company’s debt as it continues
to make timely payments.  Management expects interest expense to
continue to decrease for the remainder of fiscal 2009, compared to the prior
year, as the Company continues to make scheduled debt payments.





The
Company had net income of $56,000 and $312,000 for the three and six months
ended January 31, 2009, compared to $335,000 and $578,000 for the three and six
months ended January 31, 2008. The decrease in earnings is primarily due to
income tax expense related to a decrease in deferred tax assets and lower
revenues partially offset by lower operating expenses.  The company
underwent a facility consolidation restructuring in the fourth quarter of fiscal
2008 to streamline its operations by locating the management, sales, support,
publishing and fulfillment activities in its Wisconsin location and
concentrating its product and web development activities in its California
location.  Management believes that this restructuring, continued
tight control over operating expenses and its recurring revenue from loyal
customers will help the Company to maintain profitability in a struggling
economy.




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(Dollars in
      thousands)





Six
      months endedJanuary
      31
                        
                        
                        Percent2009
                        
                        
                        2008
                        
                        
                        ChangeNet
      income
                        
                        $
                        312
                        
                        
                        $
                        578
                        
                        
                        
                        (46.0
                        )
      %Adjustments
      to reconcile net income to net cash provided by operating
      activities:Amortization
      of software products
                        
                        
                        419
                        
                        
                        
                        381
                        
                        
                        
                        10.0Amortization
      of debt discount and other
                        
                        
                        8
                        
                        
                        
                        18
                        
                        
                        
                        (55.6
                        )Depreciation
      and other amortization
                        
                        
                        424
                        
                        
                        
                        402
                        
                        
                        
                        5.5Deferred
      income taxes
                        
                        
                        217
                        
                        
                        
                        -
                        
                        
                        
                        100.0Stock
      based compensation
                        
                        
                        161
                        
                        
                        
                        46
                        
                        
                        
                        250.0Stock
      issued to 401(k) plan
                        
                        
                        45
                        
                        
                        
                        37
                        
                        
                        
                        21.6Net
      change in working capital
                        
                        
                        (345
                        )
                        
                        
                        (848
                        )
                        
                        
                        59.3Net
      cash provided by operating activities
                        
                        
                        1,241
                        
                        
                        
                        614
                        
                        
                        
                        102.1Net
      cash used in investing activities
                        
                        
                        (589
                        )
                        
                        
                        (255
                        )
                        
                        
                        (131.0
                        )Net
      cash used in financing activities
                        
                        
                        (589
                        )
                        
                        
                        (655
                        )
                        
                        
                        10.1Effect
      of foreign currency exchange rate changes on cash
                        
                        
                        (11
                        )
                        
                        
                        7
                        
                        
                        
                        (257.1
                        )Net
      change in cash
                        
                        $
                        52
                        
                        
                        $
                        (289
                        )
                        
                        
                        (118.0
                        )
      %




Net cash
provided by operating activities increased for the six month period ended
January 31, 2009, compared to the same period last year, primarily due to the
decreased use of 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.  Management expects net cash provided by
operating activities to vary over the prior year for the remainder of fiscal
2009 due to the net effect of cost efficiencies efforts, lower levels of revenue
and timing of working capital flows.





Net cash
used in investing activities increased for the six month period ended January
31, 2009, compared to the same period last year, primarily due to an increase in
capitalized software product costs.  Management expects cash used in
investing activities may fluctuate from quarter to quarter, depending on the
level of capital expenditures and the timing of acquisitions.





Net cash
used in financing activities decreased for the six month period ended January
31, 2009, compared to the same period last year, primarily due to a decrease in
debt related to notes that were paid in full in the second quarter of fiscal
2008.  Management believes that funds generated from operations will
be adequate to fund the Company’s operations, investments and debt payments for
the foreseeable future. ARI assumes its bank will renew their line of credit,
but with the recent tightening in the credit markets, there can be no assurance
that this will occur, which would put significant pressure on the Company’s cash
position and may increase the expense of obtaining alternative working capital
financing.  Management has made assumptions in its remarks that the
global credit markets will not deteriorate further and that its commercial bank
will continue the relationship it has had with ARI for many years and renew the
line of credit under substantially similar terms.





21
 Index


At
January 31, 2009, the Company had cash and cash equivalents of approximately
$1,138,000 compared to approximately $1,086,000 at July 31,
2008.  Cash from operations of approximately $1,241,000 was used
primarily to fund investments in software development and the repayment of
debt.





Acquisitions





Since
December 1995, the Company has had a formal corporate 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, seven business acquisitions and one
software asset acquisition have been completed, six of which were fully
integrated into the Company’s operations prior to fiscal year
2007.  The corporate development program is still an important
component of the Company’s long-term growth strategy.





On July
1, 2008, the Company acquired certain assets of Info Access, the micropublishing
division of Eye Communication Systems, Inc. (“ECSI”) pursuant to the terms of an
Asset Purchase Agreement, by and among ECSI, John Bessent and the
Company.  Under its terms, the Company acquired all of the assets
related to electronic parts catalog, electronic commerce and certification
testing for service technicians.  Consideration for the acquisition
included (1) approximately $1.0 million in cash, (2)
312,500 shares of the Company common stock, 125,000 of which will be held in
escrow for 15 months pending the satisfaction of certain conditions relating to
post-closing revenues, (3) an aggregate amount of $300,000 in debt to ECSI,
including a 90-day promissory note in the amount of $100,000, which was paid in
September, 2008, and a one-year promissory note in the amount of $200,000, and
(4) the assumption of certain liabilities.





Off-Balance
Sheet Arrangements





ARI has
no significant off-balance sheet arrangements that have or are reasonably likely
to have a material current or future effect on its financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources.





Forward
Looking Statements





Certain
statements contained in this Form 10-Q are forward looking statements including
revenue growth, income, future cash flows, cash generation and sources of
liquidity.  Expressions such as “believes,” “anticipates,” “expects,”
and similar expressions are intended to identify such forward looking
statements.  Several important factors can cause actual results to
materially differ from those stated or implied in the forward looking
statements.  Such factors include, but are not limited to the factors
listed on Exhibit 99.1 of the Company’s annual report on Form 10-K for the year
ended July 31, 2008, which is incorporated herein by reference.  The
forward-looking statements are made only as of the date hereof, and the Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements.





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK– Not Applicable.





ITEM 4T.  CONTROLS AND PROCEDURES




Evaluation of Disclosure Controls and
Procedures.




We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized,
and reported within the required time periods and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure.




As
required by Rule 13a-15 under the Exchange Act, we have completed an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness and the design and operation of our disclosure controls and
procedures as of January 31, 2009. Based upon this evaluation, our management,
including the Chief Executive Officer and the Chief Financial Officer, has
concluded that our disclosure controls and procedures were effective as of
January 31, 2009.





Changes
in Internal Controls





There
were no changes to the Company’s internal control over financial reporting
during the quarter ended January 31, 2009 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.


22
 Index


PART
II - OTHER INFORMATION





ITEM 1.  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.  No material
legal proceedings arose during the three and six months ended January 31,
2009.





On June
23, 2008, Powersports Complete, LLC (“Powersports”) filed a complaint in the
United States District Court for the Eastern District of Wisconsin against the
Company and its wholly-owned subsidiary, ARI Outsourced F&I Center, LLC
(“ARI Outsourced”).  The complaint claims, among other things, that
the Company and ARI Outsourced owe $56,960 to Powersports in connection with
their business arrangements during 2007.  The complaint also claims
that Powersports, among other remedies, is entitled to compensatory damages in
the amount of $1,250,000 and punitive damages in the amount of
$2,500,000.  The Company and ARI Outsourced filed their answer to the
complaint on September 16, 2008.  The answer denied that Powersports
is entitled to the payments described above, and asserted numerous counterclaims
against Powersports.  On February 4, 2009, the parties agreed to
settle all outstanding claims between them.  The settlement has no
material effect to the Company’s financial statements.




ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





During
the quarter ended January 31, 2009, the Company did not sell any equity
securities which were not registered under the Securities Act or repurchase any
of its equity securities.




ITEM 3.  DEFAULTS UPON SENIOR SECURITIES –
None.
 
 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 (a)           The
Company held its 2008 Annual Meeting of Shareholders on December 18,
2008.
 
 (b)
              Votes
      cast for the election of Brian E. Dearing to serve as director until the
      2011 Annual Shareholder’s Meeting were as
  follows:
 
 For
                  5,217,546Withheld
      authority to vote for
                  559,466
 
 Votes
      cast for the election of Roy W. Olivier to serve as director until the
      2011 Annual Shareholder’s Meeting were as
  follows:
 
 For
                5,670,825Withheld
      authority to vote for
                106,187
  Votes
cast for the election of P. Lee Poseidon to serve as director until the 2011
Annual Shareholder’s Meeting were as follows:
 
 For
                    5,712,602Withheld
      authority to vote for
                    64,410
 
 (c)           Votes
cast to ratify the appointment of Wipfli LLP as ARI’s auditors for the year
ending July 31, 2009 were as follows:
  For
                5,714,059Against
                60,084Abstained
                2,868
 
 ITEM 5.  OTHER INFORMATION – None.
 
 ITEM 6.  EXHIBITS
  31.1
                  Section
      302 Certification of Chief Executive
Officer.
 31.2
                Section
      302 Certification of Chief Financial
Officer.
 32.1
                  Section
      906 Certification of Chief Executive
Officer.
 32.2
                Section
      906 Certification of Chief Financial
Officer.


23
 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:
                            March
      2, 2009
                            /s/
      Roy W. OlivierRoy
      W. Olivier, Chief Executive Officer/s/
      Kenneth S. FolbergKenneth
      S. Folberg, Chief Financial Officer




24