ARI Annual Report FY 2011

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 2011 () TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from toCommission file number 000-19608 ARI Network Services, Inc. (Name of small business issuer in its charter)WISCONSIN 39- 1388360(State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 10850 West Park Place, Suite 1200, Milwaukee, Wisconsin 53224 (Address of principal executive office)Issuers telephone number (414) 973-4300Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share (Title of Class)Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities ActYes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.Yes No Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.Yes  NoIndicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).Yes  No

Indicate by check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (S229.405 of this chapter) is not containedherein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smallerreporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 ofthe Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company)Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes No The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing price of the registrant’scommon stock on January 31, 2011 as reported on the OTC bulletin board, was $4.1 million.As of October 19, 2011, there were 7,987,944 shares of the registrant’s shares outstanding. DOCUMENTS INCORPORATED BY REFERENCEPortions of the Definitive Proxy Statement, to be filed with the Securities and Exchange Commission no later than 120 days after July 31,2011, for the 2011 Annual Meeting of Shareholders are incorporated by reference in Part III hereof. 2

ARI Network Services, Inc. FORM 10-K FOR THE FISCAL YEAR ENDED JULY 31, 2011 INDEXPART I Page Item 1 Business 4 Item 1a Risk Factors 11 Item 2 Properties 15 Item 3 Legal Proceedings 15 Item 4 [Removed and Reserved for Future Use] 15PART II Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer 16 Purchases of Equity Securities Item 6 Selected Financial Data 17 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of 18 Operations Item 8 Financial Statements and Supplementary Data 28 Item 9 Changes In and Disagreements With Accountants on Accounting and Financial 28 Disclosure Item 9A Controls and Procedures 28PART III Item 10 Directors, Executive Officers, and Corporate Governance 30 Item 11 Executive Compensation 30 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related 30 Stockholder Matters Item 13 Certain Relationships and Related Transactions 30 Item 14 Principal Accounting Fees and Services 30PART IV Item 15 Exhibits 31 Signatures 33 Report of Independent Registered Public Accounting Firm 34 Consolidated Financial Statements 35 3

This Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in Item 7, contains forward-looking statements regarding future events and our future results that are subject to the safeharbors created under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). Allstatements other than statements of historical facts are statements that could be deemed to be forward-looking statements. Thesestatements are based on current expectations, estimates, forecasts, and projections about the markets in which we operate and thebeliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,”“believes,” “seeks,” “estimates,” “endeavors,” “strives,” “may,” variations of such words, and similar expressions are intended to identifysuch forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipatedgrowth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements.Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptionsthat are difficult to predict, estimate, or verify, including those identified below under “Item 1A. Risk Factors” and elsewhere herein.Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake noobligation to revise or update any forward-looking statements for any reason.PART IItem 1. BusinessOverviewARI Network Services, Inc. (“ARI”) is a leader in creating, marketing, and supporting solutions that enhance revenue and reduce costs forour customers. Our innovative, technology-enabled solutions connect the community of consumers, dealers, distributors, andmanufacturers to help them efficiently service and sell more whole goods, parts, garments, and accessories (“PG&A”) worldwide inselected vertical markets that include power sports, outdoor power equipment, marine, and appliances. We estimate that approximately18,000 equipment dealers, 125 manufacturers, and 150 distributors worldwide leverage our technology to drive revenue, gainefficiencies and increase customer satisfaction.Our suite of software and SaaS solutions are designed to facilitate our customers’ operations, increasing sales through additional foot andwebsite traffic, more effective lead management, and greater conversion rates on those leads. To achieve this, our solutions allow ourcustomers to: (i) efficiently market to their customers and prospects in order to drive increased traffic to their location and website; (ii)manage and nurture customers and prospects; (iii) increase revenues by selling PG&A online; (iv) increase revenues by generating leadsfor whole goods; and (v) increase revenues and reduce costs of our dealer customers by enhancing the productivity of our customers’support operations, specifically with respect to the sale of manufacturers’ parts.We were incorporated in Wisconsin in 1981. Our principal executive office and headquarters is located in Milwaukee, Wisconsin. Theoffice address is 10850 West Park Place, Suite 1200, Milwaukee, WI 53224, and our telephone number at that location is (414) 973-4300.Our principal website address is www.arinet.com.Our SolutionsToday, we generate revenue from three primary categories of technology-enabled solutions: (i) electronic catalogs for publishing, viewingand interacting with PG&A information from OEMs and distributors; (ii) lead generation and management products and services designedto help dealers generate sales of whole goods, PG&A through efficient marketing of their products; and (iii) websites with eCommercecapabilities designed to generate leads for whole goods and sales of PG&A through the sites and provide information to consumers in thedealers’ local areas.Electronic CatalogsOur electronic catalog solutions, which encompass our PartSmart®, PartSmart Web™ and PartStream™ products, contain enhanced datarelating to manufacturers’ whole goods, and PG&A. The solutions allow distributors and dealers to view and interact with thisinformation to efficiently support the sales and service of equipment. We believe that we have the broadest library of available contentin the vertical markets we serve, and our multi-line electronic catalog solution is the fastest and most efficient in the marketplace. Wederived 59% of our revenues from subscriptions to, and support for, our electronic catalog services in fiscal 2011. 4

PartSmart®, our CD-based electronic parts catalog, is used by dealers worldwide in the outdoor power, power sports, marine, andagricultural equipment industries to increase productivity by significantly reducing parts lookup time. Our PartSmart® software allowsmulti-line dealers to look up parts and service information for all manufacturer product lines that the dealer carries, and integrates withmore than 85 of the leading dealer business management systems. We also provide a version of our PartSmart® product to the applianceindustry, known as PartSmart® IPL. PartSmart Web™, a SaaS solution, is used by distributors and manufacturers to provide their dealers with access to parts and pricing information via the Internet. PartStream™, a SaaS solution, is a modular, consumer-focused illustrated parts lookup application that integrates with existing dealer website platforms and shopping carts and allows consumers to quickly identify the desired part, add the part to their electronic shopping cart and check out. It leverages ARI’s parts content, delivering it to PartStream™ users on demand from ARI servers.Lead Generation and Management Products and ServicesOur award-winning lead generation and management solutions, which encompass our Footsteps™ product and SearchEngineSmart™service, are designed to increase traffic to dealers’ stores and websites and more efficiently manage and nurture generated leads,increasing conversion rates and ultimately revenues. We derived 9.3% of our revenues from lead generation and management servicesin fiscal 2011. Footsteps™, a SaaS solution, connects the equipment manufacturers with their dealer channel through lead consolidation and distribution, and allows dealers to handle leads more efficiently and professionally through marketing automation and business management system integration. The product is used as a complete database of customers and prospects, and manages the dealer to customer relationship from generating email campaigns and automated responses, to providing sales teams with a daily follow-up calendar and reminder notices. Our SearchEngineSmart™ service generates additional traffic to dealers’ stores and websites through optimization of the dealers’ paid search engine marketing campaigns, including organic optimization for local results.Website SolutionsOur website solutions, which are tailored to the vertical markets we serve and are eCommerce enabled, provide consumers withinformation about the dealer and its product lines and allow consumers to purchase PG&A through the dealers’ website 24 hours a day, 7days a week. Our website solutions include WebSiteSmart Pro®, eXceleratePro™ and eXceleratePro™ 2, and LeadStorm™. We also offera mobile solution that allows dealers’ websites to be fully functional on smart mobile phones. Website services accounted for 24% ofrevenues in fiscal 2011.Other ServicesWe also offer a suite of complementary technology-enabled solutions, which include professional services for the customization ofsoftware and website solutions; website hosting; and document transfer and communication services to customers in the manufacturedequipment industry. On a combined basis, these other services accounted for 7.9% of fiscal 2011 revenues.Our StrategyWe believe the following strategic foundations will allow us to continue to provide our community with the innovative solutions andworld class customer service they have come to expect and drive the growth and profitability our shareholders deserve.Nurture and retain existing customers through world class customer service and product feature upgradesWe believe there is a significant opportunity to leverage our relationships with existing customers and, accordingly, we place a highdegree of focus on reducing the level of customer “churn”. In order to retain our existing customers over time, we must keep themsatisfied and continuously improve upon the value the customer receives. To this end we have made significant investments in ourcustomer support operations, publishing, product development, and technology infrastructure during the past several years.Additionally, we realigned internal resources to designate a team that is proactively focused on customer satisfaction and renewingcustomers’ subscriptions before they are set to expire. We will continue to invest in this area as well as identify new product featuresdesigned to enhance our customers’ user experience and value. 5

Drive organic growth through innovative new service offerings, differentiated content and geographic expansionAs a subscription-based, recurring revenue business, the most important drivers of future growth are: (i) increasing the level of ourmonthly recurring revenue (“MRR”); (ii) increasing MRR as a percentage of total revenue; and (ii) reducing the rate of our customerchurn. We discussed above our strategy for reducing our customer churn rates, and we have already seen significant improvement inthese rates in fiscal 2011 and expect to see these rates continue to improve in fiscal 2012 and beyond.The strategy we will utilize to drive increased MRR includes the following: (i) rapidly expand our base of customers and users throughnew innovative solutions, (ii) sell more to our existing customer base by developing and deploying “must have” new product features andupgrades; (iii) develop and deploy basic versions of our existing and new products (we refer to these as “freemium” versions), which webelieve will allow us to quickly ramp up the number of users and allow us to upsell premium versions and additional features into thesecustomers; and (iv) expand into new geographic markets.The first three components of our organic growth strategy essentially allows us to very rapidly expand our customer and user base, andthen leverage these customers and users through upsells of new innovative solutions and value-added upgrades and features of ourexisting solutions. The introduction of new solutions, upgrades to existing products, and new feature sets are all designed to grow ouraverage revenue per dealer (“ARPD”), an important measure for a subscription-based business, and the increase in our customer baseserves to quickly compound the benefits of an increased ARPD. We have made, and expect to continue to make, significant investmentsin our product management and development teams. In fiscal 2011 we realigned these teams with resources assigned to each of ourcore products. The teams will continue to research and develop new features and functionality in our existing products. Additionally, werecently implemented an internal “Innovation Factory”, a team that will be solely dedicated to rapidly deploying enhancements tocurrent products and the creation of new value-added solutions.We believe that a significant opportunity exists to expand our services into international markets as our manufacturing customers do thesame. Currently, only a small percentage of our revenues are generated from our international operations. One of our initiatives forfiscal 2012 is to align internal business development resources to drive additional relationships with European manufacturers anddistributors. We will also upgrade our product roadmaps to allow us to rapidly deploy those products internationally, with a focus on the“BRIC” countries of Brazil, Russia, India, and China.Lastly, we will continue to expand and enrich what we believe to be the broadest library of available content in the vertical markets weserve. We must continue to enhance our value proposition through enrichment of our content or this competitive advantage will beginto lose its distinction. Content enrichment can take several forms, including the incorporation of user reviews and feedback into ourexisting content, further enhancing content provided to us by our manufacturer customers, and creating new forms of content thatfurther our customers’ ability b to efficiently service and sell more whole goods, PG&A.Lead the market with open integration to related platformsOne of our strategic advantages is our focus on integrating our solutions with dealer business management systems (“DMS”) in order topass key information, including customer and transactional data, between the systems. We currently have integration capabilities withover 85 DMS’s and we continue to seek other strategic alliances that can be integrated with our product and service offerings. In fiscal2012 we plan to build a dedicated integration team to expand on the capabilities of our interface and to connect, invasively if necessary,with the top DMS providers in the vertical markets we serve.Successfully execute acquisitions that align with our core strategyHistorically, acquisitions have been a significant driver of ARI’s growth. Since 2007, the Company has successfully closed four strategicacquisitions while reviewing, and ultimately deciding not to pursue, a multitude of others. Our 2009 acquisition of Channel BladeTechnologies (“Channel Blade”) and our 2008 acquisition of the electronic parts catalog and eCommerce assets of Info Access expandednot only our product offerings but the number of markets we serve. As a result of those acquisitions, ARI is the market leader in themarine, RV and appliance markets. Although we believe organic growth will be the primary driver of our business for the foreseeablefuture, we will continue to evaluate acquisitions that are in alignment with our core strategy. 6

Sales, Marketing and Support TeamsWe organize our sales and marketing programs into three distinct sales channels and two geographic regions, including North Americaand Europe.Sales ChannelsWe go to market utilizing three distinct sales teams, determined through a combination of customer, product, and geographic market.Our field sales personnel focus on building relationships with manufacturers and distributors, while our inside, telephone-based salesteam focuses on selling to dealers. The dealer sales team is further divided by product (catalog sales versus other products and services)and an international sales team in The Netherlands. We are also in the process of enhancing our core products to allow for customerself-service sales capabilities.MarketingOur marketing strategy is designed to drive knowledge of our value proposition into the markets we serve. We use a variety of marketingprograms to target and build relationships with our prospective and current customers and partners. Our primary marketing activitiesinclude: • participation in dealer meetings, trade shows and industry events to create awareness, build our lead database and develop relationships; • search engine marketing and online and print direct marketing to generate awareness and action; • ongoing website development to educate prospects and provide product information, testimonials, live demonstrations and marketing collateral; • email and phone campaigns used to capture leads; • use of customer testimonials; and • sales tool kits and field marketing training to enable our sales organization to more effectively develop leads and close transactions.Customer Service and SupportCustomer support is a critical part of our strategy as it is essential to retaining our existing customer base and reducing the level ofcustomer churn. We maintain customer support operations in each of the Company’s four locations. Our support representatives areavailable via telephone or email. We also maintain a customer satisfaction and renewal team that focuses on proactively reaching out tocustomers to ensure that our customers are satisfied and are receiving the most value possible from their spend with ARI.Our Competitive StrengthsMarket Leader in Core VerticalsWe believe that we are one of the leaders in each of our core vertical markets and also believe we are the market leader in the outdoorpower, marine, and appliance markets. Our direct relationships with approximately 18,000 dealers, 125 manufacturers, and 150distributors allow us to cost-effectively leverage our published catalog content into a large and diversified customer base and to launchnew product enhancements and technology-enabled solutions to this customer base.Breadth and Depth of Published ContentThe breadth and depth of our catalog content, as well as our ability to enhance and efficiently publish manufacturers’ PG&A data as itbecomes available, provides ARI with a critical competitive advantage. Our electronic catalog content enables multi-line dealers to easilyaccess catalog content for multiple manufacturers using a single software platform. This advantage, which saves our customerssignificant time, provides "stickiness" to our catalog customer base that allows us to efficiently and cost effectively nurture our existingcustomers while devoting resources to develop new products and services, enabling us to grow our overall customer base. 7

Recurring Revenue ModelApproximately 80% of our revenue is subscription-based and recurring revenue. The majority of our customers are on contracts oftwelve months or longer, and these contracts typically auto-renew for additional twelve month terms. This provides us with advancedvisibility into our future revenues. Our recurring revenue model also emphasizes the importance of maintaining a low rate of customerchurn, one of the key drivers of any recurring revenue, subscription-based businesses. Historically, we measured customer renewal rates.Over the past year we began measuring customer churn rates. Although similar, we believe that customer churn is a better managementtool as it allows us to focus on the reasons we may lose customers and take action actions on those reasons within our control in order toreduce churn rates in the future.Our recurring revenue model, when combined with low rates of customer churn, significantly reduces the cost to maintain and nurtureour customer base. This in turn frees up resources to enhance our existing products and work toward new product innovations.Additionally, a substantial portion of our electronic catalog business is focused on our customers’ service and repair operations. Thisallows our revenues to remain strong even in a down economy, as consumers tend to repair, rather than buy new equipment during achallenging economy.Suite of Products Covers Entire Sales and Service CycleOur suite of dealer products and services and eCommerce capabilities enhance our customers front office operations by covering theentire sales cycle, from lead generation and lead management to sales of PG&A to the consumer, both in-store and online, and ourelectronic catalog products allow dealers to efficiently service and repair equipment.We believe that our competitive advantages will enable us to compete effectively and sustainably in our core markets, although given thecurrent pace of technological change, it is possible that unidentified competitors could emerge, existing competitors could merge and/orobtain additional capital, thereby making them more formidable, or new technologies could come on-stream and potentially threatenour position.Our Markets and the Challenges We FaceCompetition for our products and services varies by product and by vertical market. We believe that no single competitor todaycompetes with us on every product and service in each of our industry verticals. In electronic catalogs, we compete primarily with Snap-on Business Solutions, which designs and delivers electronic parts catalogs, accessory sales tools, and manufacturer networkdevelopment services, primarily to the automotive, power sports, outdoor power, construction, agriculture and mining markets. Inaddition, there is a variety of smaller companies focused on one or two specific industries.In lead management, websites and eCommerce, our primary competitors are PowerSports Network, owned by Dominion Enterprises, and50 Below. Competition for our website development services also comes from in-house information technology groups that may preferto build their own web-based proprietary systems, rather than use our proven industry solutions. There are also large, general marketeCommerce companies, such as IBM, which offer products and services that could address some of our customers’ needs. These generaleCommerce companies do not typically compete with us directly, but they could decide to do so in the future. We believe we maintain acompetitive advantage in our core vertical markets given the integration of our published catalog content into our lead management andwebsite products.Several of the markets we serve, including power sports, marine, and RV, are closely aligned with the state of the economy, given the"luxury" nature of the products in those verticals. In fiscal 2010 we experienced an increase in customer churn in these markets due tomanufacturer bankruptcies, dealer closures, and extreme cost reduction measures by our dealers. Our customer churn rates improved inthese markets in fiscal 2011 as the effects of the economy began to ease off those markets. It is also important to note that the impactsof a difficult economic environment are somewhat softened by the consumers willingness in a down economy to repair existingequipment rather than purchase new equipment, which serves to amplify the importance of our published parts content provided tocustomers via our catalog parts lookup products and our website products. 8

Intellectual PropertyWe rely on various intellectual property laws in the United States and other jurisdictions as well as confidentiality procedures andcontractual provisions to protect our proprietary technology and our brand. We also enter into confidentiality and proprietary rightsagreements with our employees, consultants and other third parties and control access to software, documentation and otherproprietary information. We have two registered trademarks in the U.S. and elsewhere: PartSmart and WebsiteSmart Pro. We also usenumerous unregistered trademarks.EmployeesAs of July 31, 2011, we had approximately 133 employees. Of these, 47 are involved in customer operations and support, 33 are in salesand marketing, 32 are engaged in maintaining or developing software and providing software customization services and 21 are involvedin general and administration functions. None of these employees is represented by a union.Fiscal Year stARI’s fiscal year ends on July 31 . Any references throughout this document to fiscal 2011 or fiscal 2010 refer to the fiscal years endedJuly 31, 2011 and 2010, respectively. Also note that the reference to the word “fiscal” has been removed from all tables throughout thisdocument. 9

Executive Officers of the RegistrantThe table below sets forth the names of ARI’s executive officers as of October 19, 2011. The officers serve at the discretion of the Boardof Directors. Name Age Capacity Served Roy W. Ol i vi er 52 Pres i dent, Chi ef Executi ve Offi cer and Di rector Dari n R. Janecek 43 Vi ce Pres i dent of Fi nance, Chi ef Fi nanci al Offi cer, Secretary and Treas urer Jon M. Li ntvet 35 Chi ef Marketi ng Offi cerRoy W. OlivierMr. Olivier was appointed President and Chief Executive Officer of the Company in May 2008, after having served in the capacity of VicePresident of Global Sales and Marketing of the Company since September 2006. Prior to joining ARI in 2006, Mr. Olivier was a consultantto start-up, small and medium-sized businesses. Prior to that, he was Vice President of Sales and Marketing for ProQuest MediaSolutions, a business he founded in 1993 and sold to ProQuest in 2000. Before that, Mr. Olivier held various sales and marketingexecutive and managerial positions with several other companies in the telecommunications and computer industries, includingMulticom Publishing Inc., Tandy Corporation, BusinessLand and PacTel.Darin R. JanecekMr. Janecek was appointed Vice President of Finance and Chief financial Officer of ARI in December 2010, after having served as VicePresident of Finance and Director of Finance since joining the Company in May 2009. Mr. Janecek also serves as Treasurer and CorporateSecretary. Prior to joining ARI, Mr. Janecek served in various mergers and acquisitions, corporate strategy and analysis roles at JohnsonControls, Inc. in Milwaukee, Wisconsin, and Crowe Horwath LLP, FTI Consulting, and CNA Insurance in Chicago, Illinois. Prior to that, heserved in several corporate accounting roles in the manufacturing and health care industries. Mr. Janecek began his career in 1991 as anauditor with Deloitte & Touche LLP. Mr. Janecek is a certified public accountant and earned a Master of Business Administration fromLoyola University, Chicago, and a Bachelor of Accounting from the University of Wisconsin - Milwaukee.Jon M. LintvetMr. Lintvet was appointed Chief Marketing Officer of ARI in October 2011. As Chief Marketing Officer, Mr. Lintvet leads all productmanagement, innovation and strategic marketing initiatives for ARI. Mr. Lintvet was Chief Executive Officer of Channel Blade prior toARI’s acquisition of the company in 2009. Following the acquisition, Mr. Lintvet was named ARI’s Director of Business Development. InNovember 2010 Mr. Lintvet was promoted to Vice President of Product. Prior to Channel Blade Mr. Lintvet served in various productdevelopment roles at Capital One. Mr. Lintvet earned a Bachelor of Science from Ithaca College in Ithaca, New York.Available InformationYou can obtain copies of our 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings with the SEC, and allamendments to these filings, free of charge from our website at www.arinet.com as soon as reasonably practical following our filing ofany of these reports with the SEC. You can also obtain copies free of charge by contacting us at our office address listed above. 10

Item 1A. Risk FactorsThe risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that wecurrently deem immaterial also may affect our results of operations and financial condition.Continued unfavorable economic conditions or reduced investments in technology spending may harm our business.Our business depends on the overall demand for technology services spending, and on the economic health and general willingness ofour current and prospective customers to make capital commitments. If the conditions in the U.S. and global economic environmentremain uncertain or continue to be volatile, or if they deteriorate further, our business, operating results and financial condition may beadversely affected. Our customers sell capital goods, some of which are considered “luxury” in nature, which are highly dependent on thedisposable income of end consumers. Continued weak or volatile economic conditions, or a reduction in consumer spending mayweaken our customers’ demand for electronic catalogs, websites, lead management or other technology-enabled services, or theirgeneral information technology spending, which would likely harm our business and operating results in a number of ways, includinglonger sales cycles, potential lower prices for our services, reduced sales, and reduced subscription renewal rates.We may become liable to our customers and lose customers if we have defects or disruptions in our service or if we provide poor service.Because we deliver some of our technology as a service, errors or defects in the software applications underlying our service, or a failureof our hosting infrastructure, may make our services, in particular our eCommerce services, unavailable to our customers. Since ourcustomers use our eCommerce services to facilitate their sales, any errors, defects, disruptions in service or other performance problemswith our services, whether in connection with the day-to-day operation of our services, upgrades or otherwise, could damage ourcustomers’ businesses.Despite the implementation of security measures, the core of our network infrastructure is vulnerable to unauthorized access, computerviruses, equipment failure and other disruptive problems, including the following: • we and our users may experience interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others; • unauthorized access may jeopardize the security of confidential information stored in our computer systems and our customers’ computer systems, which may result in liability to our customers and also may deter potential customers; • we may face liability for transmitting viruses to third parties that damage or impair their access to computer networks, programs, data or information; • there may be a systemic failure of Internet communications, leading to claims associated with the general unavailability of some of our products; or • eliminating computer viruses and alleviating other security or technical problems may require interruptions, delays or cessation of service to our customers.If we have any errors, defects, disruptions in service or other performance problems with our services, customers could elect not torenew, or delay or withhold payment to us, we could lose future sales or customers may make claims against us, which could result in anincrease in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or litigation costs.Our core markets and verticals are competitive, and if we do not compete effectively, our operating results may be harmed.The markets for electronic catalog, websites, lead management and other technology-enabled services targeted at the equipmentindustry are competitive, and the eCommerce area, specifically, is rapidly changing with relatively low barriers to entry. With theintroduction of new technologies and market entrants, we expect competition to remain intense. In addition, increased competitiongenerally could result in reduced sales, reduced margin or the failure of our services to achieve or maintain more widespread marketacceptance. Competition in our market is based principally upon service breadth and functionality; service performance, security andreliability; ability to tailor and customize services for a specific company, vertical market or industry; ease of use of the service; speed andease of deployment, integration and configuration; total cost of ownership, including price and implementation and support costs;professional services implementation; strength of customer relationships; and financial resources of the vendor. To compete effectively,we also must be able to more frequently update our services to meet market demand.Our principal competitors include Snap-on Business Solutions, 50 Below, and Powersports Network, owned by Dominion Enterprises.Some of our actual and potential competitors enjoy competitive advantages over us, such as greater name recognition within our targetvertical markets, larger marketing budgets, as well as substantially greater financial, technical and other resources. If we are not able tocompete effectively, our operating results will be harmed. 11

The impact of negative factors on the business may not be immediately reflected in our financial results.Because we recognize subscription revenue over the term of the applicable agreement, the lack of subscription renewals or new serviceagreements may not be reflected immediately in our operating results. The majority of our revenue in any given period is attributable toservice agreements entered into during previous periods. A decline in new or renewed service agreements in any one period will not befully reflected in our revenue in that period but will harm our revenue in future periods. As a result, the effect of significant downturns insales and market acceptance of our services in a particular period may not be fully reflected in our operating results until future periods.Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, becauserevenue from new customers must be recognized over the applicable subscription term.Our operating results may fluctuate from quarter to quarter.We expect that a portion of our revenue in the future will be derived from non-recurring fee income, which consists primarily of revenuesfrom professional services such as software customization and training, software sales and one-time network installation fees. Thetiming of receipt of this revenue is dependent upon several factors that we cannot predict. These factors include: • the time required to close large license fee and development agreements, which can be delayed due to customer requirements and decision-making processes; • the seasonality of certain sectors of the equipment industry in which we operate; • delays in the introduction of new products or services and their acceptance by customers; and • delays in delivering customized software to our customers.Our costs are not entirely predictable and may vary from quarter-to-quarter due to acquisitions or non-recurring expenditures. Cashflows may also vary from quarter to quarter, depending on the timing of disbursements and customer payments, which exhibitconsiderable seasonality. These fluctuations may make period-to-period comparisons of our results of operations more complex.Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm ouroperating results.A change in accounting standards or practices could harm our operating results and may even affect our reporting of transactionscompleted before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncementshave occurred and may occur in the future. Changes to existing rules or the questioning of current practices may harm our operatingresults or the way we conduct our business and may increase our compliance costs.Our business could suffer if we are unable to protect our intellectual property rights or are liable for infringing the intellectual propertyrights of others.We regard our trademarks, proprietary technology and similar intellectual property as critical to our success, and we rely upon trademarklaw, trade secret protection, and confidentiality and license agreements with our employees, strategic partners, and others to protect ourproprietary rights, but these measures can have only limited effectiveness. Prevalent use of the Internet has also increased the ease withwhich third parties can distribute our intellectual property without our authorization.We intend to pursue the registration of our material trademarks as necessary. We may not be entitled to the benefits of any suchregistration until such registration takes effect. In addition, effective protection may not be available in every country in which ourproducts are available. Further, we may be subject to claims in the ordinary course of our business, including claims of allegedinfringement of the trademarks, copyrights and other intellectual property rights of third parties by us and our licensees.Other parties may assert claims of infringement of intellectual property or other proprietary rights against us. These claims, even ifwithout merit, could require us to expend significant financial and managerial resources. Furthermore, if claims like this were successful,we might be required to change our trademarks, alter our content, products or services, or pay financial damages, any of which couldsubstantially increase our operating expenses. We also may be required to obtain licenses from others to refine, develop, market anddeliver new services. We may be unable to obtain any needed license on commercially reasonable terms or at all, and rights grantedunder any licenses may not be valid and enforceable. In the future we could be subject to legal proceedings and claims from time to timein the ordinary course of our business, including claims of alleged infringement of trademarks and other intellectual property rights ofthird parties by us and our licensees. Any such claims could have a material adverse effect on our business, financial condition andoperating results. 12

We are dependent on our management and employees.We are dependent on the services of our executive officers and other key employees. There can be no assurance, however, that we canobtain executives of comparable expertise and commitment in the event of death, disability, or voluntary departure of one of ourexecutive officers or other key employees, or that our business would not suffer material adverse effects as the result of the death,disability, or voluntary departure. Further, the loss of the services of any one or more of these employees could have an adverse effecton our business. In addition, we will also need to attract and retain other highly skilled technical and managerial personnel for whomcompetition is intense. If we are unable to do so, our business, results of operations and financial condition could be materially adverselyaffected.Our common stock has a very limited trading market.Our common stock is traded on the OTC bulletin board, which typically provides less liquidity than the NASDAQ or any other nationalsecurities exchange. In addition, trading in our common stock has historically been extremely limited. Because of the thinness of themarket for our stock, the price of our common stock may be subject to manipulation. This limited trading may adversely affect theliquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also throughdelays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us. As a result, there could be a largerspread between the bid and the ask prices of our common stock and an investor may not be able to sell shares of our common stockwhen or at prices you desire.Our shareholder rights plan may permit our board to block a takeover attempt and adversely affect the value of our common stock.Our board of directors adopted a shareholder rights plan and declared a dividend of an associated right, which together are expected tohave the effect of deterring any takeover of the Company that is not preceded by board approval of the proposed transaction. Theexistence of such shareholder rights plan may deter potential tender offers for our common stock or other acquisition offers and mayhave the effect of delaying or preventing a change of control.We may not be able to identify, acquire and successfully integrate acquisitions.A key component of our growth strategy has been and will continue to be acquisitions and other business development opportunitiesthat solidify or accelerate our market position in our core offerings and vertical markets. The successful implementation of this strategydepends upon our ability to identify suitable acquisition candidates, acquire such businesses on acceptable terms, finance the acquisitionand integrate their operations successfully into ARI. There can be no assurance that such candidates will be available or, if suchcandidates are available, that the price will be attractive or that we will be able to identify, acquire, finance or integrate such businessessuccessfully. In addition, in pursuing such acquisition opportunities, we may compete with other entities with similar growth strategies;these competitors may be larger and have greater financial and other resources than ARI. Competition for these acquisition targets couldalso result in increased prices of acquisition targets and/or a diminished pool of companies available for acquisition.The successful integration of these acquisitions also may involve a number of additional risks, including: (i) the inability to retain theclients of the acquired business; (ii) the lingering effects of poor client relations or service performance by the acquired business, whichalso may taint our existing business; (iii) the inability to retain the desirable management, key personnel and other employees of theacquired business; (iv) the inability to fully realize the desired efficiencies and economies of scale; (v) the inability to establish, implementor police ARI’s existing standards, controls, procedures and policies on the acquired business; (vi) diversion of management attention;and (vii) exposure to client, employee and other legal claims for activities of the acquired business prior to acquisition. In addition, anyacquired business could perform significantly worse than expected.The inability to identify, acquire, finance and successfully integrate acquisitions could have a material adverse effect on ARI or itsestimated or desired business, income, growth or other condition and results.Future acquisitions may result in dilution to existing shareholders.The timing, size and success of acquisition efforts and any associated capital commitments cannot be readily predicted. Futureacquisitions may be financed by issuing shares of common stock, cash, or a combination thereof. To the extent our common stock is usedfor all or a portion of the consideration to be paid for future acquisitions, dilution may be experienced by existing stockholders. 14

We face risks with our international strategy.Our business strategy includes increasing our presence in the non-U.S. equipment markets. This strategy presents a number of specialrisks, including: • managing more geographically diverse operations; • dealing with currency fluctuations; • the increased costs of operation; • only having a small number of employees in these markets; • our dependence on value-added resellers and contractors to sell and service our products; • a much smaller and more concentrated current customer base; and • the assumption that U.S. international policy will remain favorable towards the countries in which we sell our products and services.Our historical losses have resulted in our weak balance sheet.While we have been profitable in recent years, we have experienced net losses in numerous fiscal years since our organization in 1981,resulting in an accumulated deficit of $89.1 million at July 31, 2011. We may not be able to maintain profitability or increase profitabilityin the future. As a result of our historical losses, our financial position has been weakened, and our ability to finance our growth isconstrained.We will require a significant amount of cash to service our indebtedness. Our ability to generate cash depends on certain factors beyondour control.Our ability to make principal and interest payments on our indebtedness and to fund planned capital expenditures and productdevelopment efforts will depend on our ability to generate cash in the future. Our future operating performance and financial results willbe subject, in part, to factors beyond our control, including dealer bankruptcies in the vertical markets we serve, and general economic,financial and business conditions. We cannot assure that our business will generate sufficient cash flow from operations or that futurefinancing facilities will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.If we are unable to generate sufficient cash flow to service our debt, we may be required to: • refinance all or a portion of our debt or obtain additional financing, neither of which can be assured; • sell some of our assets or operations; • reduce or delay capital expenditures, research and development efforts and acquisitions; or • revise or delay our strategic plans.If we are required to take any of these actions, it could have a material adverse effect on our business, financial condition and results ofoperations. In addition, we cannot assure that we would be able to take any of these actions, that these actions would enable us tocontinue to satisfy our capital requirements or that these actions would be permitted under the terms of our various debt instruments. 15

Item 2. PropertiesThe table below summarizes ARI’s current facilities. Management believes that the Company’s current facilities are suitable andsufficient to support present operations. Square Lease Operating Description of Use Location Footage Expiration Segment Corpora te hea dqua rters Mi l wa ukee, WI 16,300 Jul y 2021 North Ameri ca Product devel opment a nd Cypres s , CA 6,000 Jul y 2013 North Ameri ca profes s i ona l s ervi ces tea m Ma ri ne a nd RV s a l es a nd s upport Vi rgi ni a Bea ch, VA 9,800 Apri l 2014 North Ameri ca Europea n s a l es a nd s upport Lei den, 200 m 2 Apri l 2015 Netherl a nds The Netherl a ndsItem 3. Legal ProceedingsNone.Item 4. [Removed and Reserved for Future Use] 16

PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesARI’s common stock is currently quoted on the OTC bulletin board under the symbol ARIS. The following table sets forth the high and lowsales price for the periods indicated. OTC bulletin board quotations reflect inter-dealer prices, without retail mark-up, mark-down orcommission and may not necessarily reflect actual transactions. Fiscal Quarter Ended: High Low 10/31/2009 $ 1.07 $ 0.55 1/31/2010 $ 1.10 $ 0.63 4/30/2010 $ 1.00 $ 0.70 7/31/2010 $ 0.84 $ 0.61 10/31/2010 $ 0.75 $ 0.31 1/31/2011 $ 0.75 $ 0.45 4/30/2011 $ 0.80 $ 0.47 7/31/2011 $ 0.99 $ 0.48As of October 19, 2011, there were approximately 671 holders of record of ARI common stock. We have not paid cash dividends to dateand have no current intention to pay cash dividends.During fiscal 2011, the Company did not repurchase any of its equity securities. 17

Item 6. Selected Financial DataThe following tables set forth certain financial information with respect to the Company for each of the previous five fiscal years, whichincludes information derived from ARI’s audited financial statements and notes thereto for fiscal 2011 and fiscal 2010. The reports,thereon, of Wipfli LLP are included elsewhere in this report. The selected financial data should be read in conjunction with“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the aforementioned Financial Statementsand Notes. All amounts are in thousands, except per share data. Statement of Income 2011 2010 2009 2008 2007 Net revenue $ 21,334 $ 21,484 $ 17,560 $ 16,917 $ 15,435 Gros s profi t 16,927 17,131 14,160 14,046 12,716 Gross margin 79.3% 79.7% 80.6% 83.0% 82.4% Net opera ting expens es 15,194 16,626 13,051 13,225 12,551 Opera ting i ncome 1,733 505 1,109 821 165 Other expens e (332) (630) (221) (28) (60) Income (l os s ) from continui ng opera tions before provi s i on for i ncome taxes 1,401 (125) 888 793 105 Income tax benefi t (expens e) 1,017 1,294 (123) 590 (4) Income from continui ng opera tions 2,418 1,169 765 1,383 101 Di s continued opera tions 25 (392) (341) - - Net i ncome $ 2,443 $ 777 $ 424 $ 1,383 $ 101 Ea rni ngs per s ha re: Income from continui ng opera tions : Ba s i c $ 0.31 $ 0.15 $ 0.11 $ 0.21 $ 0.02 Di l uted $ 0.31 $ 0.15 $ 0.11 $ 0.20 $ 0.02 Net i ncome: Ba s i c $ 0.31 $ 0.10 $ 0.06 $ 0.21 $ 0.02 Di l uted $ 0.31 $ 0.10 $ 0.06 $ 0.20 $ 0.02 Other Financial Data 2011 2010 2009 2008 2007 Amorti za ti on of ca pi ta l i zed s oftwa re products $ 1,127 $ 1,054 $ 876 $ 764 $ 800 Depreci a ti on a nd a morti za ti on 1,688 1,640 1,054 727 631 Ca pi ta l expendi tures 670 541 636 119 639 Softwa re devel opment cos ts ca pi ta l i zed 1,741 1,340 759 524 358 18

Balance Sheet Data st As of July 31 2011 2010 2009 2008 2007 Ca s h a nd ca s h equi va l ents $ 1,134 $ 938 $ 650 $ 1,086 $ 1,050 Worki ng ca pi ta l defi ci t (2,998) (3,692) (4,246) (5,475) (5,221) Net ca pi ta l i zed s oftwa re product cos ts 2,815 2,395 2,397 1,596 1,606 Tota l a s s ets 21,099 19,777 18,607 12,193 9,927 Current porti on of debt a nd l ea s e obl i ga ti ons 1,289 1,217 726 1,471 1,031 Long term debt a nd l ea s e obl i ga ti ons 4,293 5,338 5,115 349 484 Tota l s ha rehol ders equi ty 7,831 5,219 4,187 2,896 718 Cash flow Data 2011 2010 2009 2008 2007 Net ca s h provi ded by (us ed for): Opera ti ng a cti vi ti es $ 3,471 $ 1,624 $ 2,745 $ 2,027 $ 1,144 Inves ti ng a cti vi ti es (2,293) (1,891) (2,219) (1,651) (2,174) Fi na nci ng a cti vi ti es (977) 550 (968) (353) (1,491)Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion of our results of operations and financial condition should be read together with our audited consolidatedfinancial statements for fiscal 2011 and fiscal 2010, including the notes thereto, which appear elsewhere in this Annual Report on Form10-K. This discussion contains forward-looking statements, which as previously identified are subject to the safe harbors created underthe Securities Act and Exchange Act.OverviewOur fiscal 2011 financial results were some of the best in the Company’s history. We more than tripled our operating income and netincome; more than doubled our cash generated from operations; paid down nearly $1 million of debt; and increased our investment inproduct development. We believe these results are the culmination of various critical initiatives of the past several years. In April 2009we acquired Channel Blade and fiscal 2011 was the first full year we experienced the efficiencies that resulted from that acquisition. Atthe end of fiscal 2010 we underwent a workforce reduction and business improvement initiative designed to help the Companystreamline its operations and focus on our core offerings of electronic catalogs, lead generation and management, and eCommercewebsites. As part of this initiative in July 2010 we divested ARI F&I Services LLC (“AFIS”), our non-strategic dealer outsourced finance andinsurance operation, and in March 2011 we divested our non-strategic electronic data interchange business devoted to the agriculturalchemicals industry (“AgChem EDI”).We generated net income of $2,443,000, or $0.31 per share in fiscal 2011, compared to net income of $777,000, or $0.10 per share, infiscal 2010. The significant improvement in earnings is attributable to several factors, including: (i) Operating expenses declined by $1,432,000, or 8.6%, in fiscal 2011, resulting from our fiscal 2010 fourth quarter workforce reduction and business improvement initiative, for which we incurred a $437,000 charge in the fiscal 2010 fourth quarter, and from our continuing efforts to reduce costs and achieve operational efficiencies throughout the organization. (ii) In fiscal 2010 we incurred losses from our discontinued AFIS operation, net of tax benefits, of $392,000. These losses did not reoccur in fiscal 2011. (iii) We recorded a gain on the sale of our AgChem EDI business of $433,000.These factors were partially offset by both an increase in interest expense in fiscal 2011 and a reduction in the amount of tax benefitrealized, each of which will be discussed below. 19

Despite a slight decline in revenue and gross profit, operating income increased to $1,733,000 in fiscal 2011 from $505,000, driven solelyby the reduction in operating expenses discussed above.At July 31, 2011, we had cash balances of $1,134,000, versus $938,000 at July 31, 2010. Furthermore, our total outstanding debt, whichincludes amounts due under our line of credit, capital lease obligations, and term note, was $5,582,000 at July 31, 2011, nearly a$1,000,000 decline from the $6,555,000 outstanding at July 31, 2010. These favorable results were due to significant growth in cashgenerated from operations, which resulted from our strategy of focusing on growing our core recurring revenue base and generatingtechnological and operating efficiencies throughout our business.Net Revenues and Gross MarginsThe table below summarizes the Company’s net revenues, gross profit and gross margin by major product category for fiscal 2011 andfiscal 2010. Percent 2011 2010 Change Catalog Revenue $ 12,649 $ 12,474 1.4% Cos t of revenue 1,546 1,621 -4.6% Gros s profi t 11,103 10,853 2.3% Gross margin percentage 87.8% 87.0% Website Revenue 5,025 5,305 -5.3% Cos t of revenue 1,120 1,012 10.7% Gros s profi t 3,905 4,293 -9.0% Gross margin percentage 77.7% 80.9% Lead generation and management Revenue 1,982 2,044 -3.0% Cos t of revenue 1,078 983 9.7% Gros s profi t 904 1,061 -14.8% Gross margin percentage 45.6% 51.9% Other Revenue 1,678 1,661 1.0% Cos t of revenue 663 737 -10.0% Gros s profi t 1,015 924 9.8% Gross margin percentage 60.5% 55.6% Total Revenue 21,334 21,484 -0.7% Cos t of revenue 4,407 4,353 1.2% Gros s profi t $ 16,927 $ 17,131 -1.2% Gross margin percentage 79.3% 79.7%Total revenues for the fiscal year ended July 31, 2011 were $21,334,000 compared to $21,484,000 for the same period last year, a declineof 0.7%. Our fiscal 2011 revenues were negatively affected by the loss of non-cash deferred revenues related to the Channel Bladeacquisition and the loss of revenues from our divested Agchem EDI business. Excluding the impact of these items, we experiencedrevenue growth of 4.0% for fiscal 2011, as shown in the table below (in thousands). Percent 2011 2010 Change Revenue as reported $ 21,334 $ 21,484 -0.7% Non-cas h deferred revenue (49) (801) -93.9% AgChem EDI revenue (275) (481) -42.8% Revenue, adjusted $ 21,010 $ 20,202 4.0% 20

The non-cash deferred revenues represent the amortization of a deferred revenue liability recorded at the time we acquired ChannelBlade. As of July 31, 2011, this liability was fully amortized and these revenues will not recur in the future. As previously discussed, wedivested our AgChem EDI business in March 2011. We recognized $275,000 of revenues related to this business in fiscal 2011 prior to thedivestiture, compared to revenues of $481,000 for the full fiscal year 2010.New sales, although down from fiscal 2010, remain strong and in fiscal 2011 we realized a significant improvement in our customer churnrates, both of which served to increase our MRR year over year by more than 30%. Given that a substantial portion of our revenues aresubscription-based, MRR and churn are two performance indicators we closely monitor, as they represent the most significant drivers offuture revenue growth.CatalogCatalog revenues are generated from software license fees, license renewal fees, software maintenance and support fees, catalogsubscription fees, and professional services related to data conversion. Catalog revenues increased 1.4% in fiscal 2011, compared tofiscal 2010, resulting from improvements in our customer churn rates and new catalog sales. Management expects catalog subscriptionsto remain the Company’s most significant source of revenues and anticipates modest growth in this category for the foreseeable future.WebsiteWebsite revenues are generated from set-up and recurring subscription fees on our website products, as well as transaction fees fromour customers’ online sales generated via the websites. Website revenues decreased 5.3% in fiscal 2011, compared to fiscal 2010. Thisdecrease in revenue was due to the decline in non-cash deferred revenues previously discussed. All of these revenues were recorded inthe website category. Excluding the recognition of these non-cash revenues, revenues from our website products increased 10.5%.Furthermore, the non-cash, non-recurring revenues in fiscal 2010 were replaced with cash-generating MRR in fiscal 2011. We expect tosee continued sales growth in fiscal 2012 from our website products and for these products to be a long-term source of growth for theCompany.Lead Generation and ManagementLead generation revenues are realized from the sale of our SearchEngineSmart  product, while lead management revenues aregenerated from set-up and subscription fees for the use of the Company’s Footsteps  product. Lead generation and managementrevenues decreased 3.0% in fiscal 2011, when compared to fiscal 2010. As previously discussed, the marine market was hard hit by theeconomy and we experienced an increase in customer churn rates on our Footsteps  product in the latter half of fiscal 2010 due to thebankruptcies of several large marine manufacturers. This churn had a negative impact on fiscal 2011 revenues. Management expectsour Footsteps product to be a significant driver of future growth for the Company, and anticipates the launch of a new platform of thisproduct in fiscal 2012.Other RevenuesOther revenues primarily consist of professional services related to software customization and website hosting fees, but also includerevenues generated from other products that are ancillary to our three core offerings. Revenues from our divested AgChem EDI businesswere also included within this category. Other revenues increased 1.0% in fiscal 2011 compared to fiscal 2010. The main driver of thisincrease was a contracted website customization project with a large manufacturer in the power sports industry, offset in part by the lossof revenues related to our divested Agchem EDI business. Management anticipates that other revenues will fluctuate based on thetiming of professional fees related to software customization, which tend to be opportunistic in nature.Cost of Revenues, Gross Profit and Gross MarginWe classify as cost of revenues those costs that are directly attributable to the provision of services to our customers. These costsinclude: Software amortization, which represents the periodic amortization of costs for internally developed or purchased software sold to our customers; Direct labor, used in the provision of catalog and marketing professional services; and Other direct costs, which represent amounts paid to third party vendors directly attributable to the services we provide our customers. 21

The table below breaks out fiscal 2011 and fiscal 2010 cost of revenues into each of these three expense categories (in thousands): Percent of Percent of 2011 Revenue 2010 Revenue Net revenues $ 21,334 $ 21,484 Cos t of revenues : Amortization of capitalized s oftware cos ts 1,127 5.3% 1,054 4.9% Direct labor 1,272 6.0% 1,395 6.5% Other direct cos ts 2,008 9.4% 1,904 8.9% Total cos t of revenues 4,407 20.7% 4,353 20.3% Gross profit $ 16,927 79.3% $ 17,131 79.7%Overall gross profit was $16,927,000, or 79.3 % of revenue, in fiscal 2011, versus $17,131,000, or 79.7% of revenue, in fiscal 2010. Therewas an increase in software amortization costs, as we began to amortize several new releases of our core products in fiscal 2011. Wealso experienced an increase in other direct costs related to royalties for the rights to sell certain catalog content. Overall gross marginwas 79.3% in fiscal 2011, which was less than half of one percentage point lower than fiscal 2010. Management expects to seeimprovements in gross margin over time as we grow our subscription-based recurring revenues, which typically have a higher marginthan our other products and services.Operating ExpensesThe table below summarizes the Company’s operating expenses by expense category for fiscal 2011 and fiscal 2010 (in thousands): Percent of Percent of Percent 2011 Revenue 2010 Revenue Change Sa l es a nd ma rketing $ 4,272 20.0% $ 4,786 22.3% -10.7% Cus tomer opera tions a nd s upport (1) 3,439 16.1% 3,469 16.1% -0.9% Softwa re devel opment a nd techni ca l s upport (2) 1,543 7.2% 1,415 6.6% 9.0% Genera l a nd a dmi ni s tra tive 4,252 19.9% 4,879 22.7% -12.9% Res tructuri ng - 0.0% 437 2.0% n/a Depreci a tion a nd a mortiza tion (3) 1,688 7.9% 1,640 7.6% 2.9% Net operating expenses $ 15,194 71.2% $ 16,626 77.4% -8.6% (1) Net of capitalized software development costs of $191 and $81 in fiscal 2011 and fiscal 2010, respectively. (2) Net of capitalized software development costs of $1,474 and $1,247 in fiscal 2011 and fiscal 2010, respectively. (3) Exclusive of amortization of software products of $1,127 and $1,054 in fiscal 2011 and fiscal 2010, respectively, which are included in cost of revenue.Net operating expenses were $15,194,000 in fiscal 2011, a decrease of $1,432,000, or 8.6%, from fiscal 2010. As part of our strategy tostreamline the business and focus on our three core offerings, we undertook a workforce reduction and business improvement initiative,which included the divestiture of AFIS, the write off of certain assets related to non-core operations, and a small headcount reduction inJuly 2010. We incurred a charge of $437,000 in fiscal 2010 related to this initiative. This initiative, coupled with the economies realizedfrom the Channel Blade acquisition and a continued focus on cost reduction and operational efficiencies, is reflected in the decrease innet operating expenses in fiscal 2011. 22

Sales and Marketing ExpensesSales and marketing expenses consist primarily of personnel and related costs, including sales commissions, for our sales and marketingemployees, and also include the cost of marketing programs and trade show attendance. Marketing programs consist of lead generationand direct marketing, advertising, events and meeting costs, public relations, brand building and product management activities. Salesand marketing expenses decreased 10.7% in fiscal 2011, when compared to fiscal 2010. As a percentage of revenue, sales and marketingexpenses declined from 22.3% in fiscal 2010 to 20.0% in fiscal 2011, driven in part by a reduction in commission expense that resultedfrom the previously-mentioned sales decline.We measure the returns realized through our sales teams with the customer acquisition cost (“CAC”) ratio, one of Bessemer VenturePartners’ “6C’s of Cloud Finance.” We experienced an improvement in our CAC ratios during fiscal 2011, compared to the same periodlast year, which means that we are generating more margin for each sales and marketing dollar spent. These improvements in CAC wereachieved by refining our sales incentive programs to better align them with our core strategy of MRR growth, as well as achievingoperating efficiencies and close management of discretionary sales and marketing spending. Sales and marketing will continue to be oneof our largest expenses, as we intend to continue to invest in sales and marketing to grow our customer base and expand relationshipswith our existing customers. However, management expects sales and marketing costs to gradually decline as a percentage of revenuesover time.Customer Operations and SupportCustomer operations and support expenses are composed of server room operations, software maintenance agreements for our corenetwork, and personnel and related costs for our operations and support employees. Customer operations and support costs remainedrelatively the same in fiscal 2011, compared to last year. Management expects customer operations and support costs to decline as apercentage of revenue in future years as we continue to consolidate our data centers into one centralized facility, while retaining theappropriate backup facilities.Software Development and Technical SupportOur software development and technical support staff have three essential responsibilities for which the accounting treatment variesdepending upon the work performed: (i) costs associated with internal software development efforts are typically capitalized as softwareproduct costs and amortized over the estimated useful lives of the product; (ii) professional services performed for customers related tosoftware customization projects are classified as cost of revenues; and (iii) all other activities are considered operating expenses andincluded within the software development and technical support operating expense category.The table below summarizes the breakdown of our total software development and technical support spending (in thousands): Percent 2011 2010 Change Total s oftware development and technical s upport cos ts $ 4,480 $ 4,138 8.26% Les s : amount capitalized as s oftware development (1,665) (1,328) 25.38% Les s : direct labor clas s ified as cos t of revenues (1,272) (1,395) -8.82% Net software development and technical support costs classified as operating expenses $ 1,543 $ 1,415 9.05%We increased our total software development and technical support costs by $330,000, or 7.95%, in fiscal 2011, compared to the sameperiod last year, which is consistent with our strategy to release new products and enhancements to existing products. We expectfluctuations in the amount of software development and technical support costs classified as operating expenses from period to period,as the mix of development and customization activities will change based on customer requirements, even if total software developmentand technical support departmental costs remain relatively constant.During fiscal 2011, we capitalized $1,665,000 of software development labor and overhead, versus $1,340,000 last year. As discussedearlier, we completed several significant product upgrades and enhancements during fiscal 2011 and are working on several newenhancements expected to be released in the upcoming quarter, which we anticipate will increase future revenues for the Company. 23

Management expects total spending for software development and technical support to continue to increase in fiscal 2012 as wecontinue to focus on our core strategy of product enhancement and innovation.General and AdministrativeGeneral and administrative expenses primarily consist of personnel and related costs for executive, finance, human resources andadministrative personnel, legal and other professional fees and other corporate expenses and overhead. General and administrativecosts declined $627,000, or 12.9%, in fiscal 2011. As a percentage of revenue, general and administrative expenses declined from 22.7%in fiscal 2010 to 19.9% in fiscal 2011.This improvement can be attributed to the various cost reduction and business improvement initiatives implemented over the lastseveral years as well as efficiencies realized from the integration of the Channel Blade operations. Management expects general andadministrative expenses to remain relatively flat in fiscal 2012 and to continue to decline, as a percentage of revenues, in fiscal 2012 andbeyond as the business continues to grow and the Company leverages its reduced cost structure.Depreciation and AmortizationDepreciation and amortization expenses consist of depreciation on fixed assets, which are composed of leasehold improvements andinformation technology assets, and the amortization of acquisition-related intangible assets. Costs associated with the amortization ofsoftware assets are a component of cost of revenues. Depreciation and amortization expense remained relatively flat in fiscal 2011.RestructuringAs discussed previously, in July 2010 the Company undertook a workforce reduction and business improvement initiative, which includedthe divestiture of AFIS, the write off of certain assets related to non-core operations, and a headcount reduction. The Company incurredrestructuring charges of $437,000 related to this initiative. The results of operations of AFIS were reclassified as a discontinued operationin the Company’s consolidated financial statements. All remaining payment obligations related to severance and net future lease costswere paid in fiscal 2011.Interest ExpenseInterest expense was $790,000 in fiscal 2011, versus $649,000 in fiscal 2010. On April 27, 2010, the interest rate on our term note, whichresulted from the April 2009 acquisition of Channel Blade, increased from 10% to 14%. Management expects a significant reduction ininterest expense beginning in fiscal 2012. On July 27, 2011 we entered into a Loan and Security Agreement (described in Note 4 to theconsolidated financial statements) with Fifth Third Bank (“Fifth Third”), the proceeds of which were used to pay off the Channel Bladenote in full. The note bears interest at a rate based on the one, two, three or six month LIBOR (as selected by the Company on the lastbusiness day of each month) plus 4.0%, and matures on July 27, 2014. The effective interest rate on the note was 4.21% at July 31, 2011.Income TaxesAs of July 31, 2011, we had unused net operating loss carryforwards (“NOLs”) for federal income tax purposes of $13,092,000 expiringbetween 2012 and 2030, and as such generally only incur alternative minimum taxes.We performed an assessment as of July 31, 2011 of the likelihood that the remaining NOLs included in our net deferred tax assets will berealized from future taxable income. The assessment resulted in a change in estimate of $1,967,000 less tax expense, or $0.25 per basicand diluted common share. This change was due to an improvement in our forecasted U.S. net income before taxes and a change in ourtax strategy related to the treatment of capitalized software product costs. Refer to Note 11 of the consolidated financial statements forfurther discussion. 24

Discontinued OperationsOn July 27, 2010 we sold AFIS, which offered dealer finance and insurance services, to F&I Smart LLC, recording a loss on the divestitureof $1,000. The results of operations of AFIS have been reflected as a discontinued operation in our consolidated financial statements forall periods presented. The results of operations of AFIS were previously reported within the United States business segment. Thefollowing table summarizes the results of operations of AFIS, included in discontinued operations for the fiscal years ended July 31 (inthousands): 2011 2010 Revenues $ - $ 136 Cos t of s a les - 13 Opera ting expens es - 776 Opera ting los s - (653) Ga in (los s ) on s a le 40 (1) Income ta x benefit (provis ion) (1) (15) 262 Net gain (loss) $ 25 $ (392) (1) Net of recorded deferred income ta x a s s et va lua tion a llowa nceLiquidity and Capital ResourcesThe following table sets forth, for the periods indicated, certain cash flow information derived from the Company’s financial statements(in thousands): Percent 2011 2010 Change Net ca s h provi ded by opera ti ng a cti vi ti es $ 3,471 $ 1,624 113.7% Net ca s h us ed i n i nves ti ng a cti vi ti es (2,293) (1,891) 21.3% Net ca s h provi ded by (us ed i n) fi na nci ng a cti vi ti es (977) 550 -277.6% Effect of forei gn currency excha nge ra te cha nges on ca s h (5) 5 -200.0% Net change in cash $ 196 $ 288 -31.9% Cash at end of period $ 1,134 $ 938 20.9%CashAt July 31, 2011, the Company had cash balances of $1,134,000, compared to $938,000 at July 31, 2010. Total cash flows declined from$288,000 in fiscal 2010 to $196,000 in fiscal 2011, as we used our increased cash flows from operations to pay down nearly $1,000,000 indebt and continue to invest in product development.Net cash provided by operations more than doubled in fiscal 2011, compared to fiscal 2010, due to several factors: (i) a greater portion of our revenues in fiscal 2011 resulted in cash collected, as the $801,000 of revenues recognized in fiscal 2010 related to the amortization of the deferred revenue liability incurred with the acquisition of Channel Blade were non-cash revenues; (ii) our accounts receivable collections have improved as we expanded our efforts and made process improvements in this area; (iii) we sold the AFIS business, which generated pre-tax operating losses of $654,000 in fiscal 2010; (iv) our operating expenses continued to decline as we focus on efficiencies throughout the organization; and (v) the Channel Blade acquisition has been fully integrated into the organization. 25

We invested more cash into the business in fiscal 2011 than we did in fiscal 2010. Fiscal 2011 cash used in investing activities was$2,293,000, compared with $1,891,000 in fiscal 2010. We continue to invest cash in the business, primarily for the development of newproducts and upgrades of existing products, as well as upgrading our technology infrastructure as part of our efforts to consolidate ourdata centers. These efforts will result in our primary data center being located in a Tier III (as defined by the Uptime Institutes tierclassification system) hosted facility in Madison, Wisconsin with one internally-hosted backup data center. Although we will continue toinvest in the business, management expects cash used in investing activities to fluctuate from period to period based on the level ofsoftware development activities as well as the timing of other capital expenditures.We used cash for financing activities of $977,000 in fiscal 2011; in fiscal 2010 we generated cash from financing activities of $550,000.We used a significant portion of the cash generated from operating activities in fiscal 2011 to pay down outstanding debt.Management believes that current cash balances and its ability to generate cash from operations, as well as the existing availability underthe Company’s line of credit with Fifth Third, are sufficient to fund the Company’s needs over the next twelve months.DebtOn July 9, 2004, we entered into a line of credit agreement with JPMorgan Chase, N.A. (the “Chase Line”) which, as amended, permittedus to borrow an amount equal to 80% of the book value of all eligible accounts receivable plus 45% of the value of all eligible openrenewal orders (provided the renewal rate was at least 85%) minus $75,000, up to $2,000,000. The agreement bore interest at 1% perannum above the prime rate plus an additional 3%, at the bank’s option, upon the occurrence of any default under the note. There was$1,025,000 outstanding on the Chase Line at July 31, 2010 and the line was paid in full and terminated on July 27, 2011.On July 27, 2011, ARI entered into a Loan and Security Agreement (the “Agreement”) with Fifth Third, filed as exhibit 10.1 on theCompany’s Form 8-K on July 28, 2011. Pursuant to the terms of the Agreement, Fifth Third extended to the Company credit facilitiesconsisting of a $1,500,000 revolving credit facility (the “Revolving Loan”) and a $5,000,000 three year term loan facility (the “Term Loan”).Each of the credit facilities bears interest at a rate based on the one, two, three or six month LIBOR (as selected by the Company on thelast business day of each month) plus 4.0% (effective rate of 4.21% at July 31, 2011). In connection with this Agreement, the Chase Lineand all other banking relationships between ARI and JP Morgan Chase, N.A. were terminated. There was $245,000 outstanding on theRevolving Loan as of July 31, 2011.The Agreement contains covenants that restrict, among other things and subject to certain conditions, the ability of the Company to incurnew debt, create liens on its assets, make certain investments, enter into merger transactions, issue capital securities and makedistributions to its shareholders. Financial covenants include a minimum fixed charge coverage ratio, as defined in the Agreement, of 1.2,and a senior leverage (maximum senior funded indebtedness to EBITDA) ratio, as defined in the Agreement, of 2.0. The Agreement alsocontains customary events of default which, if triggered, could result in an acceleration of the Company’s obligations under theAgreement. The Credit Facilities are secured by a first priority security interest in substantially all assets of the Company and by a firstpriority pledge of all outstanding equity securities of each of the Company’s domestic subsidiaries and 65% of outstanding equitysecurities of the Company’s foreign subsidiary.Long-term debt consisted of the following at July 31, 2011 and 2010 (in thousands): 2011 2010 Notes pa ya bl e: Cha nnel Bl a de Technol ogi es $ - $ 5,000 Fi fth Thi rd Ba nk 5,000 - Tota l l ong-term debt 5,000 5,000 Les s current ma turi ti es (917) - Long-term debt, non-current $ 4,083 $ 5,000Principal and interest on the new Term Loan will be repaid in fixed monthly principal installments of $83,333 plus accrued but unpaidinterest on the unpaid principal balance commencing on September 1, 2011 through July 1, 2014, with a final balloon payment due July27, 2014. Mandatory prepayments of the Credit Facilities will be required in the amount of 50% of the Company’s excess cash flow forthe six-month periods ending January 31, 2012 and July 31, 2012 and for each fiscal year thereafter. Excess cash flow is defined as theremainder of net income plus interest, taxes, depreciation and amortization expense for such period, minus cash taxes paid, capitalexpenditures incurred, capitalized software costs and scheduled payments of principal and interest charges. 26

AcquisitionsSince 1995 the Company has had a formal corporate development program aimed at identifying, evaluating and closing acquisitions thataugment and strengthen the Company’s market position, product offerings, and personnel resources. Since the program’s inception, ninebusiness acquisitions and one software asset acquisition have been completed. All of these acquisitions have been fully integrated intothe Company’s operations.On April 27, 2009, the Company acquired substantially all of the assets of Channel Blade Technologies, the leading provider of websites,lead management and marketing automation solutions in the marine and RV markets. Consideration for the acquisition includedapproximately $500,000 in cash, 615,385 shares of the Company’s common stock at a market price of $0.75 per share, $765,000 ofassumed liabilities and a $5,000,000 note payable. The Company included the results of operations of Channel Blade in its consolidatedfinancial statements for all periods presented.On April 17, 2009, AFIS acquired the assets of Powersports Outsourcing Group, valued at approximately $85,000, in partial satisfaction ofits debt to ARI of approximately $185,000, $149,000 of which we purchased from Keybank National Association on April 16, 2009. PSOG,located in Schenectady, NY and then led by Mark L. Taylor, had been offering outsourced F&I services to power sports, marine and RVcustomers in the Northeast United States since 1998. In connection with the acquisition, AFIS entered into a three year employmentagreement with Mr. Taylor to serve as Director of F&I Business Development. Effective March 8, 2010, ARI and Mr. Taylor terminated theemployment agreement and entered into an arrangement pursuant to which Mr. Taylor continued to provide any necessary transitionalservices to the Company for six months following the effective date. This agreement has expired.On July 27, 2010, ARI sold all of the equity interests in AFIS to F&I Smart LLC (the “Subject Interests”) in a membership interest saleagreement. The sales price of the Subject Interests is a contingent amount based on dealer revenue beginning July 28, 2010 and endingon August 28, 2013. We have not accrued for any future contingent proceeds as we are not able to estimate the amounts at this time.The Company recognized a $1,000 loss on the sale of AFIS in the fourth quarter of fiscal 2010.Critical Accounting JudgmentsThe Company’s discussion and analysis of its financial condition and results of operations are based upon its financial statements, whichhave been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation offinancial statements in conformance with GAAP requires estimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The SEC has defined a company’s criticalaccounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, andwhich require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, we have identified as the most critical accounting policies and judgmentsthose addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptionsthat are significant to understanding our results. For additional information, refer to Note 1 of the consolidated financial statements,which appear elsewhere within this report on Form 10-K. Although we believe that our estimates, assumptions, and judgments arereasonable, they are based upon information currently available. Actual results may differ significantly from these estimates underdifferent assumptions, judgments, or conditions.Revenue RecognitionArrangements that include professional services are evaluated to determine whether those services are essential to the functionality ofother elements of the arrangement. Types of services that are considered essential include customizing complex features andfunctionality in a product’s base software code or developing complex interfaces within a customer’s environment. When professionalservices are not considered essential, the revenue allocable to the professional services is recognized as the services are performed.When professional services are considered essential, revenue under the arrangement is recognized pursuant to contract accounting usingthe percentage-of-completion method with progress-to-completion measured based upon labor hours incurred. When the currentestimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract is made in the periodthe amount is determined.Allowance for Doubtful AccountsThe Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to makerequired payments. The Company currently estimates a reserve for most amounts due over 90 days, unless there is reasonable assuranceof collectability. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required. 27

Impairment of Long-Lived AssetsEquipment and leasehold improvements, capitalized software product costs and other identifiable assets are reviewed for impairmentannually, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of theexpected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for thedifference between the fair value and carrying value of the asset or group of assets. During fiscal 2011 and fiscal 2010, the Companydisposed of equipment and leasehold improvements with a cost basis of $371,000 and $1,220,000, respectively and recorded a loss ondisposal of $0 and $10,000, respectively.In fiscal 2010, the Company incurred an impairment charge of $48,000 on capitalized software, with a cost basis of $208,000, which wasdisposed of, and an additional impairment charge of $141,000 on assets that are still in use. These impairment charges are included inrestructuring costs on the statement of operations. The Company did not incur any software impairment charges in fiscal 2011.Deferred Income TaxesThe tax effect of the temporary differences between the book and tax basis of assets and liabilities and the estimated tax benefit from taxnet operating losses is reported as deferred tax assets and liabilities in the balance sheet. An assessment of the likelihood that netdeferred tax assets will be realized from future taxable income is performed. Because the ultimate realizability of deferred tax assets ishighly subject to the outcome of future events, the amount established as a valuation allowance is considered to be a significant estimatethat is subject to change in the near term. To the extent a valuation allowance is established or there is a change in the allowance duringa period, the change is reflected with a corresponding increase or decrease in the tax provision in the statement of income. Werecognized a tax benefit of $1,017,000 and $1,294,000 from continuing operations in fiscal 2011 and fiscal 2010, respectively, both ofwhich primarily resulted from a change in our estimated tax valuation allowance.Stock-Based CompensationThe Company uses the Black-Scholes model to value stock options granted. Expected volatility is based on historical volatility of theCompany’s stock. The expected life of options granted represents the period of time that options granted are expected to beoutstanding. The risk-free rate for periods within the contractual term of the options is based on the U.S. Treasury yields in effect at thetime of grant. As stock-based compensation expense recognized in our results of operations is based on awards ultimately expected tovest, the amount has been reduced for estimated forfeitures based on our historical experience. Management reviews the criticalassumptions used in the Black-Scholes model each quarter and adjusts those assumptions when necessary.Goodwill and Other Intangible AssetsAs fully described in note 1 to the Consolidated Financial Statements, we periodically review the carrying value of goodwill to determinewhether an impairment may exist. We determined that there is a single reporting unit for the purpose of goodwill impairment tests. Weestimate the fair value of the reporting unit using various valuation techniques, with our primary techniques being a discounted cash flowvaluation and control premium adjusted market capitalization. There are many estimates and assumptions involved in preparing adiscounted cash flow analysis, including estimating future operating results, selecting a weighted average cost of capital to discountestimated future cash flows, anticipated long-term growth rates, and future profit margins.Estimating the fair value of a reporting unit is an inherently subjective process. Changes in assumptions, estimates, and other inputscould result in the indication of potential impairment of a portion of the recorded goodwill. Management believes the assumptions,estimates, and other inputs used reflect their best efforts and are appropriate for valuing the reporting unit. Our goodwill impairmenttest indicated that goodwill was not impaired in fiscal 2011 or fiscal 2010.Impairment tests are also performed for those intangible assets with estimable useful lives if circumstances warrant a review. Due to therestructuring in the fourth quarter of fiscal 2010, the Company performed an impairment test on intangible assets with definite livesusing estimated future cash flows from these assets for the remainder of their useful lives in fiscal 2010. There were no impairments tointangible assets with estimable useful lives as a result of this test. There were no circumstances to warrant a review of intangible assetswith estimable useful lives in fiscal 2011.Earn-out ReceivableAs part of the purchase price for the disposition of a component of the business, we recorded an earn-out receivable with anticipatedpayments to ARI annually over a four-year period following the closing date. The earn-out was recorded at fair value, which was theestimated future receipts less an imputed discount, based on the present value of the estimated earn-out payments, discounted at an 28

imputed interest rate at the time the note is issued and any subsequent changes in prevailing interest rates shall be ignored. Imputedinterest is amortized to interest income over the life of the earn-out.Quarterly Financial DataThe following table sets forth the unaudited results of operations for each of the eight quarterly periods ended July 31, 2011, preparedon a basis consistent with the audited financial statements, reflecting all normal recurring adjustments that are considered necessary.The quarterly information is as follows (in thousands, except per share data): 1s t Qua rter 2nd Qua rter 3rd Qua rter 4th Qua rter 2011 2010 2011 2010 2011 2010 2011 2010Net revenues $ 5,324 $ 5,437 $ 5,238 $ 5,334 $ 5,354 $ 5,352 $ 5,418 $ 5,361Gros s ma rgi n 4,157 4,486 4,152 4,361 4,259 4,232 4,359 4,052Income from continui ng opera tions 99 325 123 339 516 155 1,680 350Di s continued opera tions - (163) - (163) 25 (129) - 63Net i ncome (l os s ) $ 99 $ 162 $ 123 $ 176 $ 541 $ 26 $ 1,680 $ 413Ba s i c a nd di l uted i ncome from continui ng opera tions per common s ha re: Ba s i c $ 0.01 $ 0.04 $ 0.02 $ 0.04 $ 0.07 $ 0.02 $ 0.21 $ 0.05 Di l uted $ 0.01 $ 0.04 $ 0.02 $ 0.04 $ 0.07 $ 0.02 $ 0.21 $ 0.05Ba s i c a nd di l uted net i ncome per common s ha re: Ba s i c $ 0.01 $ 0.02 $ 0.02 $ 0.02 $ 0.07 $ 0.00 $ 0.21 $ 0.05 Di l uted $ 0.01 $ 0.02 $ 0.02 $ 0.02 $ 0.07 $ 0.00 $ 0.21 $ 0.06Off-Balance Sheet ArrangementsARI has no significant off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on itsfinancial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.Item 8. Financial Statements and Supplementary DataReference is made to the consolidated financial statements, the reports thereon and the notes thereto commencing after the signaturepage of this Report, which are incorporated herein by reference.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresWe maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed underthe Exchange Act, as amended, is recorded, processed, summarized, and reported within the required time periods and that suchinformation is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow for timely decisions regarding required disclosure.As required by Rule 13a-15 under the Exchange Act, we have completed an evaluation, under the supervision and with the participationof our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness and the design andoperation of our disclosure controls and procedures as of July 31, 2011. Based upon this evaluation, our management, including theChief Executive Officer and the Chief Financial Officer, has concluded that our disclosure controls and procedures were effective as of July31, 2011.Management’s Annual Report on Internal Control over Financial Reporting 29

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including ourChief Executive Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control overfinancial reporting based on the framework in Internal Control over Financial Reporting – Guidance for Smaller Public Companies issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, ourmanagement concluded that our internal control over financial reporting was effective as of July 31, 2011.This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regardinginternal control over financial reporting. Internal control over financial reporting was not subject to attestation by our independentregistered public accounting firm pursuant to the amendments to Rule 2-02(f) of Regulation S-X that exempt us from this attestationrequirement based on our status as a non-accelerated filer. We are required to provide only management’s report in this Annual Reporton Form 10-K.Changes in Internal ControlsThere were no changes to the Company’s internal control over financial reporting during the year ended July 31, 2011 that havematerially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.Limitations on Effectiveness of Controls and ProceduresOur management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls andprocedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated,can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, therealities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally,controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override ofthe control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events andthere can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time,controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures maydeteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and notbe detected. 30

PART IIIItem 10. Directors, Executive Officers, and Corporate GovernanceInformation required by Item 10 of Part III is included in our Proxy Statement relating to our 2011 Annual Meeting of Shareholders, and isincorporated herein by reference.Item 11. Executive CompensationInformation required by Item 11 of Part III is included in our Proxy Statement relating to our 2011 Annual Meeting of Shareholders, and isincorporated herein by reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersInformation required by Item 12 of Part III is included in our Proxy Statement relating to our 2011 Annual Meeting of Shareholders, and isincorporated herein by reference.Item 13. Certain Relationships and Related TransactionsInformation required by Item 13 of Part III is included in our Proxy Statement relating to our 2011 Annual Meeting of Shareholders, and isincorporated herein by reference.Item 14. Principal Accounting Fees and ServicesInformation required by Item 14 of Part III is included in our Proxy Statement relating to our 2011 Annual Meeting of Shareholders, and isincorporated herein by reference. 31

PART IVItem 15. Exhibits 2.1 Asset Purchase Agreement dated March 1, 2011 between ARI Network Services, Inc. and Globalrange Corporation, incorporated herein by reference to Exhibit 2.1 to the Form 8-K filed on March 4, 2011. 3.1 Articles of Incorporation of the Company, as amended, incorporated herein by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1999. 3.2 Articles of Amendment of the Company, incorporated herein by reference to Exhibit 3.2 of Form 8-K filed on August 18, 2003. 3.3 By-laws of the Company incorporated herein by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-l (Reg. No. 33-43148). 4.2 The Company agrees to furnish to the Commission upon request copies of any agreements with respect to long term debt not exceeding 10% of the Company’s consolidated assets. 10.1 Rights Agreement dated as of August 7, 2003, between the Company and American Stock Transfer & Trust Company, as Rights Agent, incorporated herein by reference to Exhibit 10.1 of Form 8-K filed on August 18, 2003. 10.2 * Summary of Executive Bonus Arrangements (Fiscal 2011). 10.3 Credit Agreement dated July 9, 2004 between the Company and Bank One, NA, incorporated by reference to exhibit 10.14 of the Company’s Form 10-K for the year ended July 31, 2004. 10.4 Amendment to Credit Agreement dated February 15, 2005, between the Company and JPMorgan Chase Bank, NA, successor by merger to Bank One, NA., incorporated herein by reference to Exhibit 10.14 of the Company’s Form 10-KSB for the fiscal year ended July 31, 2005. 10.5 Continuing Security Agreement dated July 9, 2004, between the Company and JPMorgan Chase Bank, NA, successor by merger to Bank One, NA., incorporated by reference to Exhibit 10.15 of the Company’s Form 10-KSB for the year ended July 31, 2004. 10.6 Line of credit note dated July 9, 2004 by the Company for $500,000, incorporated by reference to exhibit 10.16 of the Company’s Form 10-KSB for the year ended July 31, 2005. 10.7 Note Modification Agreement dated February 15, 2005 to the Line of Credit Note dated July 9, 2004 by the Company for $500,000, incorporated herein by reference to Exhibit 10.17 of the Company’s Form 10-KSB for the fiscal year ended July 31, 2005. 10.8 Note Modification Agreement dated October 26, 2006, to the Line of Credit Note dated July 9, 2004 by the Company for $1,000,000, incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K filed on October 31, 2006. 10.9 Note Modification Agreement dated April 25, 2006 to the Line of Credit Note dated July 9, 2004 by the Company for $500,000, incorporated herein by reference to Exhibit 10.16 of the Company’s Form 10-KSB for the fiscal year ended July 31, 2006. 10.10 First Amendment to Rights Agreement dated November 10, 2005, between the Company and American Stock Transfer & Trust Company, as Rights Agent, incorporated by reference to Exhibit 10.1 of Form 8-K filed on November 14, 2005. 10.11 Amendment to Credit Agreement dated May 10, 2007, between the Company and JP Morgan Chase Bank, NA, successor by merger to Bank One, NA, incorporated by reference to the Company’s Form 10-QSB for the quarter ended April 30, 2007. 10.12 Note Modification Agreement dated May 10, 2007, between the Company and JP Morgan Chase Bank, NA, successor by merger to Bank One, NA, incorporated by reference to the Company’s Form 10-QSB for the quarter ended April 30, 2007. 10.13 Note Modification Agreement dated April 25, 2008, between the Company and JP Morgan Chase Bank, NA, successor by merger to Bank One, NA. 10.14 Credit Agreement Amendment dated April 6, 2009, incorporated by reference to Form 10-Q for the quarter ended April 30, 2009. 10.15 Credit Agreement Amendment dated April 8, 2010, between the Company and JP Morgan Chase Bank, NA, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 18, 2010. 10.16* Change of Control Agreement dated September 13, 2006 between the Company and Roy W. Olivier, incorporated by reference to Exhibit 10.3 of the Company’s Form 10-QSB for the quarter ended October 31, 2007. 32

10.17* Employment Agreement dated May 1, 2008 between the Company and Roy W. Olivier, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on May 2, 2008. 10.18* Amendment to Change of Control Agreement dated May 2, 2008, by and between ARI Network Services, Inc. and Roy W. Olivier. 10.19* Employment Agreement dated December 10, 2010 between Darin R. Janacek and the Company, incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed on December 16, 2010. 10.20* Change of Control Agreement dated December 10, 2010 between Darin R. Janacek and the Company, incorporated herein by reference to Exhibit 10.2 to the Form 8-K filed on December 16, 2010. 10.21* ARI Network Services, Inc. 2010 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed on December 22, 2010. 10.22* ARI Network Services, Inc. 2000 Employee Stock Purchase Plan, as Amended and Restated November 4, 2010, incorporated herein by reference to Exhibit 10.2 to the Form 8-K filed on December 22, 2010. 10.23 Loan and Security Agreement dated as of July 27, 2011 by and between ARI Network Services, Inc. and Fifth Third Bank, incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed on July 28, 2011. 10.24 Membership Interests Security Agreement dated as of July 27, 2011 by ARI Network Services, Inc. to and in favor of Fifth Third Bank, incorporated herein by reference to Exhibit 10.2 to the Form 8-K filed on July 28, 2011. 21.1 Subsidiaries of the Company. 23.1 Consent of Wipfli LLP. 24.1 Powers of Attorney appear on the signature page hereof. 31.1 Section 302 Certification of Chief Executive Officer. 31.2 Section 302 Certification of Chief Financial Officer. 32.1 Section 906 Certification of Chief Executive Officer. 32.2 Section 906 Certification of Chief Financial Officer.*Indicates Management Contract or Compensatory Plan or Agreement. 33

SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be stsigned on its behalf by the undersigned, thereunto duly authorized, on this 31 day of October 2011.ARI NETWORK SERVICES, INC.By: /s/ Roy W. OlivierRoy W. OlivierPresident and Chief Executive OfficerBy: /s/ Darin R. JanecekDarin R. JanecekVice President of Finance and Chief Financial OfficerKNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Roy W. Olivier and DarinR. Janecek, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and his name, placeand stead, in any and all capacities, to sign any and all amendments to this report and to file the same with all exhibits thereto, and otherdocuments in connection therewith, with the Commission, granting unto said attorney-in-fact and agent full power and authority to doand perform each act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person,hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to bedone by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated./s/ Brian E. Dearing October 31, 2011Brian E. DearingChairman of the Board/s/ Roy W. Olivier October 31, 2011Roy W. OlivierDirector/s/ Gordon J. Bridge October 31, 2011Gordon J. BridgeDirector/s/ Ted C. Feierstein October 31, 2011Ted C. FeiersteinDirector/s/ William C. Mortimore October 31, 2011William C. MortimoreDirector/s/ P. Lee Poseidon October 31, 2011P. Lee PoseidonDirector 34

Report of Wipfli LLP,Report of Independent Registered Public Accounting FirmTo the Board of Directors and ShareholdersARI Network Services, Inc.We have audited the accompanying consolidated balance sheets of ARI Network Services, Inc. and Subsidiaries (theCompany) as of July 31, 2011 and 2010 and the related consolidated statements of income, shareholders’ equity and cashflows for the years then ended. These financial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, anaudit of its internal control over financial reporting. Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, weexpress no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements, assessing the accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis forour opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of theCompany as of July 31, 2011 and 2010 and the results of its operations and its cash flows for the years then ended, inconformity with accounting principles generally accepted in the United States./s/ Wipfli LLPMilwaukee, WisconsinOctober 31, 2011 35

Consolidated Financial StatementsARI Network Services, Inc.Years ended July 31, 2011 and 2010 36

ARI Network Services, Inc. Consolidated Balance Sheets (Dollars in Thousands, Except per Share Data) July 31 July 31 2011 2010Current assets: Cash and cash equivalents $ 1,134 $ 938 Trade receivables, less allowance for doubtful accounts of $383 and $565 at July 31, 2011 and 2010, respectively 1,179 1,359 Work in process 169 133 Prepaid expenses and other 802 481 Deferred income taxes 2,693 2,600 Total current assets 5,977 5,511Equipment and leasehold improvements: Computer equipment and software for internal use 2,304 1,883 Leasehold improvements 558 506 Furniture and equipment 2,000 1,970 4,862 4,359 Less accumulated depreciation and amortization 2,988 2,433 Net equipment and leasehold improvements 1,874 1,926Capitalized software product costs: Amounts capitalized for software product costs 16,693 15,919 Less accumulated amortization 13,878 13,524 Net capitalized software product costs 2,815 2,395Deferred income taxes 2,607 1,616Other long term assets 346 63Other intangible assets 2,041 2,827Goodwill 5,439 5,439Total assets $ 21,099 $ 19,777 See accompanying notes 37

ARI Network Services, Inc. Consolidated Balance Sheets (Dollars in Thousands, Except per Share Data) July 31 July 31 2011 2010Current liabilities: Current borrowings on line of credit $ 245 $ 1,025 Current portion of long-term debt 917 - Accounts payable 561 490 Deferred revenue 5,282 5,270 Accrued payroll and related liabilities 1,264 1,322 Accrued taxes 106 60 Other accrued liabilities 473 844 Current portion of capital lease obligations 127 192 Total current liabilities 8,975 9,203Non-current liabilities: Long-term debt 4,083 5,000 Long-term portion of accrued compensation - 17 Capital lease obligations 210 338 Total non-current liabilities 4,293 5,355Total liabilities 13,268 14,558Shareholders equity: Cumulative preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0 shares issued and outstanding at July 31, 2011 and 2010, respectively - - Junior preferred stock, par value $.001 per share, 100,000 shares authorized; 0 shares issued and outstanding at July 31, 2011 and 2010, respectively - - Common stock, par value $.001 per share, 25,000,000 shares authorized; 7,901,774 and 7,768,921 shares issued and outstanding at July 31, 2011 and 2010, respectively 8 8 Common stock warrants and options 1,092 983 Additional paid-in capital 95,834 95,748 Accumulated deficit (89,064) (91,507) Other accumulated comprehensive loss (39) (13)Total shareholders equity 7,831 5,219Total liabilities and shareholders equity $ 21,099 $ 19,777 See accompanying notes 38

ARI Network Services, Inc. Consolidated Statements of Income (Dollars in Thousands, Except per Share Data) 2011 2010Net revenue $ 21,334 $ 21,484Cost of revenue 4,407 4,353Gross profit 16,927 17,131Operating expenses: Sales and marketing 4,272 4,786 Customer operations and support 3,439 3,469 Software development and technical support (net of capitalized software product costs) 1,543 1,415 General and administrative 4,252 4,879 Restructuring - 437 Depreciation and amortization (exclusive of amortization of software product costs included in cost of revenue) 1,688 1,640Net operating expenses 15,194 16,626Operating income 1,733 505Other income (expense): Interest expense (790) (649) Gain on sale of a component of the business 433 - Other, net 25 19Total other income (expense) (332) (630)Income (loss) from continuing operations before provision for income tax 1,401 (125) Income tax benefit (expense) 1,017 1,294Income from continuing operations 2,418 1,169 Discontinued operations, net of tax 25 (392)Net income $ 2,443 $ 777Income from continuing operations per common share: Basic $ 0.31 $ 0.15 Diluted $ 0.31 $ 0.15Net income per common share: Basic $ 0.31 $ 0.10 Diluted $ 0.31 $ 0.10 See accompanying notes 39

ARI Network Services, Inc. Consolidated Statements of Shareholders Equity (Dollars in Thousands) Other Common Stock Accumulated Total Shares Issued Par Warrants & Paid-in Accumulated Comprehensive Shareholders and Outstanding Value Options Capital Deficit Income (Loss) EquityBalance July 31, 2009 7,693,510 $ 8 $ 816 $ 95,681 $ (92,284) $ (34) $ 4,187Stock-based compensation - - 167 - - - 167Issuance of common stock under company 401(k) plan 58,332 - - 52 - - 52Issuance of common stock under executive bonus plan 10,495 - - 10 - - 10Issuance of common stock under stock purchase plan 6,584 - - 5 - - 5 Subtotal 75,411 - 167 67 - - 234Net Income 777 777Foreign currency translation adjustments 21 21 Comprehensive income 798Balance July 31, 2010 7,768,921 $ 8 $ 983 $ 95,748 $ (91,507) $ (13) $ 5,219Stock-based compensation - - 109 - - - 109Issuance of common stock under company 401(k) plan 86,739 - - 60 - - 60Issuance of common stock under executive bonus plan 33,140 - - 20 - - 20Issuance of common stock under stock purchase plan 12,174 - - 5 - - 5Issuance of common stock from exercise of stock options 800 1 1 Subtotal 132,853 - 109 86 - - 195Net Income 2,443 2,443Foreign currency translation adjustments (26) (26) Comprehensive income 2,417Balance July 31, 2011 7,901,774 $ 8 $ 1,092 $ 95,834 $ (89,064) $ (39) $ 7,831Shareholders Equity includes cumulative preferred stock, par value $.001 per share, 1,000,000 shares authorized; 0 shares issued and outstanding for allperiods presented.Shareholders Equity includes junior preferred stock, par value $.001 per share, 100,000 shares authorized; 0 shares issued and outstanding for all periodspresented. See accompanying notes 40

ARI Network Services, Inc. Consolidated Statements of Cash Flows (Dollars in Thousands) 2011 2010Operating activitiesNet income $ 2,443 $ 777 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of software products 1,127 1,054 Impairment of software products - 189 Amortization of interest income related to present value of earnout (19) - Depreciation and other amortization 1,688 1,640 Loss on disposal of equipment - 10 Gain on disposal of a component of the business (433) - Loss on disposal of discontinued operations - 1 Provision for bad debt allowance 73 287 Deferred income taxes (1,084) (1,562) Stock based compensation related to stock options 109 167 Stock issued as contribution to 401(k) plan 60 52 Net change in assets and liabilities: Trade receivables 73 (301) Work in process (36) 10 Prepaid expenses and other (131) (160) Other long term assets (89) (4) Accounts payable 26 (288) Deferred revenue 49 (253) Accrued payroll and related liabilities (59) (87) Accrued taxes 46 (22) Other accrued liabilities (372) 114 Net cash provided by operating activities 3,471 1,624Investing activitiesPurchase of equipment, software and leasehold improvements (670) (541)Cash received from disposition of a component of the business 118 -Cash surrendered in disposal of discontinued operations - (10)Software developed for internal use (194) (99)Software development costs capitalized (1,547) (1,241) Net cash used in investing activities (2,293) (1,891)Financing activitiesBorrowings (repayments) under line of credit (780) 525Payments under long-term debt (5,000) (117)Borrowings under long-term debt 5,000 -Proceeds from capital lease obligations incurred - 300Payments of capital lease obligations (203) (163)Proceeds from issuance of common stock 6 5 Net cash provided by (used in) financing activities (977) 550Effect of foreign currency exchange rate changes on cash (5) 5Net change in cash and cash equivalents 196 288Cash and cash equivalents at beginning of period 938 650Cash and cash equivalents at end of period $ 1,134 $ 938Cash paid for interest $ 964 $ 474Cash paid for income taxes $ 10 $ 89Noncash investing and financing activitiesCapital lease obligations incurred for computer equipment $ 10 $ 170Accrued earn-out receivable related to disposition of a component of the business 384 -Net current liabilities related to disposition of a component of the business 50 -Net current assets and liabilities surrendered in sale of discontinued operations - 9Issuance of common stock related to payment of executive compensation 20 10 See accompanying notes 41

ARI Network Services, Inc. Notes to Consolidated Financial Statements1. Description of the Business and Significant Accounting PoliciesDescription of the BusinessARI Network Services, Inc. (“ARI”) provides technology-enabled solutions that help dealers, distributors and manufacturers worldwideincrease revenue and reduce costs. Our suite of products and services include: (i) electronic catalogs for publishing, viewing andinteracting with technical reference information about equipment; (ii) lead generation and management products and services designedto help dealers grow their businesses and increase profitability through efficient marketing of their products; and (iii) websites witheCommerce capabilities designed to generate sales through the sites and provide information to consumers in the dealers’ local areas.We deliver our products and services to companies of all sizes across a dozen vertical markets, with a core emphasis on the outdoorpower, power sports, marine, RV, and appliance sectors. We estimate that approximately 18,000 equipment dealers, 125 manufacturers,and 150 distributors worldwide leverage our technology to drive revenue, gain efficiencies and increase customer satisfaction.Our principal executive office and headquarters is located in Milwaukee, Wisconsin. The office address is 10850 West Park Place, Suite1200, Milwaukee, WI 53224, and our telephone number at that location is (414) 973-4300. Our principal website address iswww.arinet.com.Basis of PresentationThese consolidated financial statements include the financial statements of ARI and its wholly-owned subsidiaries. We eliminated allsignificant intercompany balances and transactions in consolidation. Any adjustments deemed necessary by management for a fairpresentation of all periods presented have been reflected as required by Regulation S-X, Rule 10-01, in the normal course of business.In fiscal 2009, ARI F&I Services, LLC (“AFIS”), a wholly-owned subsidiary of ARI, acquired Powersports Outsourcing Group. AFIS wassubsequently sold on July 27, 2010. The results of AFIS have been reported as a discontinued operation.Fiscal YearOur fiscal year ends on July 31. References to fiscal 2011, for example, refer to the fiscal year ending July 31, 2011, and references tofiscal 2010 refer to the fiscal year ending July 31, 2010.Foreign Currency TranslationThe functional currency of the Company’s subsidiary in the Netherlands is the Euro; accordingly, monetary assets and liabilities aretranslated into U.S. dollars at the rate of exchange existing at the end of the period, and non-monetary assets and liabilities are translatedinto U.S. dollars at historical exchange rates. Income and expense amounts, except for those related to assets translated at historicalrates, are translated at the weighted-average exchange rates during the period. Adjustments resulting from the re-measurement of thefinancial statements into the functional currency are charged or credited to comprehensive income (loss).Use of EstimatesThe preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”)requires management to make estimates and assumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates. The Company considers capitalization and amortization ofsoftware product costs, valuation of intangible assets, accruals for anticipated losses on projects, accruals for anticipated future earn-outreceipts related to the disposition of a component of the business, and the deferred tax valuation allowance to be significant estimatesthat are subject to change in the near term.Changes in Accounting EstimatesDuring fiscal 2011 and fiscal 2010, the Company had a change in its estimated valuation allowance related to deferred tax assets due toongoing revisions and evaluations of the estimated future expected results of operations and tax planning strategies. The differencebetween the amounts previously recorded as a valuation allowance and the amount currently recorded was charged to income tax 42

expense, as more fully discussed in Note 11. The amount of this change in accounting estimate was income of $1,967,000, or $0.25 perbasic and diluted common share in fiscal 2011, and $1,402,000, or $0.18 per basic and diluted common share, in fiscal 2010.ConcentrationsThe Company had no cash deposits in excess of the insurance coverage provided by the Federal Deposit Insurance Corporation (“FDIC”)as of July 31, 2011 that would be exposed to loss in the event of a nonperformance by the financial institution. The Company’s policy isto maintain cash in European bank accounts only to the extent required to cover day-to-day operating activities. Any excess Europeancash balances are transferred to our U.S. accounts on a periodic basis.No single customer accounted for 10% or more of ARI’s revenue in fiscal 2011 or fiscal 2010.Revenue RecognitionRevenue from software licenses, annual or periodic maintenance fees and catalog subscription fees, which are included in multipleelement arrangements, are all recognized ratably over the contractual term of the arrangement, as vendor specific objective evidencedoes not exist for these elements. ARI considers all arrangements with payment terms extending beyond twelve months not to be fixedor determinable and evaluates other arrangements with payment terms longer than normal to determine whether the arrangement isfixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer.Arrangements that include acceptance terms beyond the standard terms are not recognized until acceptance has occurred. Ifcollectability is not considered probable, revenue is recognized when the fee is collected.Revenue for use of the network and for information services is recognized on a straight-line basis over the period of the contract.Arrangements that include professional services are evaluated to determine whether those services are essential to the functionality ofother elements of the arrangement. Types of services that are considered essential to software license arrangements include customizingcomplex features and functionality in a product’s base software code or developing complex interfaces within a customer’s environment.When professional services are considered essential to software license arrangements, revenue under the arrangement is recognizedpursuant to contract accounting using the percentage-of-completion method with progress-to-completion measured based upon laborhours incurred. Professional services revenue for set-up and integration of hosted websites, or other services considered essential to thefunctionality of other elements of this type of arrangement, is amortized over the term of the contract. When professional services arenot considered essential, the revenue allocable to the professional services is recognized as the services are performed. When thecurrent estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract is made in theperiod the amount is determined.Revenue for variable transaction fees, primarily for use of the shopping cart feature of our websites, is recognized as it is earned.Amounts invoiced to customers prior to recognition as revenue as discussed above are reflected in the accompanying balance sheets asdeferred revenue.In conjunction with our acquisition of Channel Blade Technologies (“Channel Blade”), we incurred a deferred revenue liability ofapproximately $1,310,000 related to setup fees charged for hosted websites. The deferred revenue liability was amortized over theterms of the customer contracts, of which none is remaining as of July 31, 2011. Approximately $49,000 and $801,000 of the ChannelBlade deferred revenue was recognized during fiscal 2011 and fiscal 2010, respectively.Revenue received from shipping and handling fees is reflected in net revenue. Costs incurred for shipping and handling are reported incost of revenue.Cash and Cash EquivalentsWe consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.Our investment policy, as approved by the Board of Directors, is designed to provide preservation of capital, adequate liquidity to meetprojected cash requirements, optimum yields in relationship to risk, market conditions and tax considerations and minimum risk ofprincipal loss through diversified short and medium term investments. Eligible investments include direct obligations of the U.S.Treasury, obligations issued or guaranteed by the U.S. government, certain time deposits, certificates of deposits issued by commercialbanks, money market mutual funds, asset backed securities and municipal bonds. Our current investments include money marketmutual funds with terms not exceeding ninety days. 43

Trade Receivables, Credit Policy and Allowance for Doubtful AccountsTrade receivables are uncollateralized customer obligations due on normal trade terms, most of which require payment within 30 daysfrom the invoice date. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance adviceor, if unspecified, are applied to the earliest unpaid invoices.The carrying amount of trade receivables is reduced by an allowance that reflects management’s best estimate of the amounts that willnot be collected. Management individually reviews all receivable balances that exceed 90 days from the invoice date and, based on anassessment of current creditworthiness, estimates the portion of the balance that will not be collected. The allowance for potentialdoubtful accounts is reflected as an offset to trade receivables in the accompanying balance sheets.Sales TaxTaxes collected from customers and remitted to governmental authorities are presented on a net basis, excluding such amounts fromrevenue.Work in ProcessWork in process consists of billable professional services performed by the Company, for which revenue was recognized pursuant tocontract accounting primarily using the percentage-of-completion method with progress-to-completion measured based upon laborhours incurred, which have not been invoiced as of the end of the reporting period.Equipment and Leasehold ImprovementsEquipment and leasehold improvements are stated at cost. The Company developed tools for internal use related to the publication ofcatalog data which is included in computer equipment and software for internal use of $194,000 and $99,000 during fiscal 2011 and2010, respectively. Depreciation and amortization are computed under the straight-line method for financial reporting purposes andaccelerated methods for income tax purposes. Depreciation and amortization have been provided over the estimated useful lives of theassets as follows:Computer equipment 3 – 7 yearsLeasehold improvements 2 – 7 yearsFurniture and equipment 3 – 5 yearsLeasehold improvements are amortized over the useful lives of the assets or the term of the related lease agreement, whichever isshorter. During fiscal 2011 and fiscal 2010, the Company disposed of equipment and leasehold improvements with a cost basis of$371,000 and $1,220,000, respectively and recorded a loss on disposal of $0 and $10,000, respectively.Capitalized and Purchased Software Product CostsCertain software development and acquisition costs are capitalized when incurred. Capitalization of these costs begins upon theestablishment of technological feasibility. The establishment of technological feasibility and the on-going assessment of recoverability ofsoftware costs require considerable judgment by management with respect to certain external factors, including, but not limited to, thedetermination of technological feasibility, anticipated future gross revenues, estimated economic life and changes in software andhardware technologies.The annual amortization of software products is the greater of the amount computed using: (a) the ratio that current gross revenues forthe network or a software product bear to the total of current and anticipated future gross revenues for the network or a softwareproduct, or (b) the straight-line method over the estimated economic life of the product which currently runs from three to five years.Amortization starts when the product is available for general release to customers. All other software development and supportexpenditures are charged to expense in the period incurred.Capitalized Interest CostsCapitalized interest costs were immaterial as a whole to the financial statements in fiscal 2011 and 2010. 44

Capitalized Finance CostsThe Company had capitalized finance costs of approximately $84,000 during fiscal 2011 for closing costs associated with the loan andsecurity agreement between Fifth Third Bank and the Company, described in Notes 4 and 5. These amounts have been classified as otherlong-term assets on the Balance Sheet.Insurance Premiums ReceivableThe Company is the beneficiary of the total premiums it paid on a split-dollar life insurance policy at the death of the policy holder.Insurance premiums receivable are recorded at present value based on the average life expectancy of the policy holder and are includedin other long term assets. Insurance premiums receivable consisted of $69,000 and $63,000 at July 31, 2011 and 2010, respectively,which is the present value of future life insurance premiums receivable of approximately $237,000 discounted at an average rate of 9%and averaged over 14 to 16 years.Impairment of Long-Lived AssetsIn accordance with GAAP, long-lived assets, including capitalized software product costs, property and equipment, and amortizedintangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may notbe recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets,a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. Such analyses necessarilyinvolve judgment. We evaluated the ongoing value of our long-lived assets as of July 31, 2010 and incurred an impairment charge of$48,000 on capitalized software, with a cost basis of $208,000, which was disposed of, and an additional impairment charge of $141,000on assets that are still in use. These impairment charges are included in restructuring costs on the statement of income. We did not haveany events or changes in circumstances to warrant an impairment evaluation in fiscal 2011.Fair Value MeasurementsGAAP has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include Level1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted marketprices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or nomarket data exists, therefore, requiring an entity to develop its own assumptions. The asset’s or liability’s fair value measurement levelwithin the hierarchy is based on the lowest level of any input that is significant to the fair value measurement.We had no financial instruments measured at fair value on a recurring basis during fiscal 2011 and 2010.ARI measures non-financial instruments at fair value on a non-recurring basis as required by GAAP. Gains and losses on items which weremeasured at fair market value on a non-recurring basis were recognized in earnings. During fiscal 2011, we had no non-financialinstruments measured at fair value on a non-recurring basis. In fiscal 2010, we incurred a loss of $189,000 related to impairment ofcertain software products measured at fair value, based on the Company’s projection of anticipated future gross revenues for thenetwork or a software product, as follows (in thousands): 2011 2010 Fair value meas urements us ing: Level 1 inputs : quoted prices in active markets for identical as s ets $ - $ - Level 2 inputs : s ignificant other obs ervable inputs - - Level 3 inputs : s ignificant unobs ervable inputs - 2,395 Total fair value $ - $ 2,395 Total loss recognized $ - $ 189 45

GoodwillGAAP requires that we assess goodwill for impairment annually, or more frequently if circumstances warrant a review. Certain triggeringevents that may warrant a more frequent impairment test include a significant change in the business climate, legal factors, a decline inoperating performance, competition, sale or disposition of a significant portion of the business, or other factors. We tested for goodwillimpairment at July 31, 2011 and 2010.We test goodwill for impairment using a two-step process, as prescribed by GAAP. The first step of the test is used to identify potentialimpairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of areporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairmentloss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with thecarrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill,an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manneras the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assetsand liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit wasthe purchase price paid to acquire the reporting unit.We determined that there is a single reporting unit for the purpose of goodwill impairment tests. We estimate the fair value of thereporting unit using various valuation techniques, with the primary technique being a discounted cash flow analysis. There are manyestimates and assumptions involved in preparing a discounted cash flow analysis, including most significantly the weighted average costof capital (“WACC”) used to discount future cash flows, anticipated long-term growth rates, and future profit margins. Management usesits best efforts to reasonably estimate all of these and other inputs in the cash flow models utilized. We estimated future cash flowsusing two forecast scenarios and management used its best judgment to assign a weighting to each scenario. Step 1 of the goodwillimpairment test indicated that goodwill was not impaired in fiscal 2011 or fiscal 2010. As a result, step 2 of the test was not performed.Deferred Income TaxesThe tax effect of the temporary differences between the book and tax bases of assets and liabilities and the estimated tax benefit fromtax net operating losses is reported as deferred tax assets and liabilities in the balance sheet. An assessment of the likelihood that netdeferred tax assets will be realized from future taxable income is performed semi-annually or when events or changes in circumstancesindicate that there may be a change in the valuation allowance. Because the ultimate realizability of deferred tax assets is highly subjectto the outcome of future events, the amount established as valuation allowance is considered to be a significant estimate that is subjectto change in the near term. To the extent a valuation allowance is established or there is a change in the allowance during a period, thechange is reflected with a corresponding increase or decrease in the tax provision in the income statement.Stock-Based CompensationARI uses the Black-Scholes model to value stock options granted. Expected volatility is based on historical volatility of the Company’sstock. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual term of the options is based on the U.S. Treasury yields in effect at the time of grant. As stock-based compensation expense recognized in our results of operations is based on awards ultimately expected to vest, the amount hasbeen reduced for estimated forfeitures, which were estimated based on our historical experience.Advertising CostsAdvertising costs, which are included in sales and marketing expense on the statement of income, are expensed as incurred. Totaladvertising costs were $77,000 and $132,000 in fiscal 2011 and fiscal 2010, respectively.Comprehensive Income (Loss)Comprehensive income is a more inclusive financial reporting method that includes disclosure of financial information that historicallyhas not been recognized in the calculation of net income. We reported comprehensive income (loss), which includes net income andforeign currency translation adjustments, in the Consolidated Statements of Shareholders’ Equity for fiscal 2011 and fiscal 2010.Legal ProvisionsARI is periodically involved in legal proceedings arising from contracts, patents or other matters in the normal course of business. Wereserve for any material estimated losses if the outcome is probable, in accordance with GAAP. We had no legal provisions in fiscal 2011or fiscal 2010. 46

Recently Adopted Accounting StandardsIn October 2009, the Financial Accounting Standards Board (the “FASB”) amended guidance related to revenue recognition for softwarewith multiple elements that became effective for the Company beginning August 1, 2010. Under the new guidance on arrangements thatinclude software elements, tangible products that have software components that are essential to the functionality of the tangibleproduct will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now besubject to other relevant revenue recognition guidance. Additionally, the FASB amended guidance on revenue arrangements withmultiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendorspecific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of theselling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The newguidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amountof revenue recognition. The impact of adopting this new standard has not had a material impact on the Company’s consolidated financialstatements for fiscal 2011.New Accounting PronouncementsManagement has reviewed recently issued accounting pronouncements and believes there are no new pronouncements that would havea material impact on our present or future financial statements.2. Basic and Diluted Net Income per Common ShareBasic net income per common share is computed by dividing net income by the basic weighted average number of common sharesoutstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted averagenumber of common shares outstanding during the period and reflects the potential dilution that could occur if all of ARI’s outstandingstock options and warrants that are in the money were exercised (calculated using the treasury stock method).The following table is a reconciliation of basic and diluted net income per common share for fiscal 2011 and fiscal 2010 (in thousands,except per share data): 2011 2010 Income from continui ng opera tions $ 2,418 $ 1,169 Income (l os s ) from di s continued opera tions 25 (392) Net i ncome $ 2,443 $ 777 Wei ghted-a vera ge common s ha res outs tandi ng 7,855 7,751 Effect of di l utive s tock options a nd wa rra nts 56 15 Di l uted wei ghted-a vera ge common s ha res outs tandi ng 7,911 7,766 Ea rni ngs per s ha re - ba s i c: Income from continui ng opera tions $ 0.31 $ 0.15 Income (l os s ) from di s continued opera tions 0.00 (0.05) Net income $ 0.31 $ 0.10 Ea rni ngs per s ha re - di l uted: Income from continui ng opera tions $ 0.31 $ 0.15 Income (l os s ) from di s continued opera tions 0.00 (0.05) Net income $ 0.31 $ 0.10 Options a nd wa rra nts tha t coul d potentia l l y di l ute net i ncome per s ha re i n the future tha t a re not i ncl uded i n the computation of di l uted net i ncome per s ha re, a s thei r i mpa ct i s a nti-di l utive 923 1,504 47

3. Capitalized and Purchased Software Product CostsThe balance of capitalized and purchased software product costs consisted of the following (in thousands): Softwa re Accumul a ted Net Product Cos ts Amortiza tion Va l ue Ba l a nce 7/31/09 $ 14,886 $ (12,489) $ 2,397 Ca pi tal i zed cos ts 1,241 - 1,241 Di s pos a l s (208) 208 - Impa i rments - (189) (189) Amortiza tion expens e - (1,054) (1,054) Ba l a nce 7/31/10 15,919 (13,524) 2,395 Ca pi tal i zed cos ts 1,547 - 1,547 Di s pos a l s (773) 773 0 Amortiza tion expens e - (1,127) (1,127) Ba l a nce 7/31/11 $ 16,693 $ (13,878) $ 2,815The estimated aggregate amortization expense for each of the five succeeding fiscal years related to capitalized and purchased softwareproduct costs consist of the following at July 31, 2011 (in thousands): 2012 $ 1,240 2013 967 2014 411 2015 139 2016 58 $ 2,8154. Line of CreditOn July 9, 2004, we entered into a line of credit agreement with JPMorgan Chase, N.A. (the “Chase Line”) which, as amended, permittedus to borrow an amount equal to 80% of the book value of all eligible accounts receivable plus 45% of the value of all eligible openrenewal orders (provided the renewal rate was at least 85%) minus $75,000, up to $2,000,000. The agreement bore interest at 1% perannum above the prime rate plus an additional 3%, at the bank’s option, upon the occurrence of any default under the note. The interestrate was subject to a floor equal to the sum of (i) 2.5%; plus (ii) the quotient of: (a) the one month LIBOR rate divided by (b) one minusthe maximum aggregate reserve requirement imposed under Regulation D of the Board of Governors of the Federal Reserve System. Theagreement included a non-usage fee of 0.25% per annum on any unused portion of the line of credit and was secured by substantially allof the Company’s assets. The line of credit limited repurchases of common stock, the payment of dividends, liens on assets and newindebtedness. It also contained a financial covenant requiring us to maintain a minimum debt service coverage ratio of 1.2 to 1.0. TheChase Line was terminated effective July 27, 2011.On July 27, 2011, ARI entered into a Loan and Security Agreement (the “Agreement”) with Fifth Third Bank (“Fifth Third”), filed as exhibit10.1 on the Company’s Form 8-K on July 28, 2011. Pursuant to the terms of the Agreement, Fifth Third extended to the Company creditfacilities consisting of a $1,500,000 revolving credit facility (the “Revolving Loan”) and a $5,000,000 term loan facility (the “Term Loan”).Each of the credit facilities bears interest at a rate based on the one, two, three or six month LIBOR (as selected by the Company on thelast business day of each month) plus 4.0%, and matures on July 27, 2014. In connection with this Agreement, the Chase Line wasterminated. There was $245,000 outstanding and $1,255,000 available on the Revolving Loan as of July 31, 2011.The Agreement contains covenants that restrict, among other things and subject to certain conditions, the ability of the Company to incurnew debt, create liens on its assets, make certain investments, enter into merger transactions, issue capital securities (other thanemployee and director options, employee benefit plans, and other compensation programs), and make distributions to its shareholders. Financial covenants include a minimum fixed charge coverage ratio, as defined in the Agreement, of 1.2, and a senior leverage(maximum senior funded indebtedness to EBITDA) ratio, as defined in the Agreement, of 2.0. The Agreement also contains customaryevents of default which, if triggered, could result in an acceleration of the Company’s obligations under the Agreement. The CreditFacilities are secured by a first priority security interest in substantially all assets of the Company and by a first priority pledge of all 48

outstanding equity securities of each of the Company’s domestic subsidiaries and 65% of outstanding equity securities of the Company’sforeign subsidiaries.5. Long-term DebtOn April 27, 2009, we issued a $5,000,000 secured promissory note in connection with the acquisition of Channel Blade. The annualinterest rate on the note was 10% for the first year and 14% thereafter. Accrued interest only was due quarterly commencing July 31,2009 through April 30, 2011. Twenty equal quarterly payments of principal and interest were due, commencing August 1, 2011. On July27, 2011 we entered into a Loan and Security Agreement (described in Note 4) with Fifth Third Bank, the proceeds of which were used topay off the Channel Blade note in full on July 27, 2011.Long-term debt consisted of the following at July 31, 2011 and 2010 (in thousands): 2011 2010 Cha nnel Bl a de Technol ogi es $ - $ 5,000 Fi fth Thi rd Ba nk 5,000 - Tota l l ong-term debt 5,000 5,000 Les s current ma turi ti es (917) - Long-term debt, non-current $ 4,083 $ 5,000Principal and interest on the new Term Loan will be repaid in fixed monthly principal installments of $83,333 plus accrued but unpaidinterest on the unpaid principal balance commencing on September 1, 2011 through July 1, 2014, with a final balloon payment due July27, 2014. Mandatory prepayments of the Credit Facilities will be required in the amount of 50% of the Company’s excess cash flow forthe six-month periods ending January 31, 2012 and July 31, 2012 and for each fiscal year thereafter. Excess cash flow is defined as theremainder of net income plus interest, taxes, depreciation and amortization expense for such period, minus cash taxes paid, capitalexpenditures incurred, capitalized software costs and scheduled payments of principal and interest charges.Minimum principal payments due on the Term Loan are as follows for the fiscal years ending (in thousands): 2012 $ 917 2013 1,000 2014 3,083 $ 5,0006. Acquisitions and DivestituresOn July 27, 2010 we sold AFIS, an outsourced F&I business located in Schenectady, NY, to F&I Smart LLC in a membership interest saleagreement (the “Subject Interests”). The sales price of the Subject Interests is a contingent amount based on dealer revenue beginningJuly 28, 2010 and ending on August 28, 2013. We have not accrued for any future contingent proceeds as we are not able to estimate theamounts and have not received any payments as of July 31, 2011. We recognized a $1,000 loss on the sale of AFIS in the fourth quarterof fiscal 2010. Refer to Note 14 for further discussion of our discontinued operation.On April 27, 2009, we acquired substantially all of the assets of Channel Blade, the leading provider of websites, lead management andmarketing automation solutions in the marine and RV markets in an asset purchase agreement valued at approximately $6,700,000, paidin cash, common stock, assumed net liabilities and a $5,000,000 note payable. The purchase price of this acquisition was allocated tovarious assets and liabilities including $918,000 of software products costs amortized over 4.1 years, $2,712,000 of intangible assets,which are amortized over 5, 8 and 2 years and $3,243,000 of goodwill related to Channel Blade’s knowledge of and penetration into themarine and RV vertical markets. The Channel Blade operation has been fully integrated into our operations.On March 1, 2011, we entered into an Asset Purchase Agreement (the “Agreement”) with Globalrange Corporation (“Globalrange”).Under the terms of the Agreement, we sold to Globalrange certain rights and assets relating to our electronic data interchange businessfor the agricultural chemicals industry (the “AgChem EDI Business”). Because the AgChem EDI Business was not a separate entity orreportable segment, the transaction was recorded as a disposition of a component of an entity. 49

As part of the purchase price for the AgChem EDI Business, Globalrange agreed to assume certain liabilities of ARI relating to the AgChemEDI Business, primarily consisting of unearned revenues (as defined in the Agreement). Globalrange will make earn-out payments to ARIannually over a four-year period following the closing date, with an initial pre-payment of $80,000. The amounts of such earn-outpayments will be determined based on collections received by Globalrange relating to the AgChem EDI Business during such period, andwill be subject to a floor and cap, in accordance with the terms of the Agreement.The earn-out was recorded at fair value, which was estimated at $580,000 less an imputed discount of $97,000, based on the presentvalue of the estimated earn-out payments, discounted at 14%, which was the prevailing rate of interest charged on the Company’s debtat the time of disposition. Imputed interest is amortized to interest income over the life of the earn-out. We recorded a gain on thedisposition of the AgChem EDI Business of $433,000 or $0.05 per share before tax. The current portion of the earn-out is included inprepaid and other assets and the remaining balance of the estimated earn-out receivable, included in Other Long Term Assets, consistedof the following at July 31, 2011 (in thousands): 2011 Ea rnout Receiva ble $ 384 Les s current ma turities (190) Long Term Earnout Receivable $ 194Changes in the earn-out receivable during the fiscal year ended July 31, 2011 were as follows (in thousands): Ba la nce a t Ma rch 1, 2011 $ 483 Pa yments (118) Imputed interes t recognized 19 Balance at July 31, 2011 $ 384The estimated receipts related to the earn-out receivable for the years subsequent to July 31, 2011 are as follows (in thousands): Yea r Endi ng Jul y 31, 2012 $ 190 2013 138 2014 85 2015 49 Tota l Es ti ma ted Pa yments 462 Les s i mputed i nteres t (78) Pres ent va l ue of Ea rnout $ 3847. Other Intangible AssetsAmortizable intangible assets include customer relationships, trade names and employee non-compete agreements. Amortizableintangible assets are composed of the following at July 31, 2011 and 2010 (in thousands): Cus tomer Trade Non-Compete Relations hips Names Agreements Total Net value 7/31/09 $ 3,235 $ 239 $ 163 $ 3,637 Amortization (667) (50) (93) (810) Net value 7/31/10 2,568 189 70 2,827 Amortization (666) (50) (70) (786) Net value 7/31/11 $ 1,902 $ 139 $ - $ 2,041 Weighted average remaining useful life 5.05 2.75 - 4.89 50

The estimated amortization expense related to intangible assets for the years subsequent to July 31, 2011 is as follows (in thousands): 2012 $ 602 2013 335 2014 322 2015 284 2016 284 2017 214 $ 2,0418. Capital and Operating LeasesThe Company leases office space and certain office equipment under operating lease arrangements expiring through 2021. The Companyis generally liable for its share of increases in the landlord’s direct operating expenses and real estate taxes related to these leases. Totalrental expense for the operating leases was $602,000 in fiscal 2011 and $738,000 in fiscal 2010, respectively. An additional $99,000 and$114,000 was paid in fiscal 2011 and 2010, respectively, which was included in accrued restructuring related to closed offices.Where applicable, rent expense for leased offices is recognized on a straight-line basis over the lease terms, which differs from thepattern of payments required by the leases. Other accrued liabilities included $310,000 and $233,000 of deferred rent at July 31, 2011and 2010, respectively. As more fully discussed in Note 13, we recorded a restructuring liability for estimated net future lease costsassociated with closed offices. The remaining balance of this restructuring liability was $0 and $80,000 as of July 31, 2011 and 2010.ARI leases approximately 16,300 square feet of office space located at 10850 West Park Place, Milwaukee, Wisconsin 53224, whichcommenced on July 17, 2009 and expires on July 17, 2021. Over the twelve year lease agreement, annual base rent of $149,000increases approximately 2.9% per year. Rent abatement was negotiated for the first fifteen months totaling approximately $187,000.Annual projected operating costs and taxes, which are subject to change, are currently $8.65 per square foot.We have certain equipment and leasehold improvements with capital lease obligations of (in thousands): Fis cal Year Ending July 31: 2011 2010 Equipment and leas ehold improvements $ 812 $ 803 Les s : accumulated depreciation (1) 494 271 Total cos t of equipment and leas ehold improvements with outs tanding capital leas e obligations $ 318 $ 532 (1) amortization of leased equipment and leasehold improvements is included in depreciation and other amortizationMinimum lease payments under remaining capital and operating leases are as follows (in thousands): Capital Operating Fiscal Year Ending July 31: Leases Leases 2012 $ 158 $ 578 2013 164 612 2014 60 460 2015 - 352 2016 - 318 Thereafter - 1,673 Total minimum leas e payments 382 3,993 Les s amounts related to interes t 45 - Net minimum lease payments $ 337 $ 3,993 51

9. Shareholder Rights PlanOn August 7, 2003, we adopted a Shareholder Rights Plan designed to protect the interests of common shareholders from an inadequateor unfair takeover, but not affect a takeover proposal which the Board of Directors believes is fair to all shareholders. Under theShareholder Rights Plan adopted by the Board of Directors, all shareholders of record on August 18, 2003 received one Preferred SharePurchase Right for each share of common stock they owned. These Rights trade in tandem with the common stock until and unless theyare triggered. Should a person or group acquire more than 10% of ARI’s common stock (or if an existing holder of 10% or more of thecommon stock were to increase its position by more than 1%), the Rights would become exercisable for every shareholder except theacquirer that triggered the exercise. The Rights, if triggered, would give the rest of the shareholders the ability to purchase additionalstock of ARI at a substantial discount. The rights will expire on August 18, 2013, and can be redeemed by the Company for $0.01 perRight at any time prior to a person or group becoming a 10% shareholder.10. Stock-based Compensation PlansEmployee Stock Purchase PlanThe Company’s 2000 Employee Stock Purchase Plan, as amended, (“ESPP”) has 225,000 shares of common stock reserved for issuance,and 177,439 of the shares have been issued as of July 31, 2011. All employees with nine months of service are eligible to participate.Shares may be purchased at the end of a specified period at the lower of 85% of the market value at the beginning or end of the specifiedperiod through accumulation of payroll deductions, not to exceed 5,000 shares per employee per year.Stock Option PlansTotal stock compensation expense in fiscal 2011 and fiscal 2010 was approximately $109,000 and $167,000, respectively. As of July 31,2011 and 2010, there was approximately $87,000 and $134,000, respectively, of total unrecognized compensation cost related to non-vested options granted under the plans.The weighted average assumptions in the following table were used to estimate the fair value of options granted: 2011 2010 Expected life (yea rs ) 10 yea rs 10 yea rs Ris k-free interes t ra te 2.9% 3.6% Expected vola tility 104.3% 93.5% Expected forfeiture ra te 18.6% 16.0% Expected dividend yield 0.0% 0.0% 52

1991 Stock Option PlanOur 1991 Stock Option Plan (“1991 Plan”) was terminated on August 14, 2001, except as to outstanding options. All options outstandingunder the 1991 Plan expired as of September 7, 2010.Changes in option shares under the 1991 Plan are as follows: Wtd. Avg. Rema i ni ng Wtd. Avg. Contra ctua l Aggrega te Number of Exerci s e Peri od Ins tri ns i c Options Pri ce (Yea rs ) Va l ueOuts tandi ng a nd exerci s a bl e a t 7/31/09 35,500 $ 2.43 1.09 $ - Gra nted - n/a n/a n/a Exerci s ed - n/a n/a n/a Forfei ted (500) 9.06 n/a n/aOutstanding and exercisable at 7/31/10 35,000 $ 2.33 0.10 $ -Outs tandi ng a nd exerci s a bl e a t 7/31/10 35,000 $ 2.33 0.10 $ - Gra nted - n/a n/a n/a Exerci s ed - n/a n/a n/a Forfei ted (35,000) 2.33 n/a n/aOutstanding and exercisable at 7/31/11 - $ - - $ -The ra nge of exerci s e pri ces for options outs tandi ng under the 1991 Pl a n a t Jul y 31, 2010 wa s $2.06 to $2.44.1993 Director Stock Option PlanThe Company’s 1993 Director Stock Option Plan (“1993 Plan”) was terminated on August 14, 2001, except as to outstanding options. Alloptions outstanding under the 1993 Plan expired as of September 11, 2010.Changes in option shares under the Director Plan are as follows: Wtd. Avg. Rema i ni ng Wtd. Avg. Contra ctua l Aggrega te Number of Exerci s e Peri od Ins tri ns i c Options Pri ce (Yea rs ) Va l ue Outs tandi ng a nd exerci s a bl e a t 7/31/09 1,313 $ 2.65 0.97 $ - Gra nted - n/a n/a n/a Exerci s ed - n/a n/a n/a Forfei ted (563) 3.46 n/a n/a Outstanding and exercisable at 7/31/10 750 $ 2.05 0.08 $ - Outs tandi ng a nd exerci s a bl e a t 7/31/10 750 $ 2.05 0.08 $ - Gra nted - n/a n/a n/a Exerci s ed - n/a n/a n/a Forfei ted (750) 2.05 n/a n/a Outstanding and exercisable at 7/31/11 - $ - - $ - The ra nge of exerci s e pri ces for options outs tandi ng under the 1993 Pl a n a t Jul y 31, 2010 wa s $2.00 to $2.13. 53

2000 Stock Option PlanThe Company’s 2000 Stock Option Plan (“2000 Plan”) had 1,950,000 shares of common stock authorized for issuance. Each incentivestock option that was granted under the 2000 Plan is exercisable for a period of not more than ten years from the date of grant (fiveyears in the case of a participant who is a 10% shareholder of the Company, unless the stock options are nonqualified), or such shorterperiod as determined by the Compensation Committee, and shall lapse upon the expiration of said period, or earlier upon termination ofthe participant’s employment with the Company. The Company’s 2000 Stock Option Plan expired on December 13, 2010, at which time itwas terminated except for outstanding options. While options previously granted under the 2000 Plan will continue to be effectivethrough the remainder of their terms, no new options may be granted under the 2000 Plan.Changes in option shares under the 2000 Plan are as follows: Wtd. Avg. Rema i ni ng Wtd. Avg. Contra ctua l Aggrega te Number of Exerci s e Peri od Ins tri ns i c Options Pri ce (Yea rs ) Va l ue Outs tandi ng a t 7/31/09 1,213,402 $ 1.51 7.08 $ 21,337 Gra nted 210,250 0.82 n/a n/a Exerci s ed - n/a n/a n/a Forfei ted (153,671) 1.35 n/a n/a Outstanding at 7/31/10 1,269,981 $ 1.41 6.48 $ 13,319 Exercisable at 7/31/10 987,453 $ 1.51 5.82 $ 13,117 Outs tandi ng a t 7/31/10 1,269,981 $ 1.41 6.48 $ 13,319 Gra nted 146,100 0.64 n/a n/a Exerci s ed (800) 0.33 n/a n/a Forfei ted (178,948) 1.15 n/a n/a Outstanding at 7/31/11 1,236,333 $ 1.36 6.10 $ 34,041 Exercisable at 7/31/11 1,055,241 $ 1.47 5.63 $ 22,125 The wei ghted a vera ge fa i r ma rket pri ce of options gra nted for the twel ve months ended Jul y 31, 2010 a nd 2011 wa s $0.82 a nd $0.64, res pectivel y. The ra nge of exerci s e pri ces for options outs tandi ng under the 2000 Pl a n wa s $0.15 to $2.74 a t Jul y 31, 2011 a nd 2010, res pectivel y.Changes in non-vested option shares under the 2000 Plan are as follows: Number of Wtd. Avg. Options Exerci s e Pri ce Non-ves ted a t 7/31/09 341,776 $ 1.40 Gra nted 210,250 0.82 Ves ted (196,812) 1.27 Forfei ted (72,686) 1.23 Non-vested at 7/31/10 282,528 $ 1.09 Non-ves ted a t 7/31/10 282,528 $ 1.09 Gra nted 146,100 0.64 Ves ted (178,975) 1.13 Forfei ted (68,561) 0.93 Non-vested at 7/31/11 181,092 $ 0.75 The wei ghted a vera ge rema i ni ng ves ting peri od wa s 1.73 a nd 2.19 yea rs a t Jul y 31, 2011 a nd 2010, res pectivel y. 54

2010 Stock Option PlanThe Board of Directors adopted the ARI Network Services, Inc. 2010 Equity Incentive Plan (the “2010 Plan”) on November 9, 2010, and itwas approved by the Companys shareholders in December 2010. The 2010 Plan is the successor to the Company’s 2000 Plan.The 2010 Plan includes the following provisions:  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.Changes in option shares under the 2010 Plan during fiscal 2011 are as follows: Wtd. Avg. Remaining Wtd. Avg. Contractual Aggregate Number of Exercise Period Instrinsic Options Price (Years) Value Outstanding at 7/31/10 - $ - - $ - Granted 54,250 0.67 n/a n/a Exercised - n/a n/a n/a Forfeited - n/a n/a n/a Outstanding at 7/31/11 54,250 $ 0.67 9.64 $ 5,570 Exercisable at 7/31/11 21,313 $ 0.66 9.61 $ 2,221 The weighted average fair market price of options granted for the twelve months ended July 31, 2011 was $0.67. The range of exercise prices for options outstanding under the 2010 Plan at July 31, 2011 was $0.575 to $0.922. Number of Wtd. Avg. Options Exercise Price Non-vested at 7/31/10 - $ - Granted 54,250 0.67 Vested (21,313) 0.66 Forfeited - - Non-vested at 7/31/11 32,937 $ 0.67 The weighted average remaining vesting period was 1.53 years at July 31, 2011.Stock WarrantsOn April 24, 2003, in exchange for previously outstanding securities, we issued to a group of investors warrants for 250,000 commonshares, exercisable at $1.00 per share that expired on December 21, 2010. 55

11. Income TaxesThe provision for income taxes is composed of the following (in thousands): 2011 2010 Current: Federal $ (25) $ - State (39) (6) Change in the beginning deferred tax as s et valuation allowance 1,967 1,402 Deferred, net (886) (102) Income tax (benefit) expens e from continuing operations $ 1,017 $ 1,294 Income tax benefit from dis continued operations $ (15) $ 262Provision for income taxes is based on taxes payable under currently enacted tax laws and an analysis of temporary differences betweenthe book and tax bases of our assets and liabilities, including various accruals, allowances, depreciation and amortization. The tax effectof these temporary differences and the estimated tax benefit from tax net operating losses are reported as deferred tax assets andliabilities in the balance sheet. An assessment of the likelihood that net deferred tax assets will be realized from future taxable income isperformed. To the extent that management believes it is more likely than not that some portion, or all, of the deferred tax asset will notbe realized, a valuation allowance is established. This assessment is based on all available evidence, both positive and negative, inevaluating the likelihood of realizability. Issues considered in the assessment include future reversals of existing taxable temporarydifferences, estimates of future taxable income (exclusive of reversing temporary differences and carryforwards) and prudent taxplanning strategies available in future periods. Because ultimately the realizability of deferred tax assets is highly subject to the outcomeof future events, the amount established as valuation allowances is considered to be a significant estimate that is subject to change in thenear term. To the extent a valuation allowance is established or there is a change in the allowance during a period, the change isreflected with a corresponding increase or decrease in the tax provision in the statement of operations.In fiscal 2010 we had a change in our estimated valuation allowance. This change resulted from an extension of the number of yearsused in the forecast to determine net operating loss utilization. Prior to fiscal 2010, in determining the amount of net operating losscarryforwards that would be utilized, we projected our taxable income for twelve quarters, with the assumption that any forecast beyondthree years was not meaningful. In fiscal 2010, we determined that we were in a position to forecast taxable income for the remaininglife of our current net operating loss carryforwards, which resulted in a gain of approximately $1,402,000, or $0.18 per basic and dilutedcommon share, for the following reasons:  We had experienced six consecutive profitable years of operations, while at the same time integrating four acquisitions. Although we incurred a taxable loss in fiscal 2010, those losses were primarily due to the results of our discontinued operation as well as one-time restructuring costs that were not expected to continue.  We continued to grow both organically and through acquisitions and were at a stage where our operating structure and costs were more sustainable.  We established a strategic plan to focus on our core offerings: electronic catalogs, websites and lead management services. This plan encompassed the discontinuation of several products and the sale of a non-strategic and underperforming subsidiary, thereby reducing our cost structure. This strategic plan has provided more stability going forward.We performed an assessment of the likelihood that the remaining net operating loss carryforwards ("NOLs") included in our net deferredtax assets will be realized from future taxable income as of July 31, 2011, which resulted in a change in estimate of $1,967,000, or $0.25per basic and diluted common share, for the following reasons:  As a result of our strategic plan to focus on our core offerings and improve operating efficiencies throughout the organization, we experienced an improvement in our forecasted US net income before taxes. 56

 In fiscal 2011, we elected to do a change in accounting method related to the tax treatment of capitalized software product costs, which defers the expense over future periods, allowing us to have a higher US taxable income in earlier periods in order to utilize the NOLs that are due to expire over the next few years.  In fiscal 2011, we elected to recognize the gain on the disposition of a portion of the business for tax purposes, versus amortizing the gain over future periods, allowing us to have a higher US taxable income in earlier periods in order to utilize the NOLs that are due to expire over the next few years.Significant components of our deferred tax liabilities and assets as of July 31 were as follows (in thousands): 2011 2010 Deferred tax a s s ets : Net opera ting l os s ca rryforwa rds $ 5,278 $ 6,808 Al terna tive mi ni mum tax credi t ca rryforwa rds 104 85 Deferred revenue 1,729 1,918 Softwa re product cos ts 46 214 Intangi bl e a s s ets 345 233 R&D credi t ca rryforwa rd - - Other 885 1,074 Total deferred tax a s s ets 8,387 10,332 Va l ua tion a l l owa nce for deferred tax a s s ets (2,720) (5,657) Net deferred tax a s s ets 5,667 4,675 Deferred tax l i a bi l i ties : Softwa re product cos ts a nd other (117) (297) Goodwi l l (250) (162) Net deferred taxes $ 5,300 $ 4,216A reconciliation between income tax expense and income taxes computed by applying the statutory federal income tax rate of 34% andthe state rate of approximately 3% to U.S. based income before income taxes is as follows (in thousands): 2011 2010 Computed i ncome ta xes a t 37% $ (570) $ (14) Perma nent i tems (78) (91) Cha nge i n es ti ma ted va l ua ti on a l l owa nce 1,967 1,402 Effecti ve ra te a djus tment (344) - Other 41 (3) Income ta x expens e (benefi t) from conti nui ng opera ti ons $ 1,017 $ 1,294 Income ta x benefi t from di s conti nued opera ti ons $ (15) $ 262 57

During fiscal 2011 and fiscal 2010, $2,266,000 and $4,231,000, respectively, of federal net operating loss carryforwards expired. Theseexpired net operating loss carryforwards have been included in the calculation of the change in valuation allowance. As of July 31, 2011,we had accumulated net operating loss carryforwards for federal and state tax purposes of approximately $14,246,000 and $8,326,000,respectively, which expire as follows: Year ended July 31, Federal State 2012 $ 3,664 $ 2,665 2013 2,746 1,841 2014 - 482 2015 - 3,258 2019 843 4 2020 6,043 - 2024 4 - 2025 - 75 2030 946 - $ 14,246 $ 8,326Of these unused federal net operating loss carryforwards, $2,038,000 expire between 2012 and 2014 and are limited to $116,000annually that can be utilized to offset taxable income. Use of these net operating loss carryforwards is restricted under Section 382 of theCode because of changes in ownership in 1997.We perform an evaluation of uncertain tax positions as a component of income tax expense on an annual basis. We determined that ARIdid not have any significant risk related to income tax expense and therefore no amounts were reserved for uncertain tax positions as ofJuly 31, 2011 and 2010. We will accrue and recognize interest and penalties related to uncertain tax positions as a component of incometax expense if it becomes necessary. Fiscal years subsequent to 2007 remain open and subject to examination by state tax jurisdictionsand the United States federal tax authorities.12. Employee Benefit PlanARI has a qualified retirement savings plan (the “401(k) Plan”) covering its employees. Each employee may elect to reduce his or hercurrent compensation by up to 50%, up to a maximum of $16,500 ($22,000 over age 50) in both calendar years 2011 and 2010 (subject toadjustment in future years) and have the amount of the reduction contributed to the 401(k) Plan. Company contributions to the 401(k)Plan are at the discretion of the Board of Directors. During fiscal 2011 and fiscal 2010, we issued 86,739 and 58,332 shares of commonstock, respectively, as a discretionary contribution to the 401(k) Plan. The amounts charged to expense for the 401(k) contributions, netof forfeitures, were $60,000 and $52,000 for the fiscal years 2011 and 2010, respectively.13. RestructuringIn July 2008 ARI announced a restructuring that consolidated our data conversion operations in Virginia into our Wisconsin location andconsolidated our software development operations in Colorado into our California location. Adjustments were made to the restructuringreserve during fiscal 2011 and fiscal 2010 to reflect changes to our assumptions regarding our ability to sublet the vacant office space inColorado and the present value of the net future lease costs through March 2011. The following represents changes to the restructuringreserve, which is included in other accrued liabilities on the balance sheet (in thousands): 2011 2010 Begi nni ng Ba l a nce $ 80 $ 93 Pa yments (99) (114) Adjus tments to res tructuri ng cha rges 19 101 Endi ng Ba l a nce $ - $ 80In July 2010, in an effort to focus on our core business, which includes electronic catalogs, websites, and lead management services, weundertook a workforce reduction and business improvement initiative, which included the divestiture of AFIS and the write off of certain 58

components of capitalized software related to products no longer in use or with limited future cash flows that are no longer considered apart of our core operation.The following represents restructuring charges incurred in fiscal 2010 from continuing operations (in thousands): Severance and related benefits $ 147 Software impairments 189 Total restructuring costs $ 336The accrued severance and related restructuring reserve from continuing operations, which was included in accrued payroll and relatedliabilities on the balance sheet, was $147,000 as of July 31, 2010 and was fully paid during fiscal 2011.The following represents the restructuring charges incurred in fiscal 2010 with respect to the AFIS divestiture, which were included indiscontinued operations (in thousands): Severance and related benefits $ 27 Other accrued liabilities 83 Total restructuring costs $ 110Changes to the accrued restructuring from discontinued operations, which was included in other accrued liabilities on the balance sheet,consisted of vendor payments and adjustments related to the settlement of estimated vendor and payroll related liabilities as follows (inthousands): 2011 Begi nni ng Ba l a nce $ 110 Pa yments (51) Adjus tments to res tructuri ng cha rges (59) Endi ng Ba l a nce $ -14. Discontinued OperationsOn July 27, 2010, we divested AFIS, which offered dealer F&I services. The divestiture resulted in a loss from discontinued operations of$1,000. During fiscal 2011, we recorded a gain of $24,000 net of income tax related to the settlement of an accrued liability for vendorservices. The results of operations of AFIS have been reflected as a discontinued operation in our consolidated financial statements forall periods presented. The results of operations of AFIS were previously reported within the United States business segment. 2011 2010 Revenues $ - $ 136 Cos t of s a les - 13 Opera ting expens es - 776 Opera ting los s - (653) Ga in (los s ) on s a le 40 (1) Income ta x benefit (provis ion) (1) (15) 262 Net gain (loss) $ 25 $ (392) (1) Net of recorded deferred income ta x a s s et va lua tion a llowa nce 59

15. Business SegmentsOur business segments are internally organized by geographic location of the operating facilities. In accordance with GAAP regardingdisclosures about business segments, we have segregated the Netherlands operation and the United States operations into separatereportable segments. Segment revenue for the Netherlands operation includes only revenue generated out of the Netherlandssubsidiary and does not include revenue sold to foreign countries by the United States operation. We evaluate the performance of andallocate resources to each of the segments based on their operating results.Information concerning our operating business segments for fiscal 2011 and fiscal 2010 is as follows (in thousands): Revenue from continui ng opera tions : 2011 2010 Netherl a nds $ 799 $ 689 Uni ted States 20,535 20,795 Cons ol i da ted $ 21,334 $ 21,484 Net i ncome (l os s ) from continui ng opera tions : 2011 2010 Netherl a nds $ (114) $ (159) Uni ted States 2,532 1,328 Cons ol i da ted $ 2,418 $ 1,169 July 31 July 31 Total As s ets 2011 2010 Netherl a nds $ 342 $ 328 Uni ted States 20,757 19,449 Cons ol i da ted $ 21,099 $ 19,77716. Related PartyBriggs & Stratton Corporation (“Briggs”) is one of our customers and owns approximately 10% of ARI stock. Briggs has entered intocustomer contracts with us and has provided vendor services to us in the ordinary course of business. Generally, the customer contractsare for one to three years and renew annually thereafter unless either party elects otherwise. We invoiced Briggs approximately$370,000 and $371,000 for products and services provided during fiscal 2011 and fiscal 2010, respectively. Briggs had unpaid net tradereceivables of $18,000, or 1%, and $15,000, or 1%, of total trade receivables outstanding as of July 31, 2011 and 2010, respectively, $0 ofwhich was over 90 days at July 31, 2011 or 2010.The vendor services provided by Briggs are for printing of materials which are generally resold to customers and included in cost of sales.Briggs invoiced us approximately $33,000 and $55,000 for printing services during fiscal 2011 and fiscal 2010, respectively, $0 and $2,000of which were unpaid as of July 31, 2011 and 2010.Gordon J. Bridge serves on our board of directors. He was assigned by the board to be the lead Director of AFIS, for which he was paid$57,050 in fiscal 2010. There were no unpaid expenses at July 31, 2011 or 2010.17. LitigationNone.18. Subsequent EventsWe evaluated whether any events or transactions occurred after the balance sheet date that would require recognition or disclosure inour financial statements in accordance with GAAP, and determined that there were no events that occurred after July 31, 2011, but priorto October 31, 2011 that would affect the financial statements for the period ending July 31, 2011. 60

ARI NETWORK SERVICES, INC. 10850 West Park Place, Suite 1200 Milwaukee, Wisconsin 53224 _______________ NOTICE OF ANNUAL MEETING OF SHAREHOLDERSDecember 20, 2011To the Shareholders of ARI Network Services, Inc.:The 2011 Annual Meeting of Shareholders of ARI Network Services, Inc. (the “Company”) will be held at the Company’s headquarterslocated at 10850 West Park Place, Suite 1200, Milwaukee, Wisconsin, on Tuesday, December 20, 2011, at 9:00 a.m., local time, for thefollowing purposes: 1. To elect three directors nominated by the Company’s Board of Directors to serve until 2014 and until their successors are elected and qualified; 2. To ratify the appointment of Wipfli LLP as the Company’s independent auditors for the Company’s fiscal year ending July 31, 2012; and 3. To transact such other business as may properly come before the meeting.Shareholders of record at the close of business on October 19, 2011 are entitled to notice of and to vote at the meeting and at alladjournments thereof.Holders of a majority of the outstanding shares must be present in person or by proxy in order for the meeting to be held.Shareholders are urged to vote by completing and returning the accompanying proxy in the enclosed envelope, by a telephone vote orby voting electronically via the internet, whether or not they expect to attend the annual meeting in person. Instructions fortelephonic and electronic voting are contained in the accompanying proxy. If you attend the meeting and wish to vote your sharespersonally, you may do so by revoking your proxy at any time prior to the voting thereof. In addition, you may revoke your proxy atany time before it is voted by advising the Secretary of the Company in writing (including executing a later dated proxy or voting viathe Internet) or by telephone of such revocation.If your shares are held in “street name” (through a broker, bank or other nominee), you may receive a separate voting instruction withthis proxy statement, or you may need to contact your broker, bank, or other nominee to determine whether you will be able to votetelephonically, electronically using the Internet, or what is required to vote your shares in person at the annual meeting. By order of the Board of Directors, Darin R. Janecek, Secretary November 2, 2011 60

ARI NETWORK SERVICES, INC. 10850 West Park Place, Suite 1200 Milwaukee, Wisconsin 53224 (414) 973-4300 PROXY STATEMENTThe Board of Directors of ARI Network Services, Inc. (the “Company”) submits the enclosed proxy for the annual meeting to beheld on the date, at the time and place and for the purposes set forth in the accompanying Notice of Annual Meeting ofShareholders. Each shareholder of record at the close of business on October 19, 2011 will be entitled to one vote for eachshare of Common Stock registered in such shareholder’s name. As of October 19, 2011, the Company had outstanding7,987,944 shares of common stock, par value $0.001 (the “Common Stock”). The presence, in person or by proxy, of a majorityof the shares of Common Stock outstanding on the record date is required for a quorum at the meeting. This proxy statementand the accompanying proxy and Annual Report to Shareholders are being sent to the Company’s shareholders commencing onor about November 9, 2011.Any shareholder executing and delivering the enclosed proxy may revoke the same at any time before it is voted by advising theSecretary of the Company in writing of such revocation (including executing a later-dated proxy) or by voting via the Internet orby telephone.Unless otherwise directed, all proxies will be voted as follows:  FOR the election of the three individuals nominated by the Company’s Board of Directors to serve as directors; and  FOR the ratification of the appointment of Wipfli LLP as the Company’s independent auditors for the Company’s fiscal year ending July 31, 2012.Under the Company’s Amended and Restated By-Laws, directors are elected by a plurality of votes cast at the meeting(assuming a quorum is present). In other words, the nominees receiving the largest number of votes will be elected. Anyshares not voted, whether by withheld authority, broker non-vote or otherwise, will have no effect on the election ofdirectors except to the extent that a failure to vote for an individual results in another individual receiving a larger number ofvotes. Any votes attempted to be cast “against” a candidate are not given legal effect and are not counted as votes cast inan election of directors. The other proposal will be approved if the affirmative votes exceed the votes cast against. Brokernon-votes and abstentions are counted for purposes of determining whether a quorum is present at the meeting but are notaffirmative votes or votes against and, therefore, will have no effect on the outcome of the voting. IMPORTANT NOTICE REGARDING THE INTERNET AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON DECEMBER 20, 2011The Company’s Annual Report to Shareholders, including this proxy statement, is available at www.proxyvote.com. 61

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSThe following table sets forth certain information regarding the beneficial ownership of shares of Common Stock by eachperson known by the Company to beneficially own 5% or more of the Common Stock, by each director or nominee of theCompany, by certain executive officers of the Company, and by all directors and executive officers of the Company as a groupas of October 19, 2011 (unless otherwise indicated). The address for each of the persons listed below is 10850 West Park Place,Suite 1200, Milwaukee, Wisconsin 53224, unless otherwise specified. Amount and Nature of Name and Address of Beneficial Owners Beneficial Ownership (1) Percent Briggs & Stratton Corporation (2) 12301 West Wirth Street Milwaukee, WI 53201 840,000 9.52% Peter H. Kamin (3) One Avery Street, 17B Boston, MA 02111 671,650 7.61% Douglas M. Singer (4) 9833 East Dreyfus Avenue Scottsdale, AZ 85260 600,000 6.80% Michael Sifen (5) 500 Central Drive, Suite 106 Virginia Beach, VA 23454 498,461 5.65% Roy W. Olivier (6) 982,799 11.14% Brian E. Dearing (7) 383,792 4.35% Gordon J. Bridge 213,653 2.42% Ted C. Feierstein 93,933 1.06% William C. Mortimore 81,375 * Darin R. Janecek 34,785 * P. Lee Poseidon 32,710 * Michael T. Tenpas (8) 31,237 * Jon Lintvet 15,849 * All current executive officers and directors as a group (8 persons) 20.84% --------------------------------------------------------------------------------------------------------------- * less than 1% 62

(1) Except as otherwise noted, the persons named in the above table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Includes options exercisable within 60 days of October 19, 2011 as follows: Mr. Olivier (350,000 shares), Mr. Janecek (28,750 shares), Mr. Dearing (111,833 shares), Mr. Tenpas (0 shares), Mr. Bridge (131,785 shares), Mr. Feierstein (93,933 shares), Mr. Mortimore (81,375 shares), Mr. Poseidon (25,000 shares), and all executive officers and directors as a group (822,676 shares).(2) Stock ownership information is provided as of March 16, 2000 based upon Schedule 13D amendment filed April 3, 2000.(3) Stock ownership information is provided as of December 31, 2011 based upon Schedule 13G amendment filed February 10, 2011. Mr. Kamin’s total includes 151,900 shares held by the Peter H. Kamin Children’s Trust, 125,840 shares held by the Peter H. Kamin Profit Sharing Plan, 30,700 shares held by the Peter H. Kamin Family Foundation and 35,970 shares held by 3K Limited Partnership.(4) Stock ownership information is provided as of March 23, 2010 based upon Schedule 13D amendment filed March 29, 2010.(5) Stock ownership information is based on stock certificates transferred by the Company’s stock transfer agent on October 17, 2011 related to shares acquired by Channel Blade Technologies Corporation (“Channel Blade”) on April 27, 2009 in connection with the Company’s acquisition of substantially all of the assets of Channel Blade.(5) Stock ownership information is provided as of March 23, 2010 based upon Schedule 13D amendment filed March 29, 2010.(6) Mr. Olivier’s total includes 606,162 shares held in the Company’s 401(k) plan, of which Mr. Olivier is a trustee with voting power. Mr. Olivier disclaims any beneficial ownership in these shares in excess of his pecuniary interest (13,246 shares).(7) Mr. Dearing’s total includes 73,860 shares which are held in family trust.(8) Mr. Tenpas, formerly the Company’s Vice President of Global Sales and Marketing, resigned his position effective June 17, 2011. PROPOSAL ONE: ELECTION OF DIRECTORSThe Company’s directors are divided into three classes, with staggered terms of three years each. At the annual meeting,shareholders will vote on the election of three directors nominated by the Company’s Board of Directors to serve until 2014and until their successors are elected and qualified. Nominees for Election to Serve Until the Annual Meeting in 2014Brian E. Dearing, age 56; Mr. Dearing is the Chairman of the Board of the Company. He has been a director since 1995 and waselected Chairman of the Board of Directors in 1997. He served as President and CEO from 1995 to 2008, and as Chief CorporateDevelopment and Strategy Officer from 2008 until May 2011. He has also served as Chief Financial Officer, Treasurer, andSecretary for several interim periods, including most of fiscal year 2008, part of fiscal 2009 and all of fiscal 2010. He currentlyoperates a consulting practice providing outsourced corporate development services to middle market companies. Prior tojoining ARI in 1995, Mr. Dearing held a series of electronic commerce executive positions at Sterling Software, Inc. in the U.S.and in Europe. Prior to joining Sterling in 1990, Mr. Dearing held a number of marketing management positions in the EDIbusiness of General Electric Information Services since 1986. Mr. Dearing holds a Masters Degree in Industrial Administrationfrom Krannert School of Management at Purdue University and a B.A. in Political Science from Union College.The Board of Directors believes that Mr. Dearing’s experience with ARI in various leadership positions, including his service asChairman of the Board, his experience as the Company’s former Chief Executive Officer, and his long tenure with the Company,gives him unique insights into the Company’s challenges, opportunities and operations. This experience, along with hisextensive business background and financial expertise, make him a valuable member of the Board of Directors.Roy W. Olivier, age 52; Mr. Olivier joined the Company in September 2006 as Vice President of Global Sales and Marketing andwas appointed as President and CEO in May 2008. He has been a director since 2008. Before joining ARI, Mr. Olivier was aconsultant to start-up, small and medium-sized businesses. Prior to that, he was Vice President of Sales and Marketing for 63

ProQuest Media Solutions, a business he founded in 1993 and sold to ProQuest in 2000. Before that, Mr. Olivier held varioussales and marketing executive and managerial positions with several other companies in the telecommunications and computerindustries, including Multicom Publishing Inc., BusinessLand and PacTel.The Board of Directors believes that Mr. Olivier’s experience with the Company as its President, Chief Executive Officer, anddirector, as well as his prior experience as the Company’s Vice President of Global Sales and Marketing, as well as his otherbusiness and industry background, has given him substantial and valuable knowledge of all aspects of the Company’s business.P. Lee Poseidon, age 56; of Ohio was appointed to the Board of Directors in June of 2008 and has been a member of the AuditCommittee since 2009. Mr. Poseidon’s business experience includes Chief Operating Officer at Quorum InformationTechnologies and at the National Automobile Dealers Association. From 2001 to 2003, he served as Senior Vice President andGeneral Manager of ProQuest’s Global Automotive business unit. Prior to joining ProQuest, Mr. Poseidon spent 15 years in aseries of executive positions in marketing, business development, product management and strategic planning at The Reynoldsand Reynolds Company. His early career included financial analysis and management positions at NCR Corporation. Mr.Poseidon earned his MBA from Xavier University and his B.A. from Ohio Wesleyan University.The Board of Directors believes that it benefits from Mr. Poseidon’s extensive management, business and industry experiencewhich he has obtained through his positions with a number of technology, publishing, manufacturing, distribution, andprofessional services businesses. In addition, Mr. Poseidon’s experience as a director of the Company, and as a member of theAudit Committee and Compensation Committee, has provided him with a deep understanding of the business of the Companyand makes him a valuable member of the Board of Directors. Directors Whose Term Expires at the Annual Meeting in 2012Gordon J. Bridge, age 69; Mr. Bridge, a director since December 1995, is a retired Information Industry senior executive. FromJanuary 2004 to September 2006, Mr. Bridge was president, and from May 2005 to September 2006 was Chief Executive Officerof CM IT Solutions, a nationwide franchise system providing information technology consulting and support services to smalland medium sized businesses. From December 1999 to August 2001, Mr. Bridge was Chairman of the Board and ChiefExecutive Officer of SurferNETWORK. From November 1995 to January 2000, Mr. Bridge was Chairman of the Board and fromApril 1997 to March 1998 was also Chief Executive Officer of ConnectInc.com, an enterprise software company. Mr. Bridge heldvarious senior executive management positions with AT&T from 1988 to 1995, including president of three business units:Consumer Interactive Services, EasyLink Services and Computer Systems. Prior to joining AT&T, Mr. Bridge was with the IBMCorporation for nearly 23 years, holding the positions of Vice President of Sales and Vice President of Marketing for the U.S.National Accounts Division in the mid 1980s. Mr. Bridge holds a B.S. in Mathematics from Bradley University.The Board of Directors believes that it benefits from Mr. Bridge’s years of executive management experience as a seniorexecutive at several large and small companies and in his current role as an independent consultant. Mr. Bridge’s strongleadership experience, his extensive knowledge in the field of information technology and his long tenure as a director alsoprovide valuable experience and insight to the Board of Directors.Ted C. Feierstein, age 54; Mr. Feierstein, a director since January 2000, is a founding partner in PrimeMetrix, a financialadvisory and consulting company for lean technology companies. Prior to that he was a senior technology banker at FirstAnalysis Securities Corporation, and a partner in Ascent Partners, a merchant bank specializing in investments, mergers andacquisitions, and strategic assistance for Internet, software and information technology-focused professional servicecompanies. Mr. Feierstein is also a founding partner of Prism Capital, a private equity fund. Prior to co-founding Ascent, Mr.Feierstein was a senior vice-president with the Corum Group, a firm specializing in merger and acquisition advisory services tothe software industry, and was a venture capitalist with Wind Point Partners, a private equity fund. Mr. Feierstein received anMBA from the Harvard Business School in 1989 and a BBA from the University of Wisconsin-Madison in 1979.The Board of Directors believes that it benefits from Mr. Feierstein’s significant expertise in the areas of finance, investmentbanking, mergers and acquisitions, venture capital and private equity services. In addition, Mr. Feierstein’s extensiveexperience as a director of the Company, as well as his experience as a member of the Compensation Committee, haveprovided him with a deep understanding of the business of the Company and make him a valuable member of the Board ofDirectors. 64

Director Whose Term Expires at the Annual Meeting in 2013William C. Mortimore, age 66; Mr. Mortimore, a director since 2004, has been on the Audit Committee since 2004 and hasbeen the Audit Committee Chair since 2007. Mr. Mortimore was the founder of Merge Technologies Incorporated (“MTI”),President and Chief Executive Officer from November 1987 through August 2000, Chief Strategist from September 2000 untilJuly 2006, Chairman of the Board from September 2000 until May 2006, Interim Chief Executive Officer from May 2006 untilJuly 2006, and a member of the Board of Directors since its inception in November 1987 until July 2006. MTI is a globalhealthcare software and services company that trades on the Nasdaq National Market under the symbol MRGE. Mr.Mortimore has served as co-founder and a senior manager of several businesses in the fields of information communicationstechnology, healthcare services and real estate and has been responsible for securing public and private financing for theseorganizations. Mr. Mortimore is an original member of the American College of Radiology/National Association of ElectricalManufacturers committee responsible for establishing and maintaining the DICOM medical imaging standard. Mr. Mortimorehas also served as a member of the Board of Directors of MRI Devices, Inc., a privately held diagnostic imaging manufacturer,from November 2002 until its sale to Intermagnetics General Corporation in mid 2004. Mr. Mortimore received a B.S. inElectrical Engineering from Michigan State University, an M.E.E. from the University of Minnesota and pursued doctoral studiesin Electrical Engineering at the University of Minnesota.The Board of Directors believes that it benefits from Mr. Mortimore’s substantial technical and management experience, whichhe has obtained through his positions with various healthcare and information technology companies, as well as publiccompany leadership and shareholder value growth experience. In addition, Mr. Mortimore’s experience as a director of theCompany, Chairman of the Audit Committee and the “audit committee financial expert,” has provided him with an in-depthunderstanding of the business of the Company and the markets in which it competes. CORPORATE GOVERNANCEThe Board of Directors held 17 meetings in fiscal 2011. Each director attended 75 percent or more of the combined number ofmeetings of the Board and of the committees on which such director served. While the Company has not adopted a formalpolicy requiring Board members to attend the annual meeting, all directors are encouraged to attend. All of the Company’sdirectors who were members of the Board of Directors on the date of the 2010 annual meeting of shareholders attended themeeting.The positions of Chairman of the Board and Chief Executive Officer of the Company are currently separate, with Mr. Dearingserving as Chairman of the Board and Mr. Olivier serving as President and Chief Executive Officer. The Company believes thisleadership structure is appropriate at this time because it allows the Company to fully benefit from the leadership ability,industry experience and history with the Company that each of these individuals possesses.The Board of Directors currently does not have a formal process for shareholders to send communications to the Board ofDirectors. Nevertheless, efforts are made to ensure that the views of shareholders are heard by the Board of Directors orindividual directors, as applicable, and that appropriate responses are provided to shareholders on a timely basis. The Board ofDirectors believes that informal communications are sufficient to communicate questions, comments and observations thatcould be useful to the Board of Directors. However, shareholders wishing to formally communicate with the Board of Directorsmay send communications directly to ARI Network Services, Inc., Attention: Chairman, 10850 West Park Place, Suite 1200,Milwaukee, Wisconsin 53224. The Chairman will review such communications and, if appropriate, forward suchcommunications to other Board members.The Company’s Board of Directors has established an Audit Committee that currently is composed of Mr. Mortimore(chairman), Mr. Bridge and Mr. Poseidon. The Board of Directors has adopted a written charter for the Audit Committee, acopy of which is attached as Appendix A. Information regarding the functions performed by the Audit Committee, itsmembership, and the number of meetings held during fiscal 2011 is set forth in the “Report of the Audit Committee” includedin this proxy statement. The members of the Audit Committee are independent under the NASDAQ listing standards regardingthe independence of directors, including Audit Committee members. The Board of Directors has determined that Mr.Mortimore is an “audit committee financial expert” and is “independent” as those terms are defined under the Securities andExchange Commission (“SEC”) regulations and the NASDAQ listing standards. 65

The Company’s Board of Directors has established a Compensation Committee that currently is composed of Mr. Poseidon, Mr.Bridge and Mr. Feierstein, each of whom is “independent” as such term is defined under the NASDAQ listing standards. Theduties of the Compensation Committee are to approve all executive compensation, to administer the Company’s 1991 IncentiveStock Option Plan, the 2000 Employee Stock Purchase Plan, the 1993 Director Stock Option Plan, the 2000 Stock Option Plan,the 2010 Equity Incentive Plan and the 2010 Employee Stock Purchase Plan, and to recommend director compensation forapproval by the entire Board. The Compensation Committee does not have a written charter, and does not engage the servicesof a compensation consultant in determining or recommending the amount or form of executive or director compensation.However, the Compensation Committee does rely on several third party services for compensation information.The Company’s chief executive officer makes recommendations to the Compensation Committee regarding the numbers ofoptions to be granted to the Company’s executive officers and other employees based in part on input he receives from theCompany’s human resources personnel. The chief executive officer also makes recommendations to the CompensationCommittee with respect to other executive compensation, though he recuses himself from portions of CompensationCommittee meetings during which his own compensation is discussed. The Company’s chief financial officer has historicallymade recommendations to the Compensation Committee regarding director compensation. The Compensation Committeemet 5 times during fiscal 2011.The Company’s Board of Directors has also established a Nominating and Corporate Governance Committee (the “NominatingCommittee”) that is currently composed of Mr. Mortimore (Chairman), Mr. Bridge and Mr. Olivier. Mr. Mortimore and Mr.Bridge are “independent” as such term is defined under the NASDAQ listing standards. Mr. Olivier is not independent underthe NASDAQ listing standards because of his employment relationship with the Company. The Board of Directors has adopted awritten charter for the Nominating Committee, a copy of which is attached as Appendix B. The duties of the NominatingCommittee include, among others: developing guidelines for selecting candidates for election to the Board of Directors, andperiodically reviewing such guidelines; recommending to the Board of Directors the nominees to stand for election to or to fillvacancies on the Board of Directors; identifying new candidates for Board membership; coordinating self-evaluations of theBoard of Directors and its committees; developing corporate governance guidelines; and developing director and officersuccession plans. The Nominating Committee, which was established by the Board of Directors effective June 2, 2011, did notmeet during fiscal 2011.The Nominating Committee and the Board of Directors will consider candidates for director that are nominated by shareholdersin accordance with the procedures set forth in the Company’s by-laws. Under the by-laws, nominations, other than those madeby the Board of Directors, must be made pursuant to timely notice in proper form to the secretary of the Company. To betimely, a shareholder’s request to nominate a person for director, together with the written consent of such person to serve asa director, must be received by the secretary of the Company at the principal office not later than 90 days and not earlier than150 days prior to the anniversary date of the annual meeting of shareholders in the immediately preceding year. To be inproper written form, the notice must contain certain information concerning the nominee and the shareholder submitting thenomination.The Nominating Committee and the Board of Directors will also consider proposed nominees whose names are submitted to itby shareholders. However, it does not have a formal process for that consideration because it believes that the informalconsideration process has been adequate given the historical lack of shareholder director nominations. The NominatingCommittee and the Board of Directors intend to review periodically whether a formal policy should be adopted.The Board of Directors has generally identified nominees based upon suggestions by non-management directors, managementmembers and/or shareholders. Under the guidelines set forth in its charter, the Nominating Committee and other directorsrecognize that the contribution of the Board of Directors depends not only on the character and capacities of the directorstaken individually but also on their collective strengths. It is the Nominating Committee’s policy that the Board should becomposed of directors who bring a variety of experience and backgrounds; who will form a central core of business executiveswith substantial senior management experience and financial expertise; who represent the balanced interests of theshareholders as a whole and the interests of the Company’s stakeholders; a majority of whom are independent under theNASDAQ listing standards; who reflect a diversity of experience, gender, race and age; and whose experience and backgroundsare relevant to the Company’s business operations and strategy. The Board of Directors does not evaluate proposed nomineesdifferently based on who made the proposal. 66

Code of EthicsThe Company has adopted a code of ethics that applies to all employees, including our principal executive officer, principalfinancial officer, principal accounting officer or controller and persons performing similar functions. The code of ethics isdesigned to promote honest and ethical conduct, including the ethical handling of conflicts of interest, compliance withapplicable laws, and full, accurate, timely and understandable disclosure in reports we send to our shareholders or file with theSEC. Violations of the code of ethics are to be reported to the Audit Committee. A copy of the code of ethics may be obtained,without charge, by sending a request to ARI Network Services, Inc., Attention: Chief Financial Officer, 10850 West Park Place,Suite 1200, Milwaukee, Wisconsin 53224.Board Oversight of RiskThe Audit Committee is responsible for assisting the Board of Directors with its oversight of the performance of the Company’srisk management functions including periodically reviewing and discussing with management the Company’s major financialrisk exposures and the steps that management has taken to assess, monitor and control such exposures and periodicallyreporting to the Board of Directors on its activities in this oversight role. 67

EXECUTIVE COMPENSATIONThe following table sets forth compensation for the Company’s fiscal year ended July 31, 2011 for Mr. Olivier, the Company’sChief Executive Officer, Darin R. Janecek, the Company’s next most highly compensated executive officer at the end of fiscal2011, and Michael T. Tenpas, who would have been the Company’s second most highly compensated executive officer at theend of fiscal 2011 but for the fact that he was not serving as an executive officer of the Company on that date. We refer tothese individuals collectively as the Company’s “named executive officers.” Summary Compensation Table Non-Equity Incentive Plan All Other Option Compen- Compen- Name and Principal Position Fiscal Year Salary Awards (1) sation (2) sation (3) Total Roy W. Olivier 2011 $ 250,000 $ - $ 137,996 $ 2,750 $ 390,746 President and Chief Executive 2010 $ 200,000 $ - $ 98,001 $ 80,203 (4) $ 378,204 Officer Darin R. Janecek 2011 $ 196,561 $ 28,600 $ 84,650 $ 2,343 $ 312,154 Chief Financial Officer, Treasurer and Secretary Michael T. Tenpas (5) 2011 $ 191,797 (6) $ - $ 45,833 $ 4,846 (7) $ 242,475 Vice President of Global Sales 2010 $ 232,640 (6) $ 14,454 $ 30,848 $ 2,849 $ 280,791 and Marketing ______________________________________________________________________________________(1) The values set forth in this column represent the grant date fair values computed in accordance with FASB ASC Topic 718 for the applicable fiscal year, disregarding the estimate of forfeitures for service-based vesting conditions. The assumptions used to determine these values with respect to fiscal 2011 and fiscal 2010 are described in Note 10 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2011.(2) Amounts shown for fiscal 2011 represent annual incentive payments, long-term incentive payments in cash and long- term incentive payments in common stock, respectively, earned during fiscal 2011, as follows: Mr. Olivier—$131,114, $3,441 and $3,441; Mr. Janecek—$70,250, $0 and $0; and Mr. Tenpas—$45,833, $0 and $0.(3) Except as described below with respect to Mr. Olivier and Mr. Tenpas, amounts represent a Company match under the Company’s 401(k) plan.(4) As part of the relocation package offered to Mr. Olivier when he first began employment with the Company, the Company agreed to pay a housing stipend to Mr. Olivier of $1,000 per month. For fiscal 2010, the Company paid Mr. Olivier $77,821 as reimbursement for the loss on the sale of his former home under this agreement.(5) Mr. Tenpas resigned his position effective June 17, 2011.(6) Amounts include sales commissions paid during fiscal 2010 and fiscal 2011 of $67,640 and $32,566, respectively.(7) Amount includes accrued vacation paid during fiscal 2011 of $4,846.Stock Option Grants. All of the Company’s employee stock option grants qualify as incentive stock options up to the $100,000per year limitation and, with limited exceptions, vest 25% per year on July 31, provided the participant is an employee of theCompany at such date. Options are exercisable up to ten years after the date of grant, one year from the date of a terminationof employment upon death or disability of the participant, 90 days from the date of termination for any reason other than“cause” or immediately upon termination for “cause.” 68

Annual Incentive Compensation. The annual component of the Company’s Management Incentive Bonus Plan (”MIBP”)provides for annual cash incentives for the participants, which, in fiscal 2011, included Mr. Olivier, Mr. Janecek and Mr. Tenpas,among others. The amount of the annual incentive opportunity was based on three to five management bonus objectives(“MBOs”) for each of the four fiscal quarters agreed upon by the executive officer and the chief executive officer (orCompensation Committee for the CEO) at the beginning of fiscal 2011. Each employee’s objectives are designed to align withthe Company’s core values.Under the MIBP for fiscal 2011, participants were eligible for a payout of up to 100% of the quarterly incentives based onachievement of performance toward each of the established objectives. At the end of the fiscal year, participants employed bythe Company became eligible for an additional payment (subject to a maximum of 150% and a floor of 25%) based on theCompanys overall performance against its financial targets. The combined results for the fiscal year ended July 31, 2011 underthe annual incentive arrangements described above resulted in payouts ranging from 90% to 108% of the participants’ targetincentive amounts for the fiscal year ended July 31, 2011, as follows: Mr. Olivier—107%; Mr. Janecek—108%; and Mr.Tenpas—90%.In addition to being a participant in the Management Incentive Bonus Plan arrangement described above, in his capacity as VicePresident of Sales, Mr. Tenpas was eligible for fiscal 2011 to receive a commission achievement of new contract sales and baserevenue components, weighted approximately 70% and 30%, respectively. For fiscal 2011, Mr. Tenpas received commissionstotaling $32,566.Long-Term Incentive Compensation. The Company’s executive officers were awarded long-term incentive compensation underthe long-term component of Company’s Management Incentive Bonus Plan until the Plan was terminated at the end of fiscal2008. These awards were based on a target award equal to the executive’s actual annual incentive earned, adjusted based onthe Company’s performance over three consecutive one-year performance periods. The amount of the payout was adjusted ona sliding scale based on the extent to which the Company’s revenue plan is achieved for each of the three years, ranging from afloor of 75% of the target award if the Company’s revenue plan is not met to a cap of 200% of the target award if revenueequals or exceeds 150% of plan. One-half of the floor amount (75% of the target award) is paid in Company Common Stock,valued at the time of payment, and the remainder of the award is paid in cash. The award was to be paid in three annualpayments following each of the three years in the performance period, provided the participant is employed by the Company atsuch time.Mr. Olivier was paid at the 75% floor for his fiscal 2007 and fiscal 2008 long-term incentive compensation during fiscal 2011with 6,508 shares of the Company’s common stock valued at $3,710 and $3,710. One-third of Mr. Olivier’s fiscal 2008 long –term incentive compensation is accrued at the 75% floor, or $6,883, which is expected to be paid during fiscal 2012, one-half incommon stock and one-half in cash.Equity Performance Bonus Plan. In October 2011, the Compensation Committee adopted a new equity performance bonusplan pursuant to which participants will be eligible to receive an award of restricted shares of Company Common Stock basedon the per share market price of the Common Stock on a pre-determined date.While the Compensation Committee intends to designate other executive officers as participants in the equity performancebonus plan for future fiscal years, Mr. Olivier is the only participant fiscal 2012. Under the plan for fiscal 2012, Mr. Olivier willreceive an award of restricted stock with a grant date fair value of $150,000 if the closing price per share of Company CommonStock on July 31, 2012 is at least $3.00. To the extent the closing price per share on July 31, 2012 is less than $3.00, theCompensation Committee may, in its discretion, determine to grant Mr. Olivier a number of shares of restricted stock based onthe Compensation Committee’s subjective assessment of the Company’s performance against key financial targets, investorrelations program activity, peer group comparisons and other subjective factors as the Compensation Committee may deemappropriate in its discretion. Any such subjective grant determination by the Compensation Committee will be subject toapproval by the Company’s Board of Directors. Any shares of restricted stock granted under the plan will be subject to a four-year vesting period, at a rate of 25% per year in each of the four years. 69

Outstanding Equity Awards at Fiscal Year-End Option Awards Number of Securities Underlying Option Option Unexercised Options Exercise Expiration Name (#) Exercisable (#) Unexercisable Price Date Roy W. Olivier 50,000 $2.10 9/15/2016 300,000 $1.53 5/1/2018 Darin R. Janecek 5,000 $0.80 7/6/2019 12,500 12,500 (1) $0.86 12/7/2019 12,500 37,500 (2) $0.63 12/10/2020 Michael T. Tenpas n/a n/a __________________________________________________________________ (1) 50% of unexercisable options will vest on each of July 31, 2012 and 2013. (2) 33% of unexercisable options will vest on each of July 31, 2012, 2013 and 2014. Agreements with Named Executive OfficersMr. Olivier. In connection with his appointment as the Company’s President and Chief Executive Officer, on May 1, 2008, theCompany entered into an employment agreement with Mr. Olivier. The term of the Mr. Olivier’s agreement is three years,subject to earlier termination in accordance with the terms of the agreement. Following the three-year term, the agreementwill automatically be renewed for successive one-year periods unless terminated by Mr. Olivier or the Company’s Board ofDirectors at least 30 days prior to the third year of the employment term or prior to the commencement of each renewal term.Mr. Olivier’s agreement provides that Mr. Olivier will receive an annual salary of at least $250,000, subject to annual review andadjustment by the Compensation Committee of the Company’s Board. Mr. Olivier is to be eligible to participate in theCompany’s Management Incentive Bonus Plan; is eligible to participate in stock option plans and grants, if any, that are offeredto senior executive/officer employees of the Company; and is entitled to receive perquisites and benefits provided by theCompany to its senior executives, subject to applicable eligibility criteria. Also pursuant to the agreement, Mr. Olivier wasgranted an option to purchase 300,000 shares of the Company’s common stock pursuant to the terms of an award agreementbetween Mr. Olivier and the Company. The agreement also provided for the reimbursement of Mr. Olivier for up to $30,000 ofhis actual out-of-pocket moving expenses incurred in accordance with its terms. Mr. Olivier sold his residence at a loss in fiscal2010 for which the Company reimbursed him $77,821. This additional amount was approved by the Compensation Committee.In the event that Mr. Olivier is terminated without “cause,” by death or “disability” or for “good reason” (as defined in theagreement), the agreement provides that Mr. Olivier will have the right to receive any unpaid base salary and any earned butunpaid bonus due to him as of the effective date of the termination. In addition, in the event Mr. Olivier is terminated without“cause” or for “good reason,” he will have the right to receive (1) his base salary, at the rate in effect at the time of termination,for one year following the date of termination; (2) a bonus for the remainder of the term of the agreement, calculated inaccordance with the agreement; and (3) acceleration of all of his outstanding unvested options as of the date of thetermination. If Mr. Olivier is terminated for “cause” or if he resigns from employment with the Company, or if the agreement isnot renewed by Mr. Olivier, he will have the right to receive any unpaid base salary and any earned but unpaid bonus due tohim as of the effective date of the termination. If Mr. Olivier retires in accordance with any retirement plan or policy for seniorexecutives adopted by the Company, he will have the right to receive any unpaid base salary and any earned but unpaid bonusdue to him as of the effective date of the termination, and any additional benefits provided under the retirement plan or policy.Mr. Janecek. In connection with his appointment as the Company’s Chief Financial Officer, on December 10, 2010, theCompany entered into an employment agreement with Mr. Janecek. The term of Mr. Janecek’s employment under theagreement is for an indefinite period and the agreement may be terminated by either party at any time and for any reason orfor no reason upon written notice to the other party. 70

The employment agreement provides that Mr. Janecek will receive an annual salary of $200,000, subject to annual review andadjustment by the Compensation Committee. Mr. Janecek is eligible to participate in the Company’s Management IncentiveBonus Plan; and is entitled to receive perquisites and benefits provided by the Company to its senior executives, subject toapplicable eligibility criteria. Also pursuant to his employment agreement, Mr. Janecek was, upon the approval of theCompensation Committee, granted an option to purchase 50,000 shares of the Company’s common stock pursuant to theterms of an award agreement between Mr. Janecek and the Company.In the event that Mr. Janecek is terminated without “cause” (as defined in the agreement) or in connection with Mr. Janecek’sdeath or disability, or if Mr. Janecek resigns his employment with the Company for “good reason” (as defined in theagreement), the agreement provides that Mr. Janecek will have the right to receive any unpaid base salary and any earned butunpaid bonus due to him as of the effective date of the termination. In addition, in the event of a termination without cause orfor good reason, Mr. Janecek will be entitled (contingent upon his execution of a severance agreement) to receive his basesalary as then in effect for nine months following the effective date of the termination and a pro rated bonus payment. If Mr.Janecek is terminated for “cause” or if he resigns his employment with the Company without good reason, he will have theright to receive any unpaid base salary with respect to the period prior to the date of termination and any earned but unpaidbonus due to him as of the effective date of termination.Change of Control Agreements. The Company has entered into Change of Control Agreements (“Change of ControlAgreements”) with each of its executive officers. The Change of Control Agreements are intended to reduce the incentive forofficers not to support a transaction that is beneficial to shareholders for fear that their employment would be terminated, toretain the services of these officers and to provide for continuity of management in the event of any “Change of Control,” asdefined below. These Change of Control Agreements provide that each officer shall receive severance benefits equal to twotimes the sum of salary and targeted bonuses and medical and dental plan continuation for two years if, within two yearsfollowing a “Change of Control,” as defined below, the officer’s employment is terminated without cause or by the executivefor good reason. For this purpose, “good reason” is defined to include: (i) a material diminution of or interference with theofficer’s duties and responsibilities; (ii) a change in the principal workplace of the officer to a location outside of a 50-mileradius from Milwaukee, Wisconsin; (iii) a reduction or adverse change in the salary, bonus, perquisites, benefits, contingentbenefits or vacation time previously provided to the officer; or (iv) an unreasonable increase in the workload of the officer. Inaddition, the officer will receive a prorated portion of the officer’s average annual bonus for the preceding three fiscal years. Ifthe officer leaves ARI for any other reason, within two years following a Change of Control, the officer will receive a proratedportion of the officer’s average annual bonus for the preceding three fiscal years. The officer is under no obligation to mitigateamounts payable under the Change of Control Agreements. In addition, upon a Change of Control, all stock options and similarawards become immediately vested and all deferred compensation becomes payable.For purposes of the Change of Control Agreements, a “Change of Control” means any of the following events: the acquisition(other than from the Company) by any individual, entity or group, subject to certain exceptions, of beneficial ownership,directly or indirectly, of 50% or more of the combined voting power of the Company’s then outstanding voting securities; (ii) amerger, consolidation, share exchange, or sale or disposition of substantially all of the assets of the Company; or (iii) approvalby the Company’s shareholders of a complete liquidation or dissolution of the Company. Director Compensation for Fiscal 2011 Fees Earned or Option All Other Name Paid in Cash Awards (1)(2) Compensation Total Gordon J. Bridge $ 26,500 $ 3,062 $ - $ 29,562 Brian E. Dearing $ 2,958 $ 3,933 $ - $ 6,891 Ted C. Feierstein $ 10,000 $ 3,062 $ - $ 13,062 William C. Mortimore $ 26,000 $ 3,062 $ - $ 29,062 P. Lee Poseidon $ 26,500 $ 3,062 $ - $ 29,562____________________(1) The values set forth in this column represent the fair market value of the fiscal 2011 option grants in accordance with FASB ASC Topic 718, disregarding the estimate of forfeitures for service-based vesting conditions. The assumptions used to determine these values are described in “Stock-based Compensation Plans”, Note 10 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2011. 71

(2) Total stock options held as of July 31, 2011 by non-employee directors of the Company during fiscal 2011 were as follows: Mr. Bridge— 134,785; Mr. Dearing— 127,833; Mr. Feierstein—96,933; Mr. Mortimore— 84,375; Mr. Poseidon— 28,000.For fiscal 2011 service, each non-employee director received an annual cash retainer of $18,000 and an option to purchase6,000 shares of Company Common Stock, which were granted on January 19, 2011 and Mr. Dearing (an employee of theCompany until May 27, 2011 and Chairman of the Board of Directors) received 7,000 shares of Company Common Stock, whichwas granted on May 27, 2011 (50% of which vested on July 31, 2011 and the remaining 50% of which will vest on July 31, 2012).The options have a term of ten years and an exercise price equal to the fair market value of the Common Stock on the date ofgrant. Audit Committee members receive an additional $6,000 per year ($8,000 for the chairman) and CompensationCommittee members and non-employee members of the Nominating Committee receive an additional $2,500 per year.Under a policy adopted by the Compensation Committee and the Board of Directors in May 2011, the Chairman of the Board(currently Mr. Dearing) will be compensated for his or her service as such at the rate of (a) one and one-half times that of theother non-employee directors for the cash portion of his or her regular Board service, (b) two times that of the other directorsfor the equity portion of his or her regular Board service, and (c) one times that of the other directors for service, including in anex officio capacity, on any committee of the Board of Directors CERTAIN TRANSACTIONSBriggs & Stratton Corporation (“Briggs”) is one of the Company’s customers and beneficially owns more than 5% of theCompany’s common stock. Briggs has entered into customer contracts with the Company in the ordinary course of business.Generally, the contracts are one to three years and renew annually unless either party elects otherwise. The Company invoicedBriggs approximately $370,000 for products and services provided during fiscal 2011. In addition, during fiscal 2011, Briggsprovided graphic design and printing services to the Company for which the Company was charged approximately $33,000. Section 16(a) Beneficial Ownership Reporting ComplianceBased solely upon its review of Forms 3, 4 and 5 and amendments thereto furnished to the Company during fiscal 2011pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, all of such forms were filed on a timely basis by oron behalf of reporting persons during fiscal 2011, except that, due to an administrative error, a late Form 4 was filed for Mr.Poseidon in June 2011 relating to several fiscal 2011 share purchases, and a late Form 4 was filed for Mr. Dearing in July 2011relating to a grant of options. EQUITY COMPENSATION PLAN INFORMATIONThe following table sets forth certain information about shares of the Company’s Common Stock outstanding and available forissuance under the Company’s existing equity compensation plans: the 2000 Employee Stock Purchase Plan, as amended, the2000 Stock Option Plan and the 2010 Equity Incentive Plan. The table details securities authorized for issuance under theCompany’s equity compensation plans as of July 31, 2011. The table does not include stock option grants, exercises orcancellations since July 31, 2011 and, in accordance with SEC rules, excludes information concerning the Company’s 401(k)plan. The Company has discontinued granting options under the 2000 Stock Option Plan, although options are outstandingunder that plan. At the 2010 annual meeting of shareholders, the Company amended the 2000 Employee Stock Purchase Planto, among other things, extend the term of the plan beyond its original December 2010 expiration date. 72

Equity Compensation Plan Information Wtd. Avg. Exercise Number of Securities Remaining Number of Securities to be Price of Available for Future Issuance Issued Upon Exercise of Outstanding Under Equity Compensation Ourtstanding Options, Options, Warrants Plans [excluding securities Warrants and Rights and Rights reflected in column (a)]Plan Category (a) (b) (c)Equity compensation plans approved by security holders 1,290,583 $ 1.33 1,886,333Equity compensation plans not approved by security holders (1) 12,998 n/a n/aTotal 1,303,581 1,886,333 ___________________________________________________________________________________ (1) Represents estimated number of shares to be issued pursuant to outstanding long-term incentive plan awards described above, based on an assumed value of $0.66 per share (the October 19, 2011 closing stock price). PROPOSAL TWO: RATIFICATION OF INDEPENDENT AUDITORSThe Audit Committee has appointed Wipfli LLP to serve as the Company’s independent accountant to audit the books andaccounts of the Company and its subsidiaries for the fiscal year ending July 31, 2012. The Board of Directors has recommendedthat shareholders ratify this appointment. It is intended that the shares represented by the proxy will be voted (unless theproxy indicates to the contrary) for ratification of the appointment. Wipfli LLP also served as the Company’s independentaccountant for the fiscal year ended July 31, 2011. A representative of Wipfli LLP is expected to be present at the meeting withthe opportunity to make a statement if he or she desires to do so, and is expected to be available to respond to appropriatequestions. Auditor’s FeesFees for professional services provided by our independent auditors in each of the last two fiscal years, in each of the followingcategories, were as follows: 2011 2010 Audit fees $ 103,000 $144,171 Audit related fees - - Tax fees - - All other fees - 17,750 Total fees $ 103,000 $ 161,921“All other” services rendered by our independent auditors in fiscal 2010 primarily consisted of services provided with respect totheir review of our Sarbanes Oxley internal control implementation efforts.The Audit Committee pre-approves all audit and permitted non-audit services provided by the independent auditors, unlesssuch pre-approval is waived in accordance with Item 2-01(c)(7)(i)(C) of Regulation S-X. These services may include auditservices, audit-related services, tax services and other services. The Audit Committee has delegated the authority to grant pre-approval of auditing or allowable non-audit services to the chairman of the Audit Committee. Each pre-approval decisionpursuant to this delegation is to be presented to the full Audit Committee at its next scheduled meeting. 73

REPORT OF THE AUDIT COMMITTEE The primary responsibility of the Committee is to oversee the Company’s financial reporting process on behalf of theBoard of Directors and to report the results of its activities to the Board. Management has the primary responsibility for thefinancial statements and the reporting process including the systems of internal controls. A complete description of theCommittee’s duties is set forth in its charter. In fulfilling its oversight responsibilities, the Committee reviewed the audited financial statements in the AnnualReport with management including a discussion of the quality, not just the acceptability, of the accounting principles, thereasonableness of significant judgments, and the clarity of disclosures in the financial statements. The Committee reviewed with the independent auditors, who are responsible for expressing an opinion on theconformity of those audited financial statements with accounting principles generally accepted in the United States, theirjudgments as to the quality, not just the acceptability, of the Company’s accounting principles and such other matters as arerequired to be discussed with the Committee under standards of the Public Company Oversight Board (United States). Inaddition, the Committee has discussed with the independent auditors the auditors’ independence from management and theCompany including matters in the written disclosures required by the Independence Standards Board and considered thecompatibility of non-audit services with auditors’ independence. The Committee discussed with the Company’s independent auditors the overall scope and plans for their audit. TheCommittee meets with the independent auditors, with and without management present, to discuss the results of theirexamination and their evaluation of the Company’s internal controls, and the overall quality of the Company’s financialreporting. The Committee held five meetings during fiscal 2011. In reliance on the views and discussions referred to above, the Committee recommended to the Board of Directors(and the Board has approved) that the audited financial statements be included in the Annual Report on Form 10-K for the yearended July 31, 2011 for filing with the Securities and Exchange Commission. The Committee has also approved the selection ofthe Company’s independent auditors for fiscal 2012. Audit Committee of the Board of Directors of ARI Network Services, Inc.:William C. Mortimore (Chairman)Gordon J. BridgeP. Lee Poseidon 74

OTHER MATTERSOther Proposed ActionThe Board of Directors of the Company knows of no other matters which may come before the meeting. However, if anymatters other than those referred to above should properly come before the meeting, the persons named in the enclosedproxy will vote such proxy in accordance with their discretion.Shareholder ProposalsAll proposals of shareholders intended to be presented at the Company’s 2012 Annual Meeting must be received by theCompany at its executive offices on or before September 21, 2012, in order to be presented at the meeting (and mustotherwise be in accordance with the requirements of the Bylaws of the Company) and must be received by July 5, 2012 to beconsidered for inclusion in the proxy statement for that meeting.Costs of SolicitationThe expenses of printing and mailing proxy materials, including reasonable expenses involved in forwarding materials tobeneficial owners of Common Stock, will be borne by the Company. In addition, directors, officers or employees of theCompany may solicit the return of proxies from certain shareholders by telephone, e-mail, facsimile or personal solicitation.SHAREHOLDERS MAY OBTAIN A COPY OF THE COMPANY’S ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SECURITIESAND EXCHANGE COMMISSION AT NO COST BY WRITING TO THE INVESTOR RELATIONS DEPARTMENT, ARI NETWORKSERVICES, INC., 10850 WEST PARK PLACE, SUITE 1200, MILWAUKEE, WISCONSIN 53224. BY ORDER OF THE BOARD OF DIRECTORS Darin R. Janecek, Secretary November 2, 2011 75

APPENDIX A: ARI NETWORK SERVICES, INC. AUDIT COMMITTEE CHARTER Effective as of August 1, 2011I. Purpose and AuthorityThe Audit Committee (“Committee”) of ARI Network Services, Inc. (“ARI” or the “Company”) is established by and among the board ofdirectors for the primary purpose of assisting the board in its oversight responsibilities with respect to: (i) The integrity of the company’s financial statements and internal controls over financial reporting; (ii) The Company’s compliance with legal and regulatory requirements; (iii) The qualifications, independence, and performance of the Company’s independent public accountants; (iv) The Company’s systems of disclosure controls and procedures, and compliance with ethical standards adopted by the Company; and (v) Reporting the results of the Committee’s activities to the board and to the public.The Committee should encourage continuous improvement of and adherence to the Company’s policies, procedures, and practices at alllevels. The Committee should also provide for open communication among the board of directors, financial and senior management, andthe independent public accountants.The Committee has the authority to conduct investigations into any matters within its scope of responsibility and obtain advice andassistance from outside legal, accounting, or other advisors, as it deems necessary to perform its duties and responsibilities.In carrying out its duties and responsibilities, the Committee shall have the authority to meet with and seek any information it requiresfrom employees, officers, directors, or external parties.The Company will provide appropriate funding, as determined by the Committee, for compensation to the independent auditors, to anyadvisors that the Committee chooses to engage, and for payment of ordinary administrative expenses of the Committee that arenecessary for carrying out its responsibilities.The Committee will primarily fulfill its responsibilities by carrying out the activities described in section III of this charter.Notwithstanding, it is specifically noted that it is not the responsibility of the Committee or any member of the Committee to plan orconduct audits or to determine that the Company’s financial statements are complete and accurate and are in accordance with generallyaccepted accounting principles. Management of the Company isresponsible for preparing the Company’s financial statements in accordance with generally accepted accounting principles, and theindependent public accountants are responsible for auditing the Company’s financial statements.II. Committee Composition and MeetingsThe Committee shall be composed of at least three members of the board of directors. Each Committee member will be bothindependent and financially literate, as defined by the requirements set forth in the rules of the Securities and Exchange Commission(“SEC”) and the Amex and Nasdaq stock markets. At least one member will qualify as an audit committee financial expert as defined bythe SEC. In addition, no member of the Committee shall have participated in the preparation of the Company’s financial statementsduring any of the past three years.The members of the Committee shall be elected by the Board to hold such office until their successors shall be dulyelected and qualified. The Board designates an “audit committee financial expert” to act as Chairman of the Committee, as defined underthe Securities and Exchange Commission regulations and NASDAQ listing standards.The Committee shall hold four quarterly meetings, coinciding with the filing dates of the Company’s financial statements with the SEC.Additionally, the Committee will meet annually near the end of July specifically for annual audit planning purposes. The Committee maymeet on a more frequent basis if it deems necessary. Special meetings of the Committee may be called at any time by any memberthereof on not less than three days’ notice. The Committee shall report periodically to the Board of Directors regarding the Committee’sactivities, findings and recommendations.The Committee may conduct its business and affairs at any time or location it deems appropriate. Attendance and participation in ameeting may take place by conference telephone or similar communications equipment by means of which all persons participating inthe meeting can hear each other. Any action to be taken at any meeting of the Committee may be taken without a meeting, if all 76

members of the Committee consent thereto in writing and such writing or writings are filed with the minutes of the Committee. Alldecisions of the Committee shall be determined by a majority vote of its members.III. ResponsibilitiesThe primary responsibilities of the Committee are described below. The table attached as Appendix A to the charter indicates the specificresponsibilities to be addressed and actions to be taken at each of the Committee’s meetings.Committee Administration and Reporting 1. Review and assess the adequacy of this charter on an annual basis, requesting board approval for proposed changes, and ensure appropriate disclosure as may be required by law or regulation. 2. Confirm annually that all responsibilities ascribed in this charter have been carried out. 3. Evaluate the Committee’s and individual members’ performance and qualifications on a regular basis. 4. Regularly report to the board of directors about activities, issues, and recommendations related to the Committee. 5. Review and approve the report that the SEC requires be included in the Company’s annual proxy statement.Oversight of Independent Auditors 6. Appoint (and recommend that the board submit for shareholder ratification), compensate, retain, and oversee the work performed by the independent audit firm. The independent auditor will report directly to the Committee and the Committee will oversee resolution of disagreements between management and the independent auditor. 7. Review the performance and independence of the independent audit firm at least annually. a. Obtain a written statement annually from the independent public accountants listing all relationships between the independent public accountants and the Company. Review and discuss any disclosed relationships or services that may affect the objectivity and independence of the independent public accountants and review the actions taken to ensure the independent public accountants’ independence. b. Monitor the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law. c. Obtain and review a report, at least annually, from the independent auditor describing: (i) the independent auditor’s internal quality control procedures; (ii) any material issues raised by the most recent internal quality control review or peer review; and (iii) other information pertaining to the Committee’s ability to assess the performance and qualifications of the independent auditors. d. Approve hiring decisions by the Company involving any partner or employee of any independent audit firm that worked on the Company’s account during the preceding three years. No audit engagement team member that participated in the audit of the Company within one year prior to the proposed date of hire may be hired by the Company as a senior executive. 8. Approve in writing any permitted non-audit services to be provided by the Company’s independent public accountants. 9. Review the independent auditors’ annual audit planning materials and discuss any items of a critical nature to the audit prior to the beginning of fieldwork. 10. Discuss with the independent auditors the matters required to be discussed in accordance with SAS 114 “The Auditor’s Communication with Those Charged with Governance” as may be modified or supplemented from time to time. 11. Review with the independent auditors any matter of significant disagreement between management and the independent auditors and any other problems or difficulties encountered during the course of their work and management’s response to such disagreements, problems or difficulties.Financial Statement Disclosure Matters 12. Review with management and the independent public accountants the Company’s quarterly operating results to be included in the Company’s quarterly reports on Form 10-Q. The Chairman of the Committee may represent the entire Committee for purposes of this review. 13. Review with management and the independent public accountants the Company’s audited financial statements to be included in the Company’s annual report on Form 10-K and, based on this review, make a recommendation to the board of directors whether to include these financial statements in the annual report on Form 10-K to be filed with the SEC. 14. Discuss the Company’s earnings press releases, including the use of any “pro forma” or other non-GAAP information provided to the investing community. 15. Review any recommendations of the independent auditors resulting from the audit and monitor management’s response in an effort to ensure that appropriate actions are taken. 77

16. Review with management and the independent auditors: (i) the Company’s annual assessment of the effectiveness of its internal control over financial reporting; (ii) any comments the independent auditor may have about the Company’s assessment; and (iii) any material weaknesses or significant deficiencies in the Company’s internal control over financial reporting identified by management or the independent auditors. 17. Review with management any significant internal control or financial reporting issues that arise throughout the year. At least annually, review with management the Company’s key internal controls and the effectiveness of those controls.Corporate Oversight and Other Matters 18. Review the procedures annually for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. 19. Review the quarterly report outlining the results and corrective actions of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters or any other matters that may involve fraud. 20. Review and approve any material transaction to which the Company is a party involving a conflict of interest with a director, executive officer or other affiliate of the Company. 21. Discuss the Company’s major financial and other significant risk exposures or deficiencies, and the steps management has taken to monitor, control, and/or mitigate the exposures, including any formal risk management policies and insurance coverage. 22. Establish, review and update as needed a Code of Business Conduct and Ethics for certain principal officers (Code) and ensure that management has established a system to enforce the Code. 23. Establish a formal whistleblower policy with the appropriate procedures for the receipt, retention, and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters, and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. Review policy at least annually and amend as necessary. 78

APPENDIX B: ARI NETWORK SERVICES, INC. NOMINATING AND CORPORATE GOVERNANCE COMMITTEE CHARTERI. PURPOSEThe purpose of the Nominating and Governance Committee of the Board of Directors of ARI is to provide assistance to the Board ofDirectors in the selection of candidates for election to the Board of Directors, including identifying, as necessary, new candidates who arequalified to serve as directors of the Company, recommending to the Board of Directors the candidates for election to the Board ofDirectors, monitoring and advising the Board on its committee structure and the composition of the Board’s committees, developing andrecommending to the Board, and thereafter periodically reviewing, corporate governance principles applicable to the Company, andmonitoring and advising the Board on corporate governance matters and practices.II. COMMITTEE COMPOSITION.The Committee will be composed of at least three members, with a majority of independent directors. Following adoption of such rules, adirector will be considered “independent” if he or she meets the requirements for independence set forth in the rules of the NasdaqStock Market. Other than the CEO, if he or she is a member or ex officio member of the Committee, no Director may serve on theCommittee during the 12 months prior to the Annual Meeting at which his or her term expires.The members of the Committee will be appointed by the Board of Directors after taking into account the recommendations of theCommittee. Other directors may be appointed to the Committee in an ex officio, non-voting capacity at the discretion of the Board ofDirectors. A member will serve until his or her successor is appointed, until his or her resignation from the Committee, until his or herposition on the Committee is eliminated due to a reduction in the size of the Committee, until he or she is removed from the Committee,until his or her death, or until his or her service on the Board of Directors terminates. The chairperson of the Committee will be themember of the Committee appointed to serve in such capacity by the Board of Directors from time to time.III. MEETINGS AND REPORTS.The Committee will meet as frequently as the Committee deems necessary, but the Committee will meet at least annually. Meetings ofthe Committee may be called by or at the request of the Chairman of the Board of Directors, the chairperson of the Committee, orotherwise as provided in the by-laws of the Company. The Committee will report periodically to the Board of Directors regarding theCommittee’s activities.IV. SPECIFIC RESPONSIBILITIES AND AUTHORITYThe specific responsibilities of the Committee are as follows: 1. Develop and recommend to the Board of Directors for adoption guidelines for selecting candidates for election to the Board of Directors, and periodically review such guidelines and recommend to the Board of Directors for adoption amendments to such guidelines that the Committee deems necessary or appropriate. A copy of such guidelines shall be attached hereto as Appendix A following adoption by the Board of Directors. 2. Annually recommend to the Board of Directors the nominees to stand for election at the Annual Meeting of Shareholders of the Company and, as necessary or deemed appropriate, recommend nominees to fill vacancies on the Board of Directors. In the course of this annual recommendation process, review and evaluate those current directors whose terms are expiring at the Annual Meeting of Shareholders of the Company, and make a specific recommendation regarding whether to re-nominate each such current director. 3. Identify, as necessary, new candidates who are qualified for Board membership in accordance with the guidelines adopted by the Board of Directors. 4. Review the qualifications of all candidates proposed for Board membership, including any candidates nominated by shareholders in accordance with the Company’s by-laws, in light of the guidelines adopted by the Board of Directors. 5. Coordinate the annual self-evaluation of the performance of the Board of Directors and each of its committees. 6. Monitor the Board’s committee structure and the composition of the committees of the Board and, in consultation with the Chairman of the Board of Directors, recommend changes in such committee structure or the composition or leadership of each committee of the Board of Directors as deemed appropriate. 7. Develop and recommend to the Board of Directors for adoption corporate governance guidelines, reevaluate such guidelines periodically and recommend to the Board of Directors for adoption any revisions that the Committee deems necessary or appropriate for the Board of Directors to discharge its responsibilities more effectively. In connection with this activity, review and assess the Company’s activities with regard to the relevant governance requirements of the Nasdaq Stock Exchange. 8. Develop and periodically review succession plans for the directors and officers and periodically report to the Board of Directors on these matters. 79

9. Review any proposed amendments (other than those reviewed by the Board of Directors or any other committee of the Board of Directors) to the Company’s Articles of Incorporation or By-Laws and recommend appropriate action to the Board of Directors. 10. Review shareholder proposals duly and properly submitted to the Company and recommend appropriate action to the Board of Directors. 11. Undertake such additional activities within the scope of the purpose of the Committee as the Committee or the Board of Directors may from time to time determine.V. DELEGATION; USE OF ADVISORS.The Committee may, if it deems appropriate from time to time, delegate authority with respect to any of its functions to a subcommitteeof the Committee.In the course of fulfilling its duties, the Committee has the sole authority to retain its own independent advisors in its discretion, includingany search firm to be used to identify director candidates, and to approve the fees and other retention terms of any advisor and toterminate such advisor. Except for special emergency situations, expenses other than minor incidental expenses must be within theCompany’s annual budget allocation for the Committee or approved in advance by the Company’s Chief Financial Officer.VI. ANNUAL EVALUATION.The Committee will evaluate its performance on an annual basis. 80

To my Fellow Shareholders, I believe we will look back on Second, as management continues to pay fiscal year 2011 as a major inflection down debt, a greater percentage of our point in the history of your Company. enterprise value will accrue to the common Your management team has shares. Debt repayment is like a “turbo completed the lion’s share of the charger” for shareholder value: even if the integration of the 2009 Channel Blade enterprise value remains constant, the lessacquisition, consolidated customer-facing debt there is, the more of that value goes toapplications into a world-class computing facility the equity. So I expect that we will get ain Madison, WI, and generated more new “double whammy”: our multiple will rise to asignificant product releases than in any prior year “normal” level as more investors hear the story,in ARI’s history. Our financial results are much and simultaneously, more of that higherimproved as a result, as are leading indicators of enterprise value will go to us, the shareholders,future success, such as our significantly reduced as the debt is paid down.churn rate. The third phase of our plan is far moreFY 2012 also marked my personal transition as exciting, however. Recurring revenue-basedChairman from a member of management to technology companies – so called “SaaS” orpurely a Board member. The “passing of the “Software as a Service” companies – trade atbaton” to Roy as CEO – and from me to Darin as multiples much, much higher than the 4 to 6CFO – is now complete. times EBITDA valuations commanded by a “typical” firm. Why? Because they have bothYet, as I move to the next phase of my personal strong operating leverage and double-digitand professional life, I am far from disconnected growth. ARI has the right business model offrom ARI. I continue to serve as your Chairman, high-margin recurring revenue, but that’s onlyas well as in a non-voting ex officio capacity, on half the equation.the Audit Committee and the newly formedNominating and Governance Committee. That’s why the third phase of our plan isI continue to hold a significant portion of our growth. Sustainable, long-term, double-digitstock, and remain deeply committed to helping revenue and profit growth. That is ourto drive its sustainable, long-term appreciation. challenge, and it is management’s renewedMy economic relationship to ARI has always focus, as emphasized by Roy in his letter.included being an investor; now it is the primarydimension of my involvement with the Company. That’s why I think we will see 2012 as an inflection point: the integration andI have tremendous confidence in your manage- infrastructure challenges are largely behindment team. Roy and I go back well over a decade, us, and the product development engineand I have watched him dramatically improve has been re-invigorated. That means yourevery aspect of our execution during his time as management team has the capacity, theCEO. Darin has more than filled my shoes as CFO, will, and the tools to drive growth.bringing to bear his unique background in publicaccounting, strategic finance and M&A, as well I have no illusions about the task before usas an eye for top talent. Jon Lintvet, the newest being an easy one. But I know well the peoplemember of the executive officer team, has to whom we have entrusted that task, andprofessionalized and accelerated our product they are capable and motivated. I fullydevelopment activities. expect that they will succeed.Looking to the future, I see three near-term To end on a reflective note, I am grateful andphases to our plan to increase shareholder value. honored to have served as your CEO, CFO,First, through the recently implemented investor and Corporate Development and Strategyrelations program, I expect our multiple to improve. Officer over the past 15 years, and I amToday, we are trading at an enterprise value to humble and steadfast in my commitment totrailing 12-month EBITDA multiple that is significantly continue to serve as your Chairman.less than the 4 to 6 times range that characterizes I look forward to 2012 with excitement andmost “Main Street” companies. In other words, renewed confidence.by “getting the word out” to potential investors,I expect that we will generate sufficient interest Sincerely,that our share price will rise to reflect the basic,intrinsic value of your Company based on itscurrent cash flow and profits. Brian E. Dearing Chairman of the Board

ARI Annual Report FY 2011

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ARI Annual Report FY 2011 Document Transcript