3. Stock-based Compensation Plans

Employee Stock Purchase Plan

The Company's 2000 Employee Stock Purchase Plan, as amended, ("ESPP") has 225,000 shares of common stock reserved for issuance, of which 185,156 and 177,439 of the shares have been issued as of January 31, 2012 and July 31, 2011, respectively. All employees with at least 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 specified period through accumulation of payroll deductions, not to exceed 5,000 shares per employee per year.

Stock Option Plans

The Company's 1991 Stock Option Plan (the "1991 Plan") was terminated on August 14, 2001, except as to outstanding options. All 35,000 options outstanding under the 1991 Plan, with a weighted average exercise price of $2.33, expired as of September 7, 2010.

The Company's 1993 Director Stock Option Plan (the "1993 Plan") was terminated on August 14, 2001, except as to outstanding options. All 750 options outstanding under the 1993 Plan, with a weighted average exercise price of $2.05, expired as of September 11, 2010.

Total stock compensation expense recognized by the Company was approximately $27,000 and $43,000 during the three and six month periods ended January 31, 2012 and approximately $34,000 and $59,000 for the same periods last year. There was approximately $226,000 and $168,000 of total unrecognized compensation costs related to non-vested options granted under the Company's stock option plans as of January 31, 2012 and 2011, respectively. There were no capitalized stock-based compensation costs at January 31, 2012 or July 31, 2011.

We used the Black-Scholes model to value stock options granted. Expected volatility is based on historical volatility of the Company's stock. The expected life of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual term of the options is based on the United States Treasury yields in effect at the time of grant.

As recognizing stock-based compensation expense is based on awards ultimately expected to vest, the amount of recognized expense has been reduced for estimated forfeitures based on the Company's historical experience.

The fair value of each option granted was estimated in the period of issuance using the assumptions in the following table for the three and six months ended January 31, 2012 and 2011, respectively:


		Three months ended January 31						Six months ended January 31
		2012			2011			2012		2011
Expected life (years)		10 years			10 years			10 years		10 years
Risk-free interest rate		2.0		%	2.8	%		2.1	%	2.8	%
Expected volatility		125.5		%	104.9	%		123.9	%	103.1	%
Expected forfeiture rate		24.8		%	18.3	%		21.2	%	16.9	%
Expected dividend yield		0.0		%	0.0	%		0.0	%	0.0	%
Weighted-average estimated fair value
of options granted during the year	$	1.04	$		0.55		$	0.96	$	0.57

2000 Stock Option Plan

The Company's 2000 Stock Option Plan (the "2000 Plan") had 1,950,000 shares of common stock authorized for issuance. Each incentive stock option that was granted under the 2000 Plan is exercisable for a period of not more than ten years from the date of grant (five years in the case of a participant who is a 10% shareholder of the Company, unless the stock options are nonqualified), or such shorter period as determined by the Compensation Committee, and shall lapse upon the expiration of said period, or earlier upon termination of the participant's employment with the Company. The 2000 Plan expired on December 13, 2010, at which time it was terminated except for outstanding options. While options previously granted under the 2000 Plan will continue to be effective through the remainder of their terms, no new options may be granted under the 2000 Plan. Changes in option shares under the 2000 Plan during the three and six months ended January 31, 2011 and 2012 are as follows:


					Wtd. Avg.
					Remaining
				Wtd. Avg.	Contractual		Aggregate
	Number of			Exercise	Period		Instrinsic
	Options			Price	(Years)		Value
Outstanding at 10/31/10	1,329,268		$	1.38	6.40	$	11,363
Granted	79,000			0.62	n/a		n/a
Exercised	-			n/a	n/a		n/a
Forfeited	(23,149	)		1.35	n/a		n/a
Outstanding at 1/31/11	1,385,119		$	1.33	6.41	$	35,575
Exercisable at 1/31/11	962,303		$	1.51	5.37	$	18,982

Outstanding at 10/31/11	1,173,594		$	1.37	5.82	$	90,116
Granted	-			n/a	n/a		n/a
Exercised	(7,750	)		0.65	n/a		n/a
Forfeited	(8,575	)		0.85	n/a		n/a
Outstanding at 1/31/12	1,157,269		$	1.38	5.59	$	298,444
Exercisable at 1/31/12	981,552		$	1.50	5.10	$	167,097


					Wtd. Avg.
					Remaining
				Wtd. Avg.	Contractual		Aggregate
	Number of			Exercise	Period		Instrinsic
	Options			Price	(Years)		Value
Outstanding at 7/31/10	1,269,981		$	1.41	6.48	$	13,319
Granted	146,100			0.64	n/a		n/a
Exercised	-			n/a	n/a		n/a
Forfeited	(30,962	)		1.35	n/a		n/a
Outstanding at 1/31/11	1,385,119		$	1.33	6.41	$	35,575
Exercisable at 1/31/11	962,303		$	1.51	5.37	$	18,982

Outstanding at 7/31/11	1,236,333		$	1.36	6.10	$	34,041
Granted	-			n/a	n/a		n/a
Exercised	(20,950	)		0.63	n/a		n/a
Forfeited	(58,114	)		1.19	n/a		n/a
Outstanding at 1/31/12	1,157,269		$	1.38	5.59	$	298,444
Exercisable at 1/31/12	981,552		$	1.50	5.10	$	167,097

The range of exercise prices for options outstanding under the 2000 Plan was $0.15 to $2.74 at January 31, 2012 and 2011, respectively.

Changes in the 2000 Plan's non-vested option shares included in the outstanding shares above during the three and six months ended January 31, 2011 and 2012 are as follows:


				Wtd. Avg.
	Number of			Exercise
	Options			Price
Non-vested at 10/31/10	346,941		$	1.01
Granted	79,000			0.62
Vested	(500	)		0.86
Forfeited	(2,625	)		0.94
Non-vested at 1/31/11	422,816		$	0.94

Non-vested at 10/31/11	179,467		$	0.75
Granted	-			n/a
Vested	(250	)		0.86
Forfeited	(3,500	)		0.80
Non-vested at 1/31/12	175,717		$	0.75


				Wtd. Avg.
	Number of			Exercise
	Options			Price
Non-vested at 7/31/10	282,528		$	1.09
Granted	146,100			0.64
Vested	(500	)		0.86
Forfeited	(5,312	)		0.92
Non-vested at 1/31/11	422,816		$	0.94

Non-vested at 7/31/11	181,092		$	0.75
Granted	-			n/a
Vested	(250	)		0.86
Forfeited	(5,125	)		0.80
Non-vested at 1/31/12	175,717		$	0.75

The weighted average remaining vesting period was 1.24 and 1.38 years at January 31, 2012 and 2011, respectively.

2010 Equity Incentive Plan

The Board of Directors adopted the ARI Network Services, Inc. 2010 Equity Incentive Plan (the "2010 Plan") on November 9, 2010, and it was approved by the Company's 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 (10) 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 the three and six months ended January 31, 2011 and 2012 are as follows:


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

Outstanding at 10/31/11	117,875		$	0.75	9.67	$	23,096
Granted	146,667		$	1.08	n/a		n/a
Exercised	-			n/a	n/a		n/a
Forfeited	(4,625	)		0.61	n/a		n/a
Outstanding at 1/31/12	259,917		$	0.94	9.65	$	145,492
Exercisable at 1/31/12	21,188		$	0.66	9.11	$	17,838


					Wtd. Avg.
					Remaining
				Wtd. Avg.	Contractual		Aggregate
	Number of			Exercise	Period		Instrinsic
	Options			Price	(Years)		Value
Outstanding at 7/31/10	-		$	-	-	$	-
Granted	24,500			0.65	n/a		n/a
Exercised	-			n/a	n/a		n/a
Forfeited	-			n/a	n/a		n/a
Outstanding at 1/31/11	24,500		$	0.65	9.97	$	2,330
Exercisable at 1/31/11	-		$	-	-	$	-

Outstanding at 7/31/11	54,250		$	0.67	9.64	$	5,570
Granted	210,667		$	1.00	n/a		n/a
Exercised	-			n/a	n/a		n/a
Forfeited	(5,000	)		0.61	n/a		n/a
Outstanding at 1/31/12	259,917		$	0.94	9.65	$	145,492
Exercisable at 1/31/12	21,188		$	0.66	9.11	$	17,838

The range of exercise prices for options outstanding under the 2010 Plan was $0.575 to $1.35 and $0.65 to $0.655 at January 31, 2012 and 2011, respectively.

Changes in the 2010 Plan's non-vested option shares included in the outstanding shares above during the three and six months ended January 31, 2011 and 2012 are as follows:


				Wtd. Avg.
	Number of			Exercise
	Options			Price

Non-vested at 10/31/10	-		$	-
Granted	24,500			0.65
Vested	-			-
Forfeited	-			-
Non-vested at 1/31/11	24,500		$	0.65

Non-vested at 10/31/11	96,562		$	0.78
Granted	146,667			1.08
Vested	-			-
Forfeited	(4,500	)		0.61
Non-vested at 1/31/12	238,729		$	0.97

				Wtd. Avg.
	Number of			Exercise
	Options			Price
Non-vested at 7/31/10	-		$	-
Granted	24,500			0.65
Vested	-			-
Forfeited	-			-
Non-vested at 1/31/11	24,500		$	0.65

Non-vested at 7/31/11	32,937		$	0.67
Granted	210,667			1.00
Vested	-			-
Forfeited	(4,875	)		0.61
Non-vested at 1/31/12	238,729		$	0.97

The weighted average remaining vesting period was 1.62 and 1.28 years at January 31, 2012 and 2011, respectively.