----

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

| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
|---|-----------------------------------------------------------------|

| WISCONSIN                                                                |   | 39-1388360                        |
|--------------------------------------------------------------------------|--------|-----------------------------------|
| (State or other jurisdiction of incorporation or organization)           |   | (IRS Employer Identification No.) |
|                                                                     |   |                              |
| 10850 West Park Place, Suite 1200, Milwaukee, Wisconsin  53224 |   |                              |
| (Address of principal executive offices)                                 |   |                              |
|                                                                     |   |                              |
| (414) 973-4300                                                           |   |                              |
| (Registrant's telephone number, including area code)                     |   |                              |

| Large accelerated filer                                 | o      |   | Accelerated filer         | o |   |
|---------------------------------------------------------|--------|--------|---------------------------|---|--------|
| Non-accelerated filer                                   | o      |   | Smaller reporting company | x |   |
| (Do not check if a smaller reporting reporting company) |   |   |

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----

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TABLE OF CONTENTS

| PART I     |    | Page                                                                                                       |
|------------|---------|------------------------------------------------------------------------------------------------------------|
|       |    |                                                                                                       |   |
|       | Item 1  | Financial Statements                                                                                       |   |
|       |    |                                                                                                       |   |
|       |    | Consolidated Balance Sheets as of January 31, 2011 (unaudited) and July 31, 2010                           | 3 |
|       |    |                                                                                                       |   |
|       |    | Consolidated Statements of Income (unaudited) for the three and six months ended January 31, 2011 and 2010 | 5 |
|       |    |                                                                                                       |   |
|       |    | Consolidated Statements of Cash Flows (unaudited) for the six months ended January 31, 2011 and 2010       | 6 |
|       |    |                                                                                                       |   |
|       |    | Notes to the Unaudited Consolidated Financial Statements                                                   | 7 |
|       |    |                                                                                                       |   |
|       | Item 2  | Management's Discussion and Analysis of Financial Condition and Results of Operations                      | 20 |
|       |    |                                                                                                       |   |
|       | Item 3  | Quantitative and Qualitative Disclosures about Market Risk                                                 | 29 |
|       |    |                                                                                                       |   |
|       | Item 4  | Controls and Procedures                                                                                    | 29 |
|       |    |                                                                                                       |   |
| PART II    |    |                                                                                                       |
|       |    |                                                                                                       |   |
|       | Item 1  | Legal Proceedings                                                                                          | 29 |
|       |    |                                                                                                       |   |
|       | Item 1A | Risk Factors                                                                                               | 29 |
|       |    |                                                                                                       |   |
|       | Item 2  | Unregistered Sales of Equity Securities and Use of Proceeds                                                | 29 |
|       |    |                                                                                                       |   |
|       | Item 3  | Defaults upon Senior Securities                                                                            | 29 |
|       |    |                                                                                                       |   |
|       | Item 4  | Removed and Reserved                                                                                       | 29 |
|       |    |                                                                                                       |   |
|       | Item 5  | Other Information                                                                                          | 29 |
|       |    |                                                                                                       |   |
|       | Item 6  | Exhibits                                                                                                   | 30 |
|       |    |                                                                                                       |   |
| Signatures | 31      |

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Table of Contents

Item 1. Financial Statements

Consolidated Balance Sheets

|                                                                                                          |   | (Unaudited) |   |   | (Audited) |   |
|---------------------------------------------------------------------------------------------------------------|--------|-------------|--------|--------|-----------|--------|
|                                                                                                          |   | January 31  |   |   | July 31   |   |
|                                                                                                          |   | 2011        |   |   | 2010      |   |
| Current assets:                                                                                               |   |        |   |   |      |   |
| Cash and cash equivalents                                                                                     |   | $           | 1,227  |   |      | $      | 938 |   |
| Trade receivables, less allowance for doubtful accounts of $355 at January 31, 2011 and $565 at July 31, 2010 |   |        | 1,006  |   |      |   | 1,359 |   |
| Work in process                                                                                               |   |        | 112    |   |      |   | 133 |   |
| Prepaid expenses and other                                                                                    |   |        | 588    |   |      |   | 481 |   |
| Deferred income taxes                                                                                         |   |        | 2,294  |   |      |   | 2,600 |   |
| Total current assets                                                                                          |   |        | 5,227  |   |      |   | 5,511 |   |
| Equipment and leasehold improvements:                                                                         |   |        |   |   |      |   |   |   |
| Computer equipment                                                                                            |   |        | 1,970  |   |      |   | 1,883 |   |
| Leasehold improvements                                                                                        |   |        | 506    |   |      |   | 506 |   |
| Software and equipment                                                                                        |   |        | 2,181  |   |      |   | 1,970 |   |
|                                                                                                          |   |        | 4,657  |   |      |   | 4,359 |   |
| Less accumulated depreciation and amortization                                                                |   |        | 2,852  |   |      |   | 2,433 |   |
| Net equipment and leasehold improvements                                                                      |   |        | 1,805  |   |      |   | 1,926 |   |
| Capitalized software product costs:                                                                           |   |        |   |   |      |   |   |   |
| Amounts capitalized for software product costs                                                                |   |        | 16,666 |   |      |   | 15,919 |   |
| Less accumulated amortization                                                                                 |   |        | 14,048 |   |      |   | 13,524 |   |
| Net capitalized software product costs                                                                        |   |        | 2,618  |   |      |   | 2,395 |   |
| Deferred income taxes                                                                                         |   |        | 1,854  |   |      |   | 1,616 |   |
| Other long term assets                                                                                        |   |        | 66     |   |      |   | 63 |   |
| Other intangible assets                                                                                       |   |        | 2,422  |   |      |   | 2,827 |   |
| Goodwill                                                                                                      |   |        | 5,439  |   |      |   | 5,439 |   |
| Total assets                                                                                                  |   | $           | 19,431 |   |      | $      | 19,777 |   |

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Table of Contents

|                                                                                                                                                                                         |   | (Unaudited) |    |   | (Audited) |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|---------|--------|-----------|--------|
|                                                                                                                                                                                         |   | January 31  |    |   | July 31   |   |
|                                                                                                                                                                                         |   | 2011        |    |   | 2010      |   |
| Current liabilities:                                                                                                                                                                         |   |        |    |   |      |   |
| Current borrowings on line of credit                                                                                                                                                         |   | $           | 1,175   |   |      | $      | 1,025 |   |
| Current portion of notes payable                                                                                                                                                             |   |        | 549     |   |      |   | - |   |
| Accounts payable                                                                                                                                                                             |   |        | 498     |   |      |   | 490 |   |
| Deferred revenue                                                                                                                                                                             |   |        | 4,794   |   |      |   | 5,270 |   |
| Accrued payroll and related liabilities                                                                                                                                                      |   |        | 1,192   |   |      |   | 1,322 |   |
| Accrued taxes                                                                                                                                                                                |   |        | 44      |   |      |   | 60 |   |
| Other accrued liabilities                                                                                                                                                                    |   |        | 749     |   |      |   | 844 |   |
| Current portion of capital lease obligations                                                                                                                                                 |   |        | 144     |   |      |   | 192 |   |
| Total current liabilities                                                                                                                                                                    |   |        | 9,145   |   |      |   | 9,203 |   |
| Non-current liabilities:                                                                                                                                                                     |   |        |    |   |      |   |   |   |
| Notes payable                                                                                                                                                                                |   |        | 4,451   |   |      |   | 5,000 |   |
| Long-term portion of accrued compensation                                                                                                                                                    |   |        | -       |   |      |   | 17 |   |
| Capital lease obligations                                                                                                                                                                    |   |        | 274     |   |      |   | 338 |   |
| Other long term liabilities                                                                                                                                                                  |   |        | -       |   |      |   | - |   |
| Total non-current liabilities                                                                                                                                                                |   |        | 4,725   |   |      |   | 5,355 |   |
| Total liabilities                                                                                                                                                                            |   |        | 13,870  |   |      |   | 14,558 |   |
|                                                                                                                                                                                         |   |        |    |   |      |   |   |   |
| Shareholders' equity:Cumulative preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0 shares issued and outstanding at January 31, 2011 and July 31, 2010, respectively |   |        | -       |   |      |   | - |   |
| Junior preferred stock, par value $.001 per share, 100,000shares authorized; 0 shares issued and outstanding at January 31, 2011 and July 31, 2010, respectively                             |   |        | -       |   |      |   | - |   |
| Common stock, par value $.001 per share, 25,000,000 shares authorized; 7,884,498 and  7,768,921 shares issued and outstanding at January 31, 2011 and July 31, 2010, respectively  |   |        | 8       |   |      |   | 8 |   |
|                                                                                                                                                                                         |   |        |    |   |      |   |   |   |
| Common stock warrants and options                                                                                                                                                            |   |        | 1,042   |   |      |   | 983 |   |
| Additional paid-in-capital                                                                                                                                                                   |   |        | 95,822  |   |      |   | 95,748 |   |
| Accumulated deficit                                                                                                                                                                          |   |        | (91,285 | )      |      |   | (91,507 | ) |
| Other accumulated comprehensive loss                                                                                                                                                         |   |        | (26     | )      |      |   | (13 | ) |
| Total shareholders' equity                                                                                                                                                                   |   |        | 5,561   |   |      |   | 5,219 |   |
| Total liabilities and shareholders' equity                                                                                                                                                   |   | $           | 19,431  |   |      | $      | 19,777 |   |

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Table of Contents

Consolidated Statements of Income

|                                                                                                            |   | (Unaudited)                   |   |   | (Unaudited)                 |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|--------|-----------------------------|--------|
|                                                                                                            |   | Three months ended January 31 |   |   | Six months ended January 31 |   |
|                                                                                                            |   | 2011                          |   |   | 2010                        |   |   | 2011 |   |   | 2010 |   |
| Net revenue                                                                                                     |   | $                             | 5,238  |   |                        | $      | 5,334 |   |   | $ | 10,562 |   |   | $ | 10,771 |   |
| Cost of revenue                                                                                                 |   |                          | 1,086  |   |                        |   | 973 |   |   |   | 2,253 |   |   |   | 1,924 |   |
| Gross profit                                                                                                    |   |                          | 4,152  |   |                        |   | 4,361 |   |   |   | 8,309 |   |   |   | 8,847 |   |
| Operating expenses:                                                                                             |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing                                                                                             |   |                          | 1,084  |   |                        |   | 1,196 |   |   |   | 2,226 |   |   |   | 2,334 |   |
| Customer operations and support                                                                                 |   |                          | 922    |   |                        |   | 847 |   |   |   | 1,711 |   |   |   | 1,656 |   |
| Software development and technical support (net of capitalized software product costs)                          |   |                          | 454    |   |                        |   | 284 |   |   |   | 776 |   |   |   | 831 |   |
| General and administrative                                                                                      |   |                          | 1,028  |   |                        |   | 1,125 |   |   |   | 2,080 |   |   |   | 2,168 |   |
| Restructuring                                                                                                   |   |                          | -      |   |                        |   | - |   |   |   | - |   |   |   | 76 |   |
| Depreciation and amortization (exclusive of amortization of software product costs included in cost of revenue) |   |                          | 410    |   |                        |   | 417 |   |   |   | 817 |   |   |   | 821 |   |
| Net operating expenses                                                                                          |   |                          | 3,898  |   |                        |   | 3,869 |   |   |   | 7,610 |   |   |   | 7,886 |   |
| Operating income                                                                                                |   |                          | 254    |   |                        |   | 492 |   |   |   | 699 |   |   |   | 961 |   |
| Other income (expense):                                                                                         |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                                                                                |   |                          | (203   | )      |                        |   | (150 | ) |   |   | (404 | ) |   |   | (289 | ) |
| Other, net                                                                                                      |   |                          | 6      |   |                        |   | (3 | ) |   |   | 6 |   |   |   | (3 | ) |
| Total other income (expense)                                                                                    |   |                          | (197   | )      |                        |   | (153 | ) |   |   | (398 | ) |   |   | (292 | ) |
| Income (loss) from continuing operations before provision for income tax                                        |   |                          | 57     |   |                        |   | 339 |   |   |   | 301 |   |   |   | 669 |   |
| Income tax benefit (expense)                                                                                    |   |                          | 66     |   |                        |   | - |   |   |   | (79 | ) |   |   | (5 | ) |
| Income from continuing operations                                                                               |   |                          | 123    |   |                        |   | 339 |   |   |   | 222 |   |   |   | 664 |   |
| Discontinued operations, net of tax                                                                             |   |                          | -      |   |                        |   | (163 | ) |   |   | - |   |   |   | (326 | ) |
| Net income                                                                                                      |   | $                             | 123    |   |                        | $      | 176 |   |   | $ | 222 |   |   | $ | 338 |   |
|                                                                                                            |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations per common share:                                                             |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                           |   | $                             | 0.02   |   |                        | $      | 0.04 |   |   | $ | 0.03 |   |   | $ | 0.08 |   |
| Diluted                                                                                                         |   | $                             | 0.02   |   |                        | $      | 0.04 |   |   | $ | 0.03 |   |   | $ | 0.08 |   |
|                                                                                                            |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Net income per common share:                                                                                    |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                           |   | $                             | 0.02   |   |                        | $      | 0.02 |   |   | $ | 0.03 |   |   | $ | 0.04 |   |
| Diluted                                                                                                         |   | $                             | 0.02   |   |                        | $      | 0.02 |   |   | $ | 0.03 |   |   | $ | 0.04 |   |

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Table of Contents

Consolidated Statements of Cash Flows

|                                                                              |   | (Unaudited)                 |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                              |   | Six months ended January 31 |   |
|                                                                              |   |                        | 2011   |   |   |   | 2010 |   |
| Operating activities                                                              |   |                        |   |   |   |   |   |   |
| Net income                                                                        |   | $                           | 222    |   |   | $ | 338 |   |
| Adjustments to reconcile net income to net cash provided by operating activities: |   |                        |   |   |   |   |   |   |
| Amortization of software products                                                 |   |                        | 524    |   |   |   | 519 |   |
| Depreciation and other amortization                                               |   |                        | 817    |   |   |   | 814 |   |
| Provision for bad debt allowance                                                  |   |                        | 21     |   |   |   | 10 |   |
| Deferred income taxes                                                             |   |                        | 68     |   |   |   | - |   |
| Stock based compensation related to stock options                                 |   |                        | 59     |   |   |   | 93 |   |
| Stock issued as contribution to 401(k) plan                                       |   |                        | 59     |   |   |   | 52 |   |
| Net change in assets and liabilities:                                             |   |                        |   |   |   |   |   |   |
| Trade receivables                                                                 |   |                        | 332    |   |   |   | (70 | ) |
| Work in process                                                                   |   |                        | 21     |   |   |   | (23 | ) |
| Prepaid expenses and other                                                        |   |                        | (107   | ) |   |   | 17 |   |
| Other long term assets                                                            |   |                        | (3     | ) |   |   | (1 | ) |
| Accounts payable                                                                  |   |                        | 8      |   |   |   | (473 | ) |
| Deferred revenue                                                                  |   |                        | (476   | ) |   |   | (719 | ) |
| Accrued payroll and related liabilities                                           |   |                        | (138   | ) |   |   | (236 | ) |
| Accrued taxes                                                                     |   |                        | (16    | ) |   |   | (48 | ) |
| Accrued sales, use and income tax                                                 |   |                        |   |   |   |   |   |   |
| Other accrued liabilities                                                         |   |                        | (95    | ) |   |   | (78 | ) |
| Net cash provided by operating activities                                         |   |                        | 1,296  |   |   |   | 195 |   |
| Investing activities                                                              |   |                        |   |   |   |   |   |   |
| Purchase of equipment, software and leasehold improvements                        |   |                        | (192   | ) |   |   | (225 | ) |
| Software capitalized for internal use                                             |   |                        | (106   | ) |   |   | (67 | ) |
| Software development costs capitalized                                            |   |                        | (747   | ) |   |   | (625 | ) |
| Net cash used in investing activities                                             |   |                        | (1,045 | ) |   |   | (917 | ) |
| Financing activities                                                              |   |                        |   |   |   |   |   |   |
| Borrowings under line of credit                                                   |   |                        | 150    |   |   |   | 525 |   |
| Payments under notes payable                                                      |   |                        | -      |   |   |   | (117 | ) |
| Proceeds from capital lease obligations incurred                                  |   |                        | -      |   |   |   | 300 |   |
| Payments of capital lease obligations                                             |   |                        | (112   | ) |   |   | (59 | ) |
| Proceeds from issuance of common stock                                            |   |                        | 6      |   |   |   | - |   |
| Net cash provided by financing activities                                         |   |                        | 44     |   |   |   | 649 |   |
| Effect of foreign currency exchange rate changes on cash                          |   |                        | (6     | ) |   |   | - |   |
| Net change in cash and cash equivalents                                           |   |                        | 289    |   |   |   | (73 | ) |
| Cash and cash equivalents at beginning of period                                  |   |                        | 938    |   |   |   | 650 |   |
| Cash and cash equivalents at end of period                                        |   | $                           | 1,227  |   |   | $ | 577 |   |
| Cash paid for interest                                                            |   | $                           | 579    |   |   | $ | 290 |   |
| Cash paid for income taxes                                                        |   | $                           | 20     |   |   | $ | 54 |   |
|                                                                              |   |                        |   |   |   |   |   |   |
| Noncash investing and financing activities                                        |   |                        |   |   |   |   |   |   |
| Issuance of common stock related to payment of executive compensation             |   | $                           | 9      |   |   | $ | 10 |   |

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Table of Contents

Notes to Unaudited Consolidated Financial Statements

| 1. | Description of the Business and Significant Accounting Policies |
|----|-----------------------------------------------------------------|

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Table of Contents

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Table of Contents

| 2. | Basic and Diluted Net Income per Share |
|----|----------------------------------------|

|                                                                                                                                                                                             |   | Three months ended January 31 |   |   | Six months ended January 31 |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|--------|-----------------------------|--------|
|                                                                                                                                                                                             |   | 2011                          |   |   | 2010                        |   |   | 2011 |   |   | 2010 |   |
| Income from continuing operations                                                                                                                                                                |   | $                             | 123    |   |                        | $      | 339 |   |   | $ | 222 |   |   | $ | 664 |   |
| Loss from discontinued operations                                                                                                                                                                |   |                          | -      |   |                        |   | (163 | ) |   |   | - |   |   |   | (326 | ) |
| Net income                                                                                                                                                                                       |   | $                             | 123    |   |                        | $      | 176 |   |   | $ | 222 |   |   | $ | 338 |   |
|                                                                                                                                                                                             |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Weighted-average common shares outstanding                                                                                                                                                       |   |                          | 7,842  |   |                        |   | 7,757 |   |   |   | 7,809 |   |   |   | 7,734 |   |
| Effect of dilutive stock options and warrants                                                                                                                                                    |   |                          | 13     |   |                        |   | 23 |   |   |   | 13 |   |   |   | 23 |   |
| Diluted weighted-average common shares outstanding                                                                                                                                               |   |                          | 7,855  |   |                        |   | 7,780 |   |   |   | 7,822 |   |   |   | 7,757 |   |
|                                                                                                                                                                                             |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per share - basic:                                                                                                                                                                      |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations                                                                                                                                                                |   | $                             | 0.02   |   |                        | $      | 0.04 |   |   | $ | 0.03 |   |   | $ | 0.08 |   |
| Loss from discontinued operations                                                                                                                                                                |   |                          | -      |   |                        |   | (0.02 | ) |   |   | - |   |   |   | (0.04 | ) |
| Net income                                                                                                                                                                                       |   | $                             | 0.02   |   |                        | $      | 0.02 |   |   | $ | 0.03 |   |   | $ | 0.04 |   |
|                                                                                                                                                                                             |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per share - diluted:                                                                                                                                                                    |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Income from continuing operations                                                                                                                                                                |   | $                             | 0.02   |   |                        | $      | 0.04 |   |   | $ | 0.03 |   |   | $ | 0.08 |   |
| Loss from discontinued operations                                                                                                                                                                |   |                          | -      |   |                        |   | (0.02 | ) |   |   | - |   |   |   | (0.04 | ) |
| Net income                                                                                                                                                                                       |   | $                             | 0.02   |   |                        | $      | 0.02 |   |   | $ | 0.03 |   |   | $ | 0.04 |   |
|                                                                                                                                                                                             |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Options 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 |   |                          | 565    |   |                        |   | 1,382 |   |   |   | 565 |   |   |   | 1,382 |   |

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Table of Contents

| 3. | Stock-based Compensation Plans |
|----|--------------------------------|

|                     |   | Three months ended January 31 |   |   | Six months ended January 31 |   |
|--------------------------|--------|-------------------------------|--------|--------|-----------------------------|--------|
|                     |   | 2011                          |   |   | 2010                        |   |   | 2011 |   |   | 2010 |   |
| Expected life (years)    |   | 10 years                      |   |   | 10 years                    |   |   | 10 years |   |   | 10 years |   |
| Risk-free interest rate  |   |                          | 2.8    | %      |                        |   | 3.5 | % |   |   | 2.8 | % |   |   | 3.6 | % |
| Expected volatility      |   |                          | 104.9  | %      |                        |   | 92.9 | % |   |   | 103.1 | % |   |   | 91.2 | % |
| Expected forfeiture rate |   |                          | 18.3   | %      |                        |   | 15.9 | % |   |   | 16.9 | % |   |   | 8.4 | % |
| Expected dividend yield  |   |                          | 0.0    | %      |                        |   | 0.0 | % |   |   | 0.0 | % |   |   | 0.0 | % |

|   | · | increasing the number of shares of Common Stock authorized for sale under the ESPP from 175,000 to 225,000; |
|--------|--------|-------------------------------------------------------------------------------------------------------------|

|   | · | amending the term of the ESPP to continue in effect until all of the shares of Common Stock reserved for issuance under the ESPP, as increased or adjusted from time to time, have been issued, unless sooner terminated in accordance with its terms; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | removing the prohibition on executive officer participation in the ESPP and providing that no executive officer will be eligible to participate in the ESPP unless otherwise determined by the Compensation Committee prior to an offering period; and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | updating the definition of “Fair Market Value” for offerings commencing on or after January 1, 2011 to relate to the bid and ask prices of the Company’s Common Stock on the NASDAQ Over-The-Counter Bulletin Board. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table of Contents

|                                    |   | Number of Options |   |   | Wtd. Avg. Exercise Price |   |   | Wtd. Avg. Remaining Contractual Period (Years) |   |   | Aggregate Instrinsic Value |   |
|-----------------------------------------|--------|------------------------|--------|--------|--------------------------|--------|--------|------------------------------------------------|--------|--------|----------------------------|--------|
| Outstanding and exercisable at 10/31/09 |   |                   | 35,500 |   |                     | $      | 2.43   |                                           |   |   | 0.84                       |   |   | $ | - |   |
| Granted                                 |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                               |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                               |   |                   | (500   | )      |                     |   | 9.06   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding and exercisable at 1/31/10  |   |                   | 35,000 |   |                     | $      | 2.33   |                                           |   |   | 0.60                       |   |   | $ | - |   |
|                                    |   |                   |   |   |                     |   |   |                                           |   |   |                       |   |   |   |   |   |
| Outstanding and exercisable at 10/31/10 |   |                   | -      |   |                     | $      | -      |                                           |   |   | -                          |   |   | $ | - |   |
| Granted                                 |   |                   | n/a    |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                               |   |                   | n/a    |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                               |   |                   | n/a    |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding and exercisable at 1/31/11  |   |                   | -      |   |                     | $      | -      |                                           |   |   | -                          |   |   | $ | - |   |

|                                   |   | Number of Options |    |   | Wtd. Avg. Exercise Price |   |   | Wtd. Avg. Remaining Contractual Period (Years) |   |   | Aggregate Instrinsic Value |   |
|----------------------------------------|--------|------------------------|---------|--------|--------------------------|--------|--------|------------------------------------------------|--------|--------|----------------------------|--------|
| Outstanding and exercisable at 7/31/09 |   |                   | 35,500  |   |                     | $      | 2.43   |                                           |   |   | 1.09                       |   |   | $ | - |   |
| Granted                                |   |                   | -       |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                              |   |                   | -       |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                              |   |                   | (500    | )      |                     |   | 9.06   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding and exercisable at 1/31/10 |   |                   | 35,000  |   |                     | $      | 2.33   |                                           |   |   | 0.60                       |   |   | $ | - |   |
|                                   |   |                   |    |   |                     |   |   |                                           |   |   |                       |   |   |   |   |   |
| Outstanding and exercisable at 7/31/10 |   |                   | 35,000  |   |                     | $      | 2.33   |                                           |   |   | 0.10                       |   |   | $ | - |   |
| Granted                                |   |                   | -       |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                              |   |                   | -       |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                              |   |                   | (35,000 | )      |                     |   | 2.33   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding and exercisable at 1/31/11 |   |                   | -       |   |                     | $      | -      |                                           |   |   | -                          |   |   | $ | - |   |

----

Table of Contents

|                                    |   | Number of Options |   |   | Wtd. Avg. Exercise Price |   |   | Wtd. Avg. Remaining Contractual Period (Years) |   |   | Aggregate Instrinsic Value |   |
|-----------------------------------------|--------|------------------------|--------|--------|--------------------------|--------|--------|------------------------------------------------|--------|--------|----------------------------|--------|
| Outstanding and exercisable at 10/31/09 |   |                   | 1,313  |   |                     | $      | 2.65   |                                           |   |   | 0.72                       |   |   | $ | - |   |
| Granted                                 |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                               |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                               |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding and exercisable at 1/31/10  |   |                   | 1,313  |   |                     | $      | 2.65   |                                           |   |   | 0.47                       |   |   | $ | - |   |
|                                    |   |                   |   |   |                     |   |   |                                           |   |   |                       |   |   |   |   |   |
| Outstanding and exercisable at 10/31/10 |   |                   | -      |   |                     | $      | -      |                                           |   |   | -                          |   |   | $ | - |   |
| Granted                                 |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                               |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                               |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding and exercisable at 1/31/11  |   |                   | -      |   |                     | $      | -      |                                           |   |   | -                          |   |   | $ | - |   |

|                                   |   | Number of Options |   |   | Wtd. Avg. Exercise Price |   |   | Wtd. Avg. Remaining Contractual Period (Years) |   |   | Aggregate Instrinsic Value |   |
|----------------------------------------|--------|------------------------|--------|--------|--------------------------|--------|--------|------------------------------------------------|--------|--------|----------------------------|--------|
| Outstanding and exercisable at 7/31/09 |   |                   | 1,313  |   |                     | $      | 2.65   |                                           |   |   | 0.97                       |   |   | $ | - |   |
| Granted                                |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                              |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                              |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding and exercisable at 1/31/10 |   |                   | 1,313  |   |                     | $      | 2.65   |                                           |   |   | 0.47                       |   |   | $ | - |   |
|                                   |   |                   |   |   |                     |   |   |                                           |   |   |                       |   |   |   |   |   |
| Outstanding and exercisable at 7/31/10 |   |                   | 750    |   |                     | $      | 2.05   |                                           |   |   | 0.08                       |   |   | $ | - |   |
| Granted                                |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                              |   |                   | -      |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                              |   |                   | (750   | )      |                     |   | 2.05   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding and exercisable at 1/31/11 |   |                   | -      |   |                     | $      | -      |                                           |   |   | -                          |   |   | $ | - |   |

----

Table of Contents

|                                    |   | Number of Options |      |   | Wtd. Avg. Exercise Price |   |   | Wtd. Avg. Remaining Contractual Period (Years) |   |   | Aggregate Instrinsic Value |   |
|-----------------------------------------|--------|------------------------|-----------|--------|--------------------------|--------|--------|------------------------------------------------|--------|--------|----------------------------|--------|
| Outstanding and exercisable at 10/31/09 |   |                   | 1,221,527 |   |                     | $      | 1.50   |                                           |   |   | 6.86                       |   |   | $ | 37,456 |   |
| Granted                                 |   |                   | 78,750    |   |                     |   | 0.80   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                               |   |                   | -         |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                               |   |                   | (8,500    | )      |                     |   | 1.45   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding at 1/31/10                  |   |                   | 1,291,777 |   |                     | $      | 1.46   |                                           |   |   | 6.80                       |   |   | $ | 34,698 |   |
| Exercisable at 1/31/10                  |   |                   | 854,251   |   |                     | $      | 1.56   |                                           |   |   | 5.80                       |   |   | $ | 26,120 |   |
|                                    |   |                   |      |   |                     |   |   |                                           |   |   |                       |   |   |   |   |   |
| Outstanding and exercisable at 10/31/10 |   |                   | 1,329,268 |   |                     | $      | 1.38   |                                           |   |   | 6.40                       |   |   | $ | 11,363 |   |
| Granted                                 |   |                   | 79,000    |   |                     |   | 0.62   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                               |   |                   | -         |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                               |   |                   | (23,149   | )      |                     |   | 1.35   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding at 1/31/11                  |   |                   | 1,385,119 |   |                     | $      | 1.33   |                                           |   |   | 6.41                       |   |   | $ | 35,575 |   |
| Exercisable at 1/31/11                  |   |                   | 962,303   |   |                     | $      | 1.51   |                                           |   |   | 5.37                       |   |   | $ | 18,982 |   |

|                                   |   | Number of Options |      |   | Wtd. Avg. Exercise Price |   |   | Wtd. Avg. Remaining Contractual Period (Years) |   |   | Aggregate Instrinsic Value |   |
|----------------------------------------|--------|------------------------|-----------|--------|--------------------------|--------|--------|------------------------------------------------|--------|--------|----------------------------|--------|
| Outstanding and exercisable at 7/31/09 |   |                   | 1,213,402 |   |                     | $      | 1.51   |                                           |   |   | 7.08                       |   |   | $ | 21,337 |   |
| Granted                                |   |                   | 100,750   |   |                     |   | 0.81   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                              |   |                   | -         |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                              |   |                   | (22,375   | )      |                     |   | 1.46   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding at 1/31/10                 |   |                   | 1,291,777 |   |                     | $      | 1.46   |                                           |   |   | 6.80                       |   |   | $ | 34,698 |   |
| Exercisable at 1/31/10                 |   |                   | 854,251   |   |                     | $      | 1.56   |                                           |   |   | 5.80                       |   |   | $ | 26,120 |   |
|                                   |   |                   |      |   |                     |   |   |                                           |   |   |                       |   |   |   |   |   |
| Outstanding and exercisable at 7/31/10 |   |                   | 1,269,981 |   |                     | $      | 1.41   |                                           |   |   | 6.48                       |   |   | $ | 13,319 |   |
| Granted                                |   |                   | 146,100   |   |                     |   | 0.64   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                              |   |                   | -         |   |                     |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                              |   |                   | (30,962   | )      |                     |   | 1.35   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding at 1/31/11                 |   |                   | 1,385,119 |   |                     | $      | 1.33   |                                           |   |   | 6.41                       |   |   | $ | 35,575 |   |
| Exercisable at 1/31/11                 |   |                   | 962,303   |   |                     | $      | 1.51   |                                           |   |   | 5.37                       |   |   | $ | 18,982 |   |

----

Table of Contents

|                   |   | Number of Options |    |   | Wtd. Avg. Exercise Price |   |
|------------------------|--------|------------------------|---------|--------|--------------------------|--------|
| Non-vested at 10/31/09 |   |                   | 363,776 |   |                     | $      | 1.36 |   |
| Granted                |   |                   | 78,750  |   |                     |   | 0.80 |   |
| Vested                 |   |                   | -       |   |                     |   | n/a |   |
| Forfeited              |   |                   | (5,000  | )      |                     |   | 1.45 |   |
| Non-vested at 1/31/10  |   |                   | 437,526 |   |                     | $      | 1.26 |   |
|                   |   |                   |    |   |                     |   |   |   |
| Non-vested at 10/31/10 |   |                   | 346,941 |   |                     | $      | 1.01 |   |
| Granted                |   |                   | 79,000  |   |                     |   | 0.62 |   |
| Vested                 |   |                   | (500    | )      |                     |   | 0.86 |   |
| Forfeited              |   |                   | (2,625  | )      |                     |   | 0.94 |   |
| Non-vested at 1/31/11  |   |                   | 422,816 |   |                     | $      | 0.94 |   |

|                  |   | Number of Options |    |   | Wtd. Avg. Exercise Price |   |
|-----------------------|--------|------------------------|---------|--------|--------------------------|--------|
| Non-vested at 7/31/09 |   |                   | 341,776 |   |                     | $      | 1.40 |   |
| Granted               |   |                   | 100,750 |   |                     |   | 0.81 |   |
| Vested                |   |                   | -       |   |                     |   | n/a |   |
| Forfeited             |   |                   | (5,000  | )      |                     |   | 1.45 |   |
| Non-vested at 1/31/10 |   |                   | 437,526 |   |                     | $      | 1.26 |   |
|                  |   |                   |    |   |                     |   |   |   |
| Non-vested at 7/31/10 |   |                   | 282,528 |   |                     | $      | 1.09 |   |
| Granted               |   |                   | 146,100 |   |                     |   | 0.64 |   |
| Vested                |   |                   | (500    | )      |                     |   | 0.86 |   |
| Forfeited             |   |                   | (5,312  | )      |                     |   | 0.92 |   |
| Non-vested at 1/31/11 |   |                   | 422,816 |   |                     | $      | 0.94 |   |

----

Table of Contents

|   | · | the aggregate number of shares of Common Stock subject to the 2010 Plan is 650,000 shares; |
|--------|--------|--------------------------------------------------------------------------------------------|

|   | · | the exercise price for options and stock appreciation rights cannot be less than 100% of the fair market value, as defined, of the Company’s Common Stock on the date of grant; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the exercise prices for options and stock appreciation rights cannot be repriced without shareholder approval, except to reflect changes to the capital structure of the Company as described in the 2010 Plan; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a maximum term of ten years for options and stock appreciation rights; |
|--------|--------|------------------------------------------------------------------------|

|   | · | a maximum of 325,000 of the shares available for issuance under the 2010 Plan can be in the form of restricted shares or restricted stock units, and the 2010 Plan does not have liberal share counting provisions (such as provisions that would permit shares withheld for payment of taxes or the exercise price of stock options to be re-granted under the plan); and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | awards cannot be transferred to third parties, with the exception of certain estate planning transfers, which can be made if the committee that administers the 2010 Plan approves such transfers. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                    |   | Number of Options |   |   | Wtd. Avg. Exercise Price |   |   | Wtd. Avg. Remaining Contractual Period (Years) |   |   | Aggregate Instrinsic Value |   |
|-----------------------------------------|--------|------------------------|--------|--------|-------------------------------|--------|--------|------------------------------------------------|--------|--------|----------------------------|--------|
| Outstanding and exercisable at 10/31/10 |   |                   | -      |   |                          | $      | -      |                                           |   |   | -                          |   |   | $ | - |   |
| Granted                                 |   |                   | 24,500 |   |                          |   | 0.65   |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Exercised                               |   |                   | -      |   |                          |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Forfeited                               |   |                   | -      |   |                          |   | n/a    |                                           |   |   | n/a                        |   |   |   | n/a |   |
| Outstanding at 1/31/11                  |   |                   | 24,500 |   |                          | $      | 0.65   |                                           |   |   | 9.97                       |   |   | $ | 2,330 |   |
| Exercisable at 1/31/11                  |   |                   | -      |   |                          | $      | -      |                                           |   |   | -                          |   |   | $ | - |   |

|                   |   | Number of Options |   |   | Wtd. Avg. Exercise Price |   |
|------------------------|--------|------------------------|--------|--------|--------------------------|--------|
| Non-vested at 10/31/10 |   |                   | -      |   |                     | $      | - |   |
| Granted                |   |                   | 24,500 |   |                     |   | 0.65 |   |
| Vested                 |   |                   | -      |   |                     |   | - |   |
| Forfeited              |   |                   | -      |   |                     |   | - |   |
| Non-vested at 1/31/11  |   |                   | 24,500 |   |                     | $      | 0.65 |   |

----

Table of Contents

| 4. | Notes Payable |
|----|---------------|

|                      |   | January 31 |   |   | July 31 |   |
|---------------------------|--------|------------|--------|--------|---------|--------|
|                      |   | 2011       |   |   | 2010    |   |
| Notes payable             |   | $          | 5,000  |   |    | $      | 5,000 |   |
| Less current maturities   |   |       | 549    |   |    |   | - |   |
| Notes payable non-current |   | $          | 4,451  |   |    | $      | 5,000 |   |

| 5. | Line of Credit |
|----|----------------|

| 6. | Shareholder Rights Plan |
|----|-------------------------|

----

Table of Contents

| 7. | Income Taxes |
|----|--------------|

|                                                           |   | Three months ended January 31 |   |   | Six months ended January 31 |   |
|----------------------------------------------------------------|--------|-------------------------------|--------|--------|-----------------------------|--------|
|                                                           |   | 2011                          |   |   | 2010                        |   |   | 2011 |   |   | 2010 |   |
| Current:                                                       |   |                          |   |   |                        |   |   |   |   |   |   |   |
| Federal                                                        |   | $                             | -      |   |                        | $      | - |   |   | $ | - |   |   | $ | - |   |
| State                                                          |   |                          | (10    | )      |                        |   | - |   |   |   | (10 | ) |   |   | (1 | ) |
| Change in the beginning deferred tax asset valuation allowance |   |                          | 137    |   |                        |   | 158 |   |   |   | 137 |   |   |   | 292 |   |
| Deferred, net                                                  |   |                          | (61    | )      |                        |   | (158 | ) |   |   | (206 | ) |   |   | (296 | ) |
|                                                           |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Income tax benefit (expense) from continuing operations        |   | $                             | 66     |   |                        | $      | - |   |   | $ | (79 | ) |   | $ | (5 | ) |

| 8. | Business Segments |
|----|-------------------|

----

Table of Contents

|                               |   | (Unaudited)                   |   |   | (Unaudited)                 |   |
|------------------------------------|--------|-------------------------------|--------|--------|-----------------------------|--------|
|                               |   | Three months ended January 31 |   |   | Six months ended January 31 |   |
|                               |   | 2011                          |   |   | 2010                        |   |   | 2011 |   |   | 2010 |   |
| Revenue from continuing operations |   |                          |   |   |                        |   |   |   |   |   |   |   |
| Netherlands                        |   | $                             | 187    |   |                        | $      | 181 |   |   | $ | 373 |   |   | $ | 357 |   |
| United States                      |   |                          | 5,051  |   |                        |   | 5,153 |   |   |   | 10,189 |   |   |   | 10,414 |   |
| Consolidated                       |   | $                             | 5,238  |   |                        | $      | 5,334 |   |   | $ | 10,562 |   |   | $ | 10,771 |   |

|                                         |   | (Unaudited)                   |   |   | (Unaudited)                 |   |
|----------------------------------------------|--------|-------------------------------|--------|--------|-----------------------------|--------|
|                                         |   | Three months ended January 31 |   |   | Six months ended January 31 |   |
|                                         |   | 2011                          |   |   | 2010                        |   |   | 2011 |   |   | 2010 |   |
| Net income (loss) from continuing operations |   |                          |   |   |                        |   |   |   |   |   |   |   |
| Netherlands                                  |   | $                             | (6     | )      |                        | $      | (56 | ) |   | $ | (54 | ) |   | $ | (71 | ) |
| United States                                |   |                          | 129    |   |                        |   | 395 |   |   |   | 276 |   |   |   | 735 |   |
| Consolidated                                 |   | $                             | 123    |   |                        | $      | 339 |   |   | $ | 222 |   |   | $ | 664 |   |

|          |   | (Unaudited) |   |   | (Audited) |   |
|---------------|--------|-------------|--------|--------|-----------|--------|
|          |   | January 31  |   |   | July 31   |   |
|          |   | 2011        |   |   | 2010      |   |
| Total Assets  |   |        |   |   |      |   |
| Netherlands   |   | $           | 250    |   |      | $      | 328 |   |
| United States |   |        | 19,181 |   |      |   | 19,449 |   |
| Consolidated  |   | $           | 19,431 |   |      | $      | 19,777 |   |

| 9. | Restructuring |
|----|---------------|

|              |   | Three months ended January 31 |   |   | Six months ended January 31 |   |
|-------------------|--------|-------------------------------|--------|--------|-----------------------------|--------|
|              |   | 2011                          |   |   | 2010                        |   |   | 2011 |   |   | 2010 |   |
| Beginning Balance |   | $                             | 50     |   |                        | $      | 142 |   |   | $ | 80 |   |   | $ | 93 |   |
| Payments          |   |                          | (29    | )      |                        |   | (30 | ) |   |   | (59 | ) |   |   | (57 | ) |
| Adjustments       |   |                          | 19     |   |                        |   | - |   |   |   | 19 |   |   |   | 76 |   |
| Ending Balance    |   | $                             | 40     |   |                        | $      | 112 |   |   | $ | 40 |   |   | $ | 112 |   |

----

Table of Contents

|              |   | Three months ended January 31, 2011 |   |   | Six months ended January 31, 2011 |   |
|-------------------|--------|-------------------------------------|--------|--------|----------------------------------------|--------|
| Beginning Balance |   | $                                   | 71     |   |                                   | $      | 147 |   |
| Payments          |   |                                | (47    | )      |                                   |   | (123 | ) |
| Ending Balance    |   | $                                   | 24     |   |                                   | $      | 24 |   |

|              |   | Three months ended January 31, 2011 |   |   | Six months ended January 31, 2011 |   |
|-------------------|--------|-------------------------------------|--------|--------|----------------------------------------|--------|
| Beginning Balance |   | $                                   | 68     |   |                                   | $      | 110 |   |
| Payments          |   |                                | (9     | )      |                                   |   | (51 | ) |
| Adjustments       |   |                                | (19    | )      |                                   |   | (19 | ) |
| Ending Balance    |   | $                                   | 40     |   |                                   | $      | 40 |   |

| 10. | Discontinued Operations |
|-----|-------------------------|

|               |   | Three months ended January 31 2010 |   |   | Six months ended January 31 2010 |   |
|--------------------|--------|-----------------------------------------|--------|--------|---------------------------------------|--------|
|               |   |                                    |   |   |                                  |   |
| Revenues           |   | $                                       | 21     |   |                                  | $      | 54 |   |
| Cost of sales      |   |                                    | 2      |   |                                  |   | 5 |   |
| Operating expenses |   |                                    | 182    |   |                                  |   | 375 |   |
| Operating loss     |   |                                    | (163   | )      |                                  |   | (326 | ) |
| Income tax benefit |   |                                    | -      |   |                                  |   | - |   |
|               |   |                                    |   |   |                                  |   |   |   |
| Net loss           |   | $                                       | (163   | )      |                                  | $      | (326 | ) |

----

Table of Contents

| 11. | Subsequent Events |
|-----|-------------------|

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

----

Table of Contents

|   | · | Deepening relationships with our existing customer base through launching new technology-enabled products and services and cross-selling complementary products and services across customers and markets; this will improve the value proposition to the customer and will foster organic growth and reduce customer churn rates in our strategic, subscription-based products and services; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Continuing to execute on our current sales strategy with a focus on growing our customer base and increasing monthly recurring revenue (“MRR”); |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Refining our organization and processes to drive innovation and efficiency, which will include providing operational focus on fewer high gross margin, critical nature, and recurring revenue products into the markets we serve; and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Pursuing strategic acquisitions that will allow us to expand our addressable market and customer base. |
|--------|--------|--------------------------------------------------------------------------------------------------------|

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| · | We continued to generate significant operating cash flows, a portion of which we deployed on product development.  Cash flows from operations for the three months ended January 31, 2011 were $770,000, versus $509,000 during the same period last year, a 51% increase.  For the six months ended January 31, 2011, cash flows from operations were $1,296,000, versus $195,000 over the same period last year.  Additionally, cash provided from financing activities for the six months ended January 31, 2011 were $44,000, whereas over the same period last year they were $649,000. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Revenues declined slightly, from $5,334,000 in the first quarter of fiscal 2010 to $5,238,000 in the first quarter of fiscal 2011, a decline of 1.8%.  For the six months ended January 31, 2011, revenues were $10,562,000 versus $10,771,000 last year, a decline of 1.9%.  The decline in revenues was primarily attributed to the loss of revenues associated with the non-cash amortization of a deferred revenue liability established at the time of the Channel Blade acquisition.  We recognized revenues of $13,000 and $36,000 from the amortization of this liability for the three and six months ended January 31, 2011, versus $246,000 and $640,000 for the same periods last year.  This represents a revenue decline of $233,000 and $604,000 for the relative year over year periods. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Operating income for the second quarter of fiscal 2011 was $254,000, compared to $492,000 for the same period last year.  On a year to date basis, operating income was $699,000, compared to $961,000 for the same period last year.  The main driver of the decline in operating income in the first half of fiscal 2011, compared to the prior year, was the year over year $604,000 decrease in non‐cash amortization of deferred revenue.  Excluding the aforementioned loss of deferred revenue, operating income for the quarter ended January 31, 2011 would have remained relatively flat compared to the same period last year, and operating income for the six months ended January 31, 2011 would have improved over last year by approximately $342,000.  This improvement can be attributed to the continued identification and execution of operational efficiencies and cost reduction strategies. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Net income for the second quarter was $123,000, or $.02 per share, compared to $176,000, or $.02 per share last year.  For the six months ended January 31, 2011, net income was $222,000, or $.03 per share, versus $338,000, or $.04 per share for the same period last year. Excluding the aforementioned loss of deferred revenue, net income for the second quarter would have been $110,000, or $.01 per share, versus a net loss of $57,000, or $.01 per share, for the same period last year.  Year to date net income would have been $186,000, or $.02 per share, versus a net loss of $302,000, or $.04 per share, for the same period last year.  Fiscal 2010's results included losses from our discontinued F&I operations of $163,000 and $326,000 for the three and six months ended January 31, 2010, respectively. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                    |   | (Unaudited)                   |   |   | (Unaudited)                 |   |
|-------------------------|--------|-------------------------------|--------|--------|-----------------------------|--------|
|                    |   | Three months ended January 31 |   |   | Six months ended January 31 |   |
|                    |   |                          |   |   |                        |   |   | Percent |   |   |   |   |   |   |   |   | Percent |   |
|                    |   | 2011                          |   |   | 2010                        |   |   | Change |   |   | 2011 |   |   | 2010 |   |   | Change |   |
| Catalog                 |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                 |   | $                             | 3,109  |   |                        | $      | 3,106 |   |   |   | 0.1 | % |   | $ | 6,239 |   |   | $ | 6,184 |   |   |   | 0.9 | % |
| Cost of revenue         |   |                          | 404    |   |                        |   | 363 |   |   |   | 11.3 | % |   |   | 801 |   |   |   | 750 |   |   |   | 6.8 | % |
| Gross profit            |   |                          | 2,705  |   |                        |   | 2,743 |   |   |   | -1.4 | % |   |   | 5,438 |   |   |   | 5,434 |   |   |   | 0.1 | % |
| Gross margin percentage |   |                          | 87.0   | %      |                        |   | 88.3 | % |   |   |   |   |   |   | 87.2 | % |   |   | 87.9 | % |   |   |   |   |
| Website                 |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                 |   |                          | 1,141  |   |                        |   | 1,361 |   |   |   | -16.2 | % |   |   | 2,357 |   |   |   | 2,835 |   |   |   | -16.8 | % |
| Cost of revenue         |   |                          | 241    |   |                        |   | 221 |   |   |   | 9.0 | % |   |   | 482 |   |   |   | 455 |   |   |   | 5.9 | % |
| Gross profit            |   |                          | 900    |   |                        |   | 1,140 |   |   |   | -21.1 | % |   |   | 1,875 |   |   |   | 2,380 |   |   |   | -21.2 | % |
| Gross margin percentage |   |                          | 78.9   | %      |                        |   | 83.8 | % |   |   |   |   |   |   | 79.6 | % |   |   | 83.9 | % |   |   |   |   |
| Lead management         |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                 |   |                          | 217    |   |                        |   | 232 |   |   |   | -6.5 | % |   |   | 409 |   |   |   | 479 |   |   |   | -14.6 | % |
| Cost of revenue         |   |                          | 72     |   |                        |   | 25 |   |   |   | 188.0 | % |   |   | 124 |   |   |   | 51 |   |   |   | 143.1 | % |
| Gross profit            |   |                          | 145    |   |                        |   | 207 |   |   |   | -30.0 | % |   |   | 285 |   |   |   | 428 |   |   |   | -33.4 | % |
| Gross margin percentage |   |                          | 66.8   | %      |                        |   | 89.2 | % |   |   |   |   |   |   | 69.7 | % |   |   | 89.4 | % |   |   |   |   |
| Other                   |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                 |   |                          | 771    |   |                        |   | 635 |   |   |   | 21.5 | % |   |   | 1,557 |   |   |   | 1,273 |   |   |   | 22.3 | % |
| Cost of revenue         |   |                          | 369    |   |                        |   | 364 |   |   |   | 1.4 | % |   |   | 846 |   |   |   | 668 |   |   |   | 26.6 | % |
| Gross profit            |   |                          | 402    |   |                        |   | 271 |   |   |   | 48.6 | % |   |   | 711 |   |   |   | 605 |   |   |   | 17.4 | % |
| Gross margin percentage |   |                          | 52.1   | %      |                        |   | 42.6 | % |   |   |   |   |   |   | 45.7 | % |   |   | 47.5 | % |   |   |   |   |
| Total                   |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                 |   |                          | 5,238  |   |                        |   | 5,334 |   |   |   | -1.8 | % |   |   | 10,562 |   |   |   | 10,771 |   |   |   | -1.9 | % |
| Cost of revenue         |   |                          | 1,086  |   |                        |   | 973 |   |   |   | 11.6 | % |   |   | 2,253 |   |   |   | 1,924 |   |   |   | 17.1 | % |
| Gross profit            |   | $                             | 4,152  |   |                        | $      | 4,361 |   |   |   | -4.8 | % |   | $ | 8,309 |   |   | $ | 8,847 |   |   |   | -6.1 | % |
| Gross margin percentage |   |                          | 79.3   | %      |                        |   | 81.8 | % |   |   |   |   |   |   | 78.7 | % |   |   | 82.1 | % |   |   |   |   |

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|                                       |   | (Unaudited)                   |   |   | (Unaudited)                 |   |
|--------------------------------------------|--------|-------------------------------|--------|--------|-----------------------------|--------|
|                                       |   | Three months ended January 31 |   |   | Six months ended January 31 |   |
|                                       |   |                          |   |   | Percent of                  |   |   |   |   |   | Percent of |   |   |   |   |   | Percent of |   |   |   |   |   | Percent of |   |
|                                       |   | 2011                          |   |   | Revenue                     |   |   | 2010 |   |   | Revenue |   |   | 2011 |   |   | Revenue |   |   | 2010 |   |   | Revenue |   |
|                                       |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net revenue                                |   | $                             | 5,238  |   |                        |   |   |   | $ | 5,334 |   |   |   |   |   | $ | 10,562 |   |   |   |   |   | $ | 10,771 |   |   |   |   |
| Cost of revenues:                          |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization of capitalized software costs |   |                          | 273    |   |                        |   | 5.2 | % |   |   | 266 |   |   |   | 5.0 | % |   |   | 524 |   |   |   | 5.0 | % |   |   | 519 |   |   |   | 4.8 | % |
| Direct labor                               |   |                          | 259    |   |                        |   | 4.9 | % |   |   | 303 |   |   |   | 5.7 | % |   |   | 588 |   |   |   | 5.6 | % |   |   | 640 |   |   |   | 5.9 | % |
| Other direct costs                         |   |                          | 554    |   |                        |   | 10.6 | % |   |   | 404 |   |   |   | 7.6 | % |   |   | 1,141 |   |   |   | 10.8 | % |   |   | 765 |   |   |   | 7.1 | % |
| Total cost of revenues                     |   |                          | 1,086  |   |                        |   | 20.7 | % |   |   | 973 |   |   |   | 18.2 | % |   |   | 2,253 |   |   |   | 21.3 | % |   |   | 1,924 |   |   |   | 17.9 | % |
| Gross profit                               |   | $                             | 4,152  |   |                        |   | 79.3 | % |   | $ | 4,361 |   |   |   | 81.8 | % |   | $ | 8,309 |   |   |   | 78.7 | % |   | $ | 8,847 |   |   |   | 82.1 | % |

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|                                           |   | (Unaudited)                   |   |   | (Unaudited)                 |   |
|------------------------------------------------|--------|-------------------------------|--------|--------|-----------------------------|--------|
|                                           |   | Three months ended January 31 |   |   | Six months ended January 31 |   |
|                                           |   |                          |   |   | Percent of                  |   |   |   |   |   | Percent of |   |   | Percent |   |   |   |   |   | Percent of |   |   |   |   |   | Percent of |   |   | Percent |   |
|                                           |   | 2011                          |   |   | Revenue                     |   |   | 2010 |   |   | Revenue |   |   | Change |   |   | 2011 |   |   | Revenue |   |   | 2010 |   |   | Revenue |   |   | Change |   |
| Sales and marketing                            |   | $                             | 1,084  |   |                        |   | 20.7 | % |   | $ | 1,196 |   |   |   | 22.4 | % |   |   | -9.4 | % |   | $ | 2,226 |   |   |   | 21.1 | % |   | $ | 2,334 |   |   |   | 21.7 | % |   |   | -4.6 | % |
| Customer operations and support (1)            |   |                          | 922    |   |                        |   | 17.6 | % |   |   | 847 |   |   |   | 15.9 | % |   |   | 8.9 | % |   |   | 1,711 |   |   |   | 16.2 | % |   |   | 1,656 |   |   |   | 15.4 | % |   |   | 3.3 | % |
| Software development and technical support (2) |   |                          | 454    |   |                        |   | 8.7 | % |   |   | 284 |   |   |   | 5.3 | % |   |   | 60.1 | % |   |   | 776 |   |   |   | 7.3 | % |   |   | 831 |   |   |   | 7.7 | % |   |   | -6.6 | % |
| General and administrative                     |   |                          | 1,028  |   |                        |   | 19.6 | % |   |   | 1,125 |   |   |   | 21.1 | % |   |   | -8.6 | % |   |   | 2,080 |   |   |   | 19.7 | % |   |   | 2,168 |   |   |   | 20.1 | % |   |   | -4.1 | % |
| Restructuring (3)                              |   |                          | -      |   |                        |   | n/a |   |   |   | - |   |   |   | n/a |   |   |   | n/a |   |   |   | - |   |   |   | n/a |   |   |   | 76 |   |   |   | 0.7 | % |   |   | n/a |   |
| Depreciation and amortization (4)              |   |                          | 410    |   |                        |   | 7.8 | % |   |   | 417 |   |   |   | 7.8 | % |   |   | -1.8 | % |   |   | 817 |   |   |   | 7.7 | % |   |   | 821 |   |   |   | 7.6 | % |   |   | -0.5 | % |
| Net operating expenses                         |   | $                             | 3,898  |   |                        |   | 74 | % |   | $ | 3,869 |   |   |   | 73 | % |   |   | 1 | % |   | $ | 7,610 |   |   |   | 72 | % |   | $ | 7,886 |   |   |   | 73 | % |   |   | -3 | % |

| (1)  | Net of capitalized software development costs of $43, $35, $106 and $67 for the three and six months ended January 31, 2011 and 2010, respectively. |
|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)  | Net of capitalized software development costs of $342, $365, $747 and $625 for the three and six months ended January 31, 2011 and 2010, respectively. |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)  | Represents an adjustment to accrued rent related to the 2008 restructuring. |
|-----------|-----------------------------------------------------------------------------|

| (4)  | Exclusive of amortization of software products of $273, $266, $524 and $519 for the three and six months ended January 31, 2011 and 2010, respectively, which are included in cost of revenue. |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                  |   | (Unaudited)                   |   |   | (Unaudited)                 |   |
|---------------------------------------------------------------------------------------|--------|-------------------------------|--------|--------|-----------------------------|--------|
|                                                                                  |   | Three months ended January 31 |   |   | Six months ended January 31 |   |
|                                                                                  |   |                          |   |   |                        |   |   | Percent |   |   |   |   |   |   |   |   | Percent |   |
|                                                                                  |   | 2011                          |   |   | 2010                        |   |   | Change |   |   | 2011 |   |   | 2010 |   |   | Change |   |
|                                                                                  |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total software development and technical support costs                                |   | $                             | 1,121  |   |                        | $      | 974 |   |   |   | 15.1 | % |   | $ | 2,198 |   |   | $ | 2,138 |   |   |   | 2.8 | % |
| Less: amount capitalized as software development                                      |   |                          | (385   | )      |                        |   | (400 | ) |   |   | -3.8 | % |   |   | (853 | ) |   |   | (692 | ) |   |   | 23.3 | % |
| Less: direct labor classified as cost of revenues                                     |   |                          | (282   | )      |                        |   | (290 | ) |   |   | -2.8 | % |   |   | (569 | ) |   |   | (615 | ) |   |   | -7.5 | % |
| Net software development and technical support costs classified as operating expenses |   | $                             | 454    |   |                        | $      | 284 |   |   |   | 60.1 | % |   | $ | 776 |   |   | $ | 831 |   |   |   | -6.6 | % |

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|                                                     |   | (Unaudited)                   |   |   | (Unaudited)                 |   |
|----------------------------------------------------------|--------|-------------------------------|--------|--------|-----------------------------|--------|
|                                                     |   | Three months ended January 31 |   |   | Six months ended January 31 |   |
|                                                     |   |                          |   |   |                        |   |   | Percent |   |   |   |   |   |   |   |   | Percent |   |
|                                                     |   | 2011                          |   |   | 2010                        |   |   | Change |   |   | 2011 |   |   | 2010 |   |   | Change |   |
| Net cash provided by operating activities                |   | $                             | 770    |   |                        | $      | 509 |   |   |   | 51 | % |   | $ | 1,296 |   |   | $ | 195 |   |   |   | 565 | % |
| Net cash used in investing activities                    |   |                          | (496   | )      |                        |   | (537 | ) |   |   | 8 | % |   |   | (1,045 | ) |   |   | (917 | ) |   |   | -14 | % |
| Net cash provided by (used in) financing activities      |   |                          | 98     |   |                        |   | 306 |   |   |   | -68 | % |   |   | 44 |   |   |   | 649 |   |   |   | -93 | % |
| Effect of foreign currency exchange rate changes on cash |   |                          | (6     | )      |                        |   | 8 |   |   |   | -175 | % |   |   | (6 | ) |   |   | - |   |   |   | n/a |   |
| Net change in cash                                       |   | $                             | 366    |   |                        | $      | 286 |   |   |   | 28 | % |   | $ | 289 |   |   | $ | (73 | ) |   |   | 496 | % |
|                                                     |   |                          |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash at end of period                                    |   | $                             | 1,227  |   |                        | $      | 577 |   |   |   | 113 | % |   | $ | 1,227 |   |   | $ | 577 |   |   |   | 113 | % |

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| (i) | A greater portion of our revenues in fiscal 2011 resulted in cash collected.  This was due to the fact that a substantial portion of the non-cash deferred revenues we recognized in fiscal 2010 were replaced with cash-generating MRR. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii) | We sold AFIS in July 2010.  In fiscal 2010, this business generated pre-tax operating losses of $653,000, of which $326,000 were incurred in the first six months. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iii) | Our operating expenses continue to decline as we focus on efficiencies throughout the organization. |
|-------|-----------------------------------------------------------------------------------------------------|

| (iv) | We have experienced an improvement in our accounts receivable collections as we have expanded our efforts in this area.  This improvement is reflected by the decline in accounts receivable, net of bad debt allowance. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Item 4.  Controls and Procedures

Item 1.  Legal Proceedings

Item 1A.  Risk Factors

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.  Defaults upon Senior Securities

Item 4.  Removed and Reserved

Item 5.  Other Information

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Item 6.  Exhibits

| 10.1 | Credit Agreement Amendment, dated December 23, 2010, between the Company and JP Morgan Chase Bank, N.A.                                                                                                      |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 | Employment Agreement dated December 10, 2010 between Darin R. Janecek and ARI Network Services, Inc., incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed on December 16, 2010.        |
| 10.3 | Change of Control Agreement dated December 10, 2010 between Darin R. Janecek and ARI Network Services, Inc., incorporated by reference to Exhibit 10.2 of the Company's Form 8-K filed on December 16, 2010. |
| 10.4 | ARI Network Services, Inc. 2010 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed on December 22, 2010.                                                       |
| 10.5 | ARI Network Services, Inc. 2000 Employee Stock Purchase Plan, as Amended and Restated November 4, 2010, incorporated by reference to Exhibit 10.2 of the Company's Form 8-K filed on December 22, 2010.      |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.                                                                                                                                           |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.                                                                                                                                           |
| 32.1 | Section 1350 Certification of Chief Executive Officer.                                                                                                                                                       |
| 32.2 | Section 1350 Certification of Chief Financial Officer.                                                                                                                                                       |

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SIGNATURES

| ARI NETWORK SERVICES, INC. |
|----------------------------|
| (Registrant)               |
|                       |   |
|                       |   |
| By:                        | /s/ Roy W. Olivier |
|                       | Roy W. Olivier |
|                       | President and Chief Executive Officer |
|                       |   |
|                       |   |
| By:                        | /s/ Darin R. Janecek |
|                       | Darin R. Janecek |
|                       | Vice President of Finance and Chief Financial Officer |

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