**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**





xANNUAL
      REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES


**EXCHANGE
      ACT OF 1934**





**FOR
      THE FISCAL YEAR ENDED JUNE 30, 2007**





or





oTRANSITION
      REPORT UNDER
      SECTION 13 OR 15(d) OF THE


**SECURITIES
      EXCHANGE ACT OF 1934**





Commission
      File Number 0-22773




**NETSOL
      TECHNOLOGIES, INC.**


(Name
      of
      small business issuer as specified in its charter)




**NEVADA**
            **95-4627685**(State
                or other jurisdiction of incorporation or
                organization)
            (I.R.S.
                Employer Identification
                Number)




23901
      Calabasas Road, Suite 2072,


Calabasas,
      CA 91302


(Address
      of principal executive offices) (Zip code)





(818)
      222-9195 / (818) 222-9197


(Issuer's
      telephone/facsimile numbers, including area code)





SECURITIES
      REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:





**COMMON
      STOCK, $.001 PAR VALUE**


**THE
      NASDAQ STOCK MARKET LLC**





SECURITIES
      REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:





**COMMON
      STOCK, $.001 PAR VALUE**


**NASDAQ
      CAPITAL MARKET**





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes xNo o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B, and no disclosure will be contained, to the best of registrant’s
      knowledge, in definitive proxy or information statements incorporated by
      reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
      x





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


Yes
o
      No x





Registrant's
      revenues for the fiscal year ended June 30, 2007 were $29,282,086.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates was $23,878,944 as of September 13, 2007.





As
      of
      September 13, 2007, Registrant had 21,374,922 shares of its $.001 par value
      Common Stock issued and outstanding and 4,130 shares of its Preferred Stock
      issued and outstanding.










**DOCUMENTS
      INCORPORATED BY REFERENCE**





(None)





Transitional
      Small Business Disclosure Format (Check one): Yes o; No x










**TABLE
      OF CONTENTS AND CROSS REFERENCE SHEET**


PAGEPART
                    IItem
                    1
                Business
                1Item
                    2
                Properties
                22Item
                    3
                Legal
                    Proceedings
                23Item
                    4
                Submission
                    of Matters to a Vote of Security Holders
                23PART
                    IIItem
                    5
                Market
                    for Common Equity and Related Stockholder Matters and Small BusinessIssuer
                    Purchases of Equity Securities
                24Item
                    6
                Management's
                    Discussion and Analysis and Plan of Operations
                25Item
                    7
                Financial
                    Statements
                37Item
                    8
                Changes
                    in and Disagreements with Accountants on Accounting and Financial
                    Disclosure
                37Item
                    8A
                Controls
                    and Procedures
                37Item
                    8B
                Other
                    Information
                37PART
                    IIIItem
                    9
                Directors,
                    Executive Officers, Promoters and Control Persons; Corporate
                    Governance;
                    Compliance with Section 16(a) of the Exchange Act
                39Item
                    10
                Executive
                    Compensation
                41Item
                    11
                Security
                    Ownership of Certain Beneficial Owners and Management and Related
                    Stockholder MattersItem
                    12
                Certain
                    Relationships and Related Transactions
                54PART
                    IVItem
                    13
                Exhibits
                    and Reports on Form 8-K
                55Item
                    14
                Principal
                    Accountant Fees and Services
                57









**PART
      I**





This
      Form
      10-KSB contains forward looking statements relating to the development of the
      Company's products and services and future operation results, including
      statements regarding the Company that are subject to certain risks and
      uncertainties that could cause actual results to differ materially from those
      projected. The words "believe," "expect," "anticipate," "intend," variations
      of
      such words, and similar expressions, identify forward looking statements, but
      their absence does not mean that the statement is not forward looking. These
      statements are not guarantees of future performance and are subject to certain
      risks, uncertainties and assumptions that are difficult to predict. Factors
      that
      could affect the Company's actual results include the progress and costs of
      the
      development of products and services and the timing of the market acceptance.





**ITEM
      1 - BUSINESS**





**GENERAL**





NetSol
      Technologies, Inc. (“NetSol” or the “Company”) is global information technology
      solution provider. NetSol’s global resource base includes diversely qualified
      and experienced resources across software development, project management,
      operations & multiple products or services offerings. NetSol helps clients
      to identify, evaluate and implement technology solutions to meet their strategic
      business challenges and maximize their bottom line. By utilizing its worldwide
      resources, NetSol delivers high-quality, cost-effective equipment and vehicle
      finance portfolio management solutions. The Company also delivers managed IT
      services ranging from consulting and application development to systems
      integration and development outsourcing. NetSol’s commitment to quality is
      demonstrated by its achievement of both ISO 9001 and SEI (Software Engineering
      Institute) CMMi (Capability Maturity Model) Level 5 assessment ,
      a
      distinction shared by only 94 companies worldwide. The Company’s clients include
      global automakers, financial institutions, technology companies and governmental
      agencies .
      NetSol’s largest customers, DaimlerChrysler Services and Toyota, rank the
      Company as a preferred vendor in more than 40 countries. Founded in 1996, NetSol
      is headquartered in Calabasas, California. NetSol Technologies also has
      operations and/or offices in: Horsham, United Kingdom; the San Francisco Bay
      Area, California, USA; Adelaide, Australia; Beijing, China; Lahore, Islamabad,
      Rawalpindi and Karachi, Pakistan; and, Bangkok, Thailand.





**COMPANY
      BUSINESS MODEL**





NetSol
      offers a broad spectrum of IT products and IT services which management believes
      deliver a high return on investment for its customers. NetSol has nearly
      perfected its delivery capabilities by continuously investing in maturing its
      software development and Quality Assurance (“QA”) processes. NetSol believes its
      key competitive advantage is its ability to build high quality enterprise
      applications using its offshore development facility in Lahore, Pakistan while
      also utilizing our facility in Beijing, China. A major portion of NetSol’s
      revenues are derived from exports in general and LeaseSoft in particular. The
      use of the facility in Pakistan as the basis for software development,
      configuration and professional services represents a cost-effective and
      economical cost arbitrage model that is based on the globally acclaimed
      advantages of outsourcing and offshore development. In the areas of professional
      services, the Company is now changing its focus from just being a custom
      development facility to offering high end services like systems integration
      and
      technology consulting services. NetSol management believes that the use of
      this
      model will only further benefit the Company in its penetration of US, European,
      developed and developing country markets. NetSol’s subsidiary, NetSol
      Technologies Limited, is listed on the Karachi Stock Exchange
      (NETSOL).





The
      two
      recent acquisitions in Horsham in the United Kingdom and in Burlingame,
      California in the United States, add an onshore development capacity. The
      capacity and capability of these locations provide the Company with contingency
      development capability in the event of any unforeseen crises at the Lahore
      facility. So far, the Lahore development facility has operated smoothly without
      any interruption since 1996. Currently about 80% of the Company’s software
      development takes place in the Lahore technology campus with the remaining
      20%
      in the US and UK.





*Achieving
      Software Maturity and Quality Assurance.*





NetSol,
      from the outset, invested heavily in creating a state of the art, world-class
      software development capability. A series of QA initiatives resulted in both
      ISO
      9001 certification as well as a CMMi level 5 assessment. These assessments
      solidify NetSol’s project delivery ability as well as permit the Company to
      target market segments consisting of organizations and corporations who prefer
      to work with software providers having the ultimate quality standard, CMMi
      Level
      5 rating. Achieving these CMMi targets required dedication by all levels of
      the
      Company.




1





Software
      Engineering Institute’s (“SEI”) CMMi, which is organized into five maturity
      levels, has become a de facto ‘Gold Standard’ for assessing and improving
      software processes. Through the CMMi, SEI and the software development community
      have established an effective means for modeling, defining, and measuring the
      maturity of the processes used by software professionals. The CMMi for software
      describes the principles and practices underlying software process maturity
      and
      is intended to help software organizations improve the maturity of their
      software processes in terms of an evolutionary path from ad hoc, chaotic
      processes to mature, disciplined software processes. Mature processes meet
      standardized software engineering methods and are integratable into a customer’s
      system. Mature processes ensure enhanced product quality resulting in faster
      project turn around and a shortened time-to-market. In short, a mature process
      would, ideally, have fewer bugs and integrate better into the customer’s system.





The
      Company has always strived to improve quality in every aspect of its business.
      This quality drive, based on the Company’s vision, trickles down from the top to
      the lowest levels in the organization. The Company believes that it is this
      quality focus that enabled the Company’s software development facility to become
      the first ISO 9001 certified software development facility in Pakistan in 1998.
      This accomplishment marked the beginning of the Company’s continuing long term
      program towards achieving the higher challenges of SW-CMMI. Thanks to the
      dedication of the Company’s employees, it is the first ever to reach CMMi level
      5 in Pakistan. Achieving the ultimate quality standard of CMMi Level 5 has
      been
      one of the most significant milestones in the history of NetSol and the company
      now joins the ranks of select club of global IT giants like IBM, Boeing,
      Infosys, and Lockheed Martin offering the highest quality of products and
      services. According to SEI there are less than 100 companies in the world
      claiming certification of CMMi Level 5.





The
      Company is divided into two groups, the Global Product Group and the Global
      Services Group; and three regions: North America; Europe, Middle East and Africa
      (“EMEA”); and, Asia Pacific (“APAC”).





The
      North
      American Region is headed by John McCue, as President of NetSol McCue, based
      in
      Burlingame, California. NetSol McCue has 35 years of experience in developing
      business solutions for the equipment and vehicle leasing industry as a provider
      of lease/loan portfolio management software for banks, leasing companies and
      manufacturers. Its flagship product, LeasePak, simplifies lease/loan
      administration and asset management by accurately tracking leases, loans and
      equipment from origination through end-of-term and disposition. The LeasePak
      brand is recognized in the US and Canadian marketplace and is configured to
      handle the unique tax and regulation requirements of North America. LeasePak
      is
      complementary to NetSol’s LeaseSoft offering and its geographic specificity
      complements LeaseSoft in regions in which LeaseSoft does not currently have
      coverage or domain support knowledge. In order to best leverage the cost
      arbitrage and enhance gross margins, NetSol US operations (after the McCue
      acquisition) has already begun training 15 developers and programmers in the
      Lahore development facility to reduce dependency in the high-cost base in
      Silicon Valley. The integration of both back end and front end of McCue with
      NetSol is on track. The Company will continue to use NetSol McCue as a platform
      for introduction of LeaseSoft to the U.S. market.





NetSol
      McCue provides the leasing technology industry in the development of Web-enabled
      and Web-based tools to deliver superior customer service, reduce operating
      costs, streamline the lease management lifecycle, and support collaboration
      with
      origination channel and asset partners. LeasePak can be configured to run on
      HP-UX, SUN/Solaris or Linux, as well as for Oracle and Sybase users. And for
      scalability, NetSol McCue offers the LeasePak Bronze, Silver and Gold Editions
      for systems and portfolios of virtually all sizes and complexities. These
      solutions provide the equipment and vehicle leasing infrastructure at leading
      Fortune 500 banks and manufacturers, as well as for some of the industry’s
      leading independent lessors, including such companies as Cisco, Hyundai, JP
      Morgan/Chase, KeyCorp Leasing, City National Bank, Bank of Tokyo Mitsubishi,
      La
      Salle National Bank, Terex Corp., National City Capital Corp., ORIX, and
      Volkswagen Credit.





With
      common customers and common goals, we believe that NetSol McCue provides a
      complimentary North American presence to our global offering of software and
      services to the lease and finance industry. Not only does this provide a U.S.
      base of operations and footprint for NetSol, but makes NetSol the only company
      focusing on the commercial and consumer lease/finance marketplace with actual
      live implementations within nearly every region of the globe, including, U.S.,
      Canada, Europe, Asia-Pacific and the far-East. With NetSol McCue, NetSol now
      has
      a regional asset finance solution suitable for the biggest auto and equipment
      finance commercial markets of North America.




2





The
      EMEA
      Region, headed by former NetSol Chief Executive Officer, Naeem Ghauri, continues
      to capitalize on the 2005 acquisition of CQ Systems Ltd. (now NetSol-CQ). As
      a
      result of the acquisition, NetSol has access to a broad European customer base
      using IT solutions complementary to NetSol’s own LeaseSoft product suite. NetSol
      continues to leverage NetSol-CQ’s knowledge base and strong presence in the
      Asset Finance market to broaden the product and market reach within the UK
      and
      Continental Europe. NetSol-CQ’s strong sales and marketing capability has
      further helped NetSol gain recognition and positioning for the broader LeaseSoft
      suite of products.




The
      integration of the former CQ Systems with NetSol has been smooth and consistent
      with NetSol’s planned strategy. During the early part of 2007, NetSol-CQ entered
      the second phase of integration by increasing its offshore development
      capability by 100%, through expansion of its Lahore based team. The Company
      expects to enhance this further during the year, improving productivity and
      net
      margins.





New
      products introduced in the last quarter included: LeaseSoft Auto-Decision
      Engine, developed to provide automation of credit checking and underwriting
      for
      standards based financial products, and LeaseSoft EDI, introduced to facilitate
      process automation between business introducers and funders. These enhancements
      to LeaseSoft Asset complement product releases earlier in the year; LeaseSoft
      Portal introduced to support online access to proposals and form the foundation
      of web-based origination systems and LeaseSoft Document Manager introduced
      to
      facilitate the automation production and distribution of proposal documentation,
      including indexation and branding of all outboard and inbound documents. All
      new
      products and enhancements have been well received by the market with sales
      and
      successful implementations during the fiscal year. The EDI, Auto-Decision and
      Origination projects were delivered on time and to budget and LeaseSoft Evolve
      with its first sale to Kennet Equipment Finance, was implemented in record
      time
      (LeaseSoft Evolve is, targeted at small portfolio companies with 250 to 2,500
      agreements is a software package designed to facilitate a simple and cost
      effective solution to support Asset Finance operations).





Product
      development continues to focus on expanding the product and market reach within
      the core competence of leasing and financial services creating the opportunity
      to broaden the product and services offerings and increasing revenues for the
      end-to-end life cycle management on lease-based contracts.





The
      introduction of new products and services contributed to the Company’s growing
      success in Europe with leading banks adopting the LeaseSoft Asset application
      suite as their end-to-end Asset Finance software solution. These organizations
      are continuing to invest to further develop their business origination systems
      to achieve competitive advantage in the marketplace.





In
      parallel with the introduction and new products and services NetSol-CQ has
      further strengthened its core competences in leasing domain knowledge and in
      Microsoft and Oracle based technologies which form the basis of all its new
      developments, to meet the ongoing demand for high quality professional
      services.





NetSol
      will continue to manage LeaseSoft pre-sales support and deliveries by having
      two
      specialized pools of resources for each of the four products under LeaseSoft.
      One group focuses on software development required for customization and
      enhancements. The second group comprises of LeaseSoft consultants concentrating
      on implementation and onsite support. Both groups are being continually trained
      in the domain of finance and leasing, system functionality, communication
      skills, organizational behavior and client management.





*NETSOL
      APAC OPERATIONS*





Our
      off-shore development center, and indeed the center of the Company’s services
      and software operations, the APAC region is headed by former President of NetSol
      and current Chief Executive Officer of NetSol PK (the Company’s Pakistan
      subsidiary), Salim Ghauri. The Asian continent, Australia and New Zealand,
      from
      the perspective of LeaseSoft marketing, are targeted by NetSol Technologies
      from
      its Lahore subsidiary, its offices in Australia, Thailand and Beijing, China.
      NetSol PK has continued to grow its service contracts within the local Pakistani
      public and defense sectors. An important aspect of these contracts is that
      not
      all of them focused solely on software development and engineering.





This
      year, APAC has gone a step further by providing both consultancy services to
      organizations so as to improve their quality of operations and services and,
      winning strategically important assignments with the E-Governance domains for
      organizations of national significance in Pakistan. These clients include
      private as well as public sector enterprises. In response, APAC has created
      a
      new division known as NDD - NetSol Defense Division in Islamabad. There is
      a
      sizable budget allocated by the government of Pakistan to automate and use
      new
      technologies and systems. NetSol is in a sound position to win some of these
      high ticketed projects.




3





APAC
      has
      entered into a major new development project at the provincial level to support
      the data entry and projects management of Land Revenue Systems. This is a very
      new opportunity that has been funded by World Bank to reform the land management
      system in Pakistan. This development project positions NetSol to win potentially
      very large size projects.





***IT
      Consulting & Services***





Information
      technology services are valuable only if they fulfill the business strategy
      and
      project objectives set forth by the customer. NetSol’s expert consultants have
      the technical knowledge and business experience to ensure the optimization
      of
      the development process in alignment with basic business principles. The Company
      offers a broad array of professional services to clients in the global
      commercial markets and specializes in the application of advanced and complex
      IT
      enterprise solutions to achieve its customers' strategic objectives. Its service
      offerings include IT Consulting & Services; NetSol Defense Division;
      Business Intelligence, Information Security, Outsourcing Services and Software
      Process Improvement Consulting; maintenance and support of existing systems;
      and, project management.





Outsourcing
      involves operating all or a portion of a customer's technology infrastructure,
      including systems analysis, system design and architecture, change management,
      enterprise applications development, network operations, desktop computing
      and
      data center management.





IT
      Consulting & Services in Pakistan has included a first entrant advantage
      into the e-government sector for both provincial and federal governments and
      armed forces automation projects. The development of solutions for clients
      has
      resulted in the development of vertical offerings catering to various industries
      and accordingly, diversifying NetSol’s offerings. These verticals have been used
      successfully in Pakistan to provide services for the Motor Transport Management
      System, Land Record Management System, Legislature, computer based trainings,
      enterprise content management, unit management systems, e government and
      defense.





The
      NetSol Defense Division (NDD), founded in 2005, specializes in providing
      solutions for improvement and optimization of business operations of the defense
      and military forces, particularly for ERP, office automation and non-warfare
      operations. Since late 2006, the division has undertaken research and
      development in collaboration with various partners for warfare and similar
      operations management systems. With a unique blend of experienced and highly
      skilled IT specialists and managers, and most importantly the domain expertise
      from the defense sector itself, NDD has positioned itself as a
      platform-independent system integration partner for the unique mission
      requirements of the defense and intelligence communities within Pakistan. The
      NDD is currently undertaking the following projects for this sector: Unit
      Management System, an initiative for the automation of administrative functions
      for the Pakistani Army, helping to realize the Army’s key objective of improving
      productivity and efficacy of the units of the Pakistani Army; Academy
      Information Management System for the Pakistan Military Academy, one of the
      top
      rated military institutes in the world; and, Network Centric Warfare (NCW)
      working to provide an information grid which provides a seamless integration
      of
      sensors, weapons, and decision makers through a common operating environment
      and
      mission applications built in compliance with laid down inter-operability
      standards.





Business
      Intelligence (BI) solution providers must have both the capability to service
      BI
      customers using its own resources but also service the customers of
      international affiliates in the APAC region. Typical BI projects run into
      several years of phased implementation and rely on expensive international
      resources with a very restricted and limited accessibility. As such, management
      believes, that NetSol’s competitors compromise on quality by turning BI projects
      into IT projects, which is a recipe for failure. Our strategy is simple; we
      identify the business pins of our potential customer and involve our industry
      domain experts directly with business managers at the client side. This results
      in ownership of the project with the business group rather than the IT group
      which is involved in the overall initiative only from a support and facilitation
      standpoint.





NetSol’s
      service capability has expanded to Basel II compliance. The Basel II Accord
      is a
      mandate by the Bank for International Settlements (BIS) requiring banks around
      the world to introduce processes and systems in their organization that will
      more effectively control and manage their enterprise wide risk. Basel II has
      introduced “risk differentiation” by allowing banks to hold capital reserves
      directly proportional to the amount of credit risk they are taking. Further,
      the
      accord has introduced a capital charge for operational risk. SunGard is the
      world’s number one software company for the financial industry with a
      comprehensive range of solutions. NetSol formed a strategic alliance with
      SunGard in April 2006, and launched its Basil II solutions with a jointly
      sponsored seminar in Karachi. The strong Basel II implementation know-how of
      NetSol’s BI consulting group combined with the world’s foremost software in the
      risk and financial industry makes NetSol, in management’s opinion, the world’s
      strongest and most proficient Basel II service in Pakistan.




4





Information
      Security services is provided by NetSol INFOSEC Unit. This unit provides
      services to secure all corporate information and its supporting processes,
      systems and networks. NetSol’s Information Security Services is a group of
      vendor-neutral, dedicated security consultants with real-life field experience.
      The INFOSEC group utilizes industry standard security best practices coupled
      with best-of-breed products to deliver proven and robust Information Security
      Management Systems (ISMS). Services include: managed security services provider;
      BS-7799/ISO 27001 Compliance Life-cycle services; information security
      assessment; penetration testing and vulnerability assessment; disaster recovery
      planning; and, network architecture design, deployment and management.





Software
      Process Improvement Consulting is provided by NetSol to companies in Pakistan
      through an independent division. The division provides quality engineering
      and
      related consulting services to technology companies. These activities are
      broadly developed under the guidelines of SEI based CMMi processes as well
      as
      the information security consulting practices. Currently, NetSol is one of
      the
      few companies authorized by Pakistan Software Export Board (PSEB) for BS7799/ISO
      27001 consulting practices in Pakistan as well as complete life cycle consulting
      for CMMi.





All
      of
      these services are available for the US and UK market. More particularly, the
      company’s U.S. division has developed a broad range of services aimed at
      LeasePak customers. These include customized report writing, system
      reconfiguration, upgrade support, integration support, and business process
      reviews and process re-engineering.





***LeaseSoft***





The
      Company develops advanced software systems for the lease and finance industries.
      NetSol has developed “LeaseSoft” as a product for automated solutions pertaining
      to leasing and asset hire or purchase lifecycle management.





LeaseSoft,
      a robust suite of four software applications, is an end-to-end solution for
      the
      lease and finance industry covering the complete leasing and finance cycle
      starting from quotation origination through end of contract. The four software
      applications under LeaseSoft have been designed and developed for a highly
      flexible setting and are capable of dealing with multinational, multi-company,
      multi-asset, multi-lingual, multi-distributor and multi-manufacturer
      environments. Each application is a complete system in itself and can be used
      independently to address specific sub-domains of the leasing/financing cycle.
      NetSol recently added LeaseSoft Fleet Management System (FMS). The Company
      has
      already signed an agreement for FMS with a major automotive company in the
      Asia
      Pacific region.




LeaseSoft
      is a result of more than eight years of effort resulting in over 60 modules
      grouped in four comprehensive applications. These four applications are complete
      systems in themselves and can be used independently to exhaustively address
      specific sub-domains of the leasing/financing cycle. When used together, they
      fully automate the entire leasing / financing cycle.




*The
      constituent software applications are:*




·  Credit
      Application Processing System (CAP). LeaseSoft.CAP provides companies in the financial sector an environment to
      handle the incoming credit applications from dealers, agents, brokers and the
      direct sales force. LeaseSoft.CAP automatically gathers information from
      different interfaces like credit rating agencies, evaluation guides, and
      contract management systems and scores the applications against defined
      scorecards. This mechanized workflow permits the credit team members to make
      their decisions more quickly and accurately. Implementation of LeaseSoft.CAP
      dramatically reduces application-processing time in turn resulting in greater
      revenue through higher number of applications finalized in a given time.
      LeaseSoft.CAP reduces the probability of a wrong decision thus, again, providing
      a concrete business value through minimizing the bad debt portfolio. LeaseSoft.CAP is a database independent online system developed in Microsoft's
      .Net framework. Toyota Leasing Thailand and BMW Financial Services China are
      the
      first two clients of LeaseSoft.CAP. The benefit of LeaseSoft.CAP being an online
      system is that it can be run from any PC with normal specifications as long
      as
      there is an internet connection.




5




·  Contract
      Management System (CMS) .
      LeaseSoft.CMS provides comprehensive business functionality that enables its
      users to effectively and smoothly manage and maintain a contract with the most
      comprehensive details throughout its life cycle. It provides interfaces with
      company banks and accounting systems. LeaseSoft.CMS effectively maintains
      details of all business partners that do business with the company including,
      but not limited to, customers, dealers, debtors, guarantors, insurance companies
      and banks. Developed with the input of a number of leasing consultants, this
      product represents a complete lease and finance product. NetSol’s LeaseSoft.CMS
      provides business functionality for all areas that are required to run an
      effective, efficient and customer oriented lease and finance
      business.




·  Wholesale
      Finance System (WFS ).
      LeaseSoft.WFS automates and manages the floor plan/bailment activities of
      dealerships through a finance company. The design of the system is based on
      the
      concept of one asset/one loan to facilitate asset tracking and costing. The
      system covers credit limit, payment of loan, billing and settlement, stock
      auditing, online dealer and auditor access, and ultimately the pay-off
      functions.




·  Fleet
      Management System (FMS ).
      LeaseSoftFMS is designed to efficiently handle all fleet management needs.
      FMS
      is easily integrated with LeaseSoftCMS and WFS as well as with any third party
      contract management system to ensure a single comprehensive system. FMS’ key
      features include: a detailed tracking information on every driver and vehicle;
      customizable reports; periodic reporting on fleet related aspects; internet
      based access to information; integration with third party software; and, linkage
      to GPS for real time tracking .




Typically,
      NetSol’s sales cycle for these products ranges between three to six months.
      NetSol derives its income both from selling the license to use the products,
      as
      well as, from related software services. The related services include
      requirement study/gap analysis, customization on the basis of gaps development,
      testing, configuration, installation at the client site, data migration,
      training, user acceptance testing, supporting initial live operations and,
      finally, the long term maintenance of the system. Any changes or enhancement
      done is also charged to the customer. In the requirements study/gaps analysis,
      the NetSol LeaseSoft team goes to the client site to study the client’s business
      and functional requirements and maps them against the existing functionality
      available in LeaseSoft. LeaseSoft has now reached a stage where hardly, if
      any
      gaps, are identified as a result of such a study. In the customization phase,
      the gaps are made part of LeaseSoft through a development cycle. This
      development takes place in Lahore, Pakistan. Then the new as per requirement
      system is thoroughly tested. This phase also takes place in Pakistan. LeaseSoft
      is a highly parameterized configurable application and hence it is able to
      be
      configured according to the business of the customer. This phase can take place
      both onsite as well as in Lahore but is usually at least partially done in
      Lahore. Next, follows the installation of the system at client site. If the
      customer was using some other system and already has data in electronic form,
      then NetSol’s data migration team migrates this data from the old system to the
      LeaseSoft database. Data migration is a mix of both client site and Lahore
      based
      work. The client is also imparted training in the areas of business user
      training, functional business training and system administration training.
      Training is followed by user acceptance testing (UAT) where client nominated
      staff and NetSol consultants test the system against the customer business
      requirements. After UAT, the system is put in normal business use. LeaseSoft
      is
      a mission critical software, and the whole business operations, from the asset
      side of a finance/leasing company, hinge upon the performance of the system.
      Hence in the early days after going live, NetSol consultants remain at the
      client site to assist the company in smooth operations. After this phase, the
      regular maintenance and support services phase for the implemented software
      begins. In addition to the daily rate paid by the customer for each consultant,
      the customer also pays for all the transportation related expenses, boarding
      of
      the consultants, and a living allowance. These practices enable NetSol to
      increase marginal revenue in a proportion larger than the marginal cost
      incurred.





License
      fees can vary generally between $300,000 up to $1,000,000 per license per
      module. There are various attributes which determine the level of complexity,
      a
      few of which are: number of contracts; size of the portfolio; business strategy
      of the company; number of business users; and, branch network of the customer.
      The Company recognizes revenue from license contracts without major
      customization when a non-cancelable, non-contingent license agreement has been
      signed, delivery of the software has occurred, the fee is fixed or determinable,
      and collectibility is probable. However, revenue from sale of licenses with
      major customization, modification, and development is recognized on percent
      of
      completion basis. Revenue from software services includes fixed price contracts
      and is recognized in accordance with the percentage of completion method using
      the output measure of “Unit of Work Completed.” The annual maintenance fee,
      which usually is an agreed upon percentage of overall monetary value of the
      implementation, then becomes an ongoing revenue stream realized on yearly
      basis.




6





As
      a
      marketing strategy NetSol is preparing a lighter version of LeaseSoft to target
      companies with simpler business models. LeaseSoft is highly modular. Hence
      various sets of functionalities can be used against the restricted requirements
      of the client. The first deployment of this lighter version is currently being
      carried out in Maritius for Mauritius Commercial Bank. NetSol
      has also provided the option of using its LeaseSoft application on monthly
      rental basis to those organizations which are small in size or have small
      turnover. This facility is initially provided to Australian Motor Finance (AMF).
      AMF is a sub-prime lender in Australia. NetSol has provided them LeaseSoft
      Proposal Management System and LeaseSoft Contract Management System.





*NETSOL
      NORTH AMERICA OPERATION - NetSol McCue, Inc.*





In
      June
      2006, NetSol acquired the issued and outstanding shares of McCue Systems, Inc.,
      (now “NetSol McCue”) a California corporation located in Burlingame, California.





NetSol
      McCue provides the leasing technology industry in the development of Web-enabled
      and Web-based tools to deliver superior customer service, reduce operating
      costs, streamline the lease management lifecycle, and support collaboration
      with
      origination channel and asset partners. LeasePak can be configured to run on
      HP-UX, SUN/Solaris or Linux, as well as for Oracle and Sybase users. And for
      scalability, NetSol McCue offers the LeasePak Bronze, Silver and Gold Editions
      for systems and portfolios of virtually all sizes and complexities. These
      solutions provide the equipment and vehicle leasing infrastructure at leading
      Fortune 500 banks and manufacturers, as well as for some of the industry’s
      leading independent lessors. NetSol customers include such companies as Cisco,
      Hyundai, JP Morgan/Chase, KeyCorp Leasing, City National Bank, Bank of Tokyo
      Mitsubishi, La Salle National Bank, Terex Corp., National City Capital Corp.,
      ORIX, and Volkswagen Credit.





NetSol
      McCue, the company’s U.S. division, has commenced the rollout of a full suite of
      IT outsourcing services and customized development solutions to the North
      American equipment finance technology market. The services offering will
      leverage 30 plus years of equipment leasing and lending experience. While the
      division's Client Consulting Services department has long offered NetSol McCue
      customers a range of business process engineering services, the new offering
      package will greatly expand the menu of available services to meet market needs.
      New services to be offered will include customized application development,
      a
      full range of Quality Assurance (QA) services, customized strategic report
      design, and business intelligence tool development. Leveraging well-established
      relationships with users of the division's flagship application, the IT Services
      team will market to these existing customers, then to adjacent groups within
      customer organizations, eventually building out to a full, industry-wide sales
      and marketing strategy.





With
      common customers and common goals, we believe the acquisition of McCue provides
      a complimentary North American presence to our global offering of software
      and
      services to the lease and finance industry. Not only does this provide a U.S.
      base of operations and footprint for NetSol, but makes NetSol the only company
      focusing on the commercial and consumer lease/finance marketplace with actual
      live implementations within nearly every region of the globe, including, U.S.,
      Canada, Europe, Asia-Pacific and the far-East. With the McCue’s acquisition,
      NetSol now has a regional asset finance pm solution to suitable for the biggest
      auto and equipment finance commercial markets of North America.





*NETSOL
      EMEA OPERATIONS - NETSO-CQ Ltd., UK.*





In
      February 2005, NetSol acquired 100% of CQ Systems Ltd., (“NetSol-CQ”) an IT
      products and service company based in the UK. As a result of this acquisition,
      NetSol has access to a broad European customer base using IT solutions
      complementary to NetSol’s LeaseSoft product. NetSol plans to leverage CQ’s
      knowledge base and strong presence in the Asset Finance market to launch
      LeaseSoft in the UK and continental Europe. CQ’s strong sales and marketing
      capability would further help NetSol gain immediate recognition and positioning
      for the LeaseSoft suite of products.





NetSol-CQ’s
      integration has included the continued leverage of the Company’s high quality
      but lower cost resources in its offshore development center in Lahore, Pakistan.
      This phase of the transition plan has been completed whereby a dedicated team
      of
      software engineers and testers have been trained on CQ product suite and most
      of
      the quality assurance, documentation and some of the CQ products core software
      development activities have been transitioned to Lahore. NetSol-CQ has been
      able
      to implement significant productivity and cost improvements which have included
      realizing the higher level of cost efficiencies of using the Lahore offshore
      facility for software development and quality assurance.




7





In
      November 2005, CQ was re-branded as NetSol-CQ and was launched into the UK
      market with new branding and logo. This was part of a global strategy to have
      consistency in our marketing collateral across the globe. All NetSol-CQ products
      have been re-branded as LeaseSoft and the Enterprise product would now be known
      as LeaseSoft Asset.





Like
      all
      NetSol companies, NetSol-CQ has seen its sales and revenues focus increasingly
      on total client services rather than on a purely, one-off, product based model.
      Roughly two-thirds of the new sales for NetSol-CQ came from products which
      did
      not exist when CQ was purchased by NetSol. The total client services model
      has
      seen an expansion from a solely back office based product to a greater front
      office focus. This front office focus tends to be highly customized as the
      initial interface for the customer. NetSol-CQ’s auto decision component was
      developed sooner than any competitors and together with its web-based portal,
      is
      one of the many front ends solutions that NetSol-CQ is implementing.





NetSol
      will continue to manage LeaseSoft pre-sales support and deliveries by having
      two
      specialized pools of resources for each of the five products under LeaseSoft.
      One group focuses on software development required for customization and
      enhancements. The second group comprises of LeaseSoft consultants concentrating
      on implementation and onsite support. Both groups are being continually trained
      in the domain of finance and leasing, system functionality, communication
      skills, organizational behavior and client management.





The
      Asian
      continent, Australia and New Zealand, from the perspective of LeaseSoft
      marketing, are targeted by NetSol Technologies from its Lahore subsidiary,
      its
      offices in Beijing, and it’s newly opened business and technical support office
      in Bangkok, Thailand. NetSol UK through its base in Horsham, United Kingdom,
      focuses on the European market. The marketing for LeaseSoft in USA and Canada
      is
      carried out directly by the Company.




NetSol
      has established a strategy to aggressively market LeaseSoft in various regions
      of the world. As part of the strategy, NetSol is forming alliances with
      reputable IT companies and has already appointed distributors in Singapore
      and
      Japan. NetSol has entered into a mutually non-exclusive agreement with Singapore
      Computer Systems (SCS) that allows SCS to market LeaseSoft in the entire Asia
      Pacific Region. Furthermore, NetSol is looking forward to developing partner
      networks all across the world with reputable companies.





*NetSol
      office in Beijing, China*





As
      part
      of the same strategy and focus on marketing LeaseSoft, NetSol established a
      sales office in Beijing, China, which acts as the sales and marketing front
      for
      NetSol in the People’s Republic of China and as the liaison office for its
      ongoing operations and implementation services for DaimlerChrysler Services,
      BMW
      and other clients in the country. The new Asia Pacific office is jointly managed
      by NetSol Technologies, Inc. and its wholly owned U.K. subsidiary, NetSol-CQ,
      Ltd.





*NetSol
      ’s new office in Bangkok, Thailand*





To
      further strengthen its presence in the Asia-Pacific market, and to provide
      exclusive services to its clients, the APAC region has recently established
      a
      support office in Bangkok, Thailand. This office is located at a prime location
      in Bangkok. The core responsibilities of this office are to enhance business
      through targeting potential customers and to provide technical support to its
      existing clients in Thailand.





Management
      believes that LeaseSoft has begun to be recognized as a unique, world-class
      product offering. This belief is based on the following instances:





·
            11
                new implementation contracts signed during the
                year.





·
            Of
                these, 7 new contracts signed during the fourth
                quarter.





·
            New
                names in the customer list, including Fiat Automotive Finance, CNH
                Capital, and a large automotive blue chip company in
                China.





·
            The
                addition of the Fleet Management System to the LeaseSoft
                Suite.





The
      current LeaseSoft client base includes DaimlerChrysler Financial Services
      (Australia, Japan, New Zealand, Singapore, South Korea, Thailand, China and
      Taiwan), Mercedes-Benz Finance Japan, Yamaha Motors Finance Australia, Toyota
      Motors Finance China, Toyota Leasing Thailand, Mauritius Commercial Bank,
      Finlease Company Limited, CNH Capital Australia, Fiat Automotive Finance China,
      a Large Automotive Blue chip Company in China and BMW Financial Services in
      China.




8





NetSol
      is
      the only Leasing and Finance Solution Provider for automotive finance companies
      providing support to Chinese clients locally from within the branch offices
      in
      China and Thailand.





NetSol
      also maintains a LeaseSoft specific product website www.leasesoft.biz .
      This
      product website is also available in the Chinese and Thai languages at http://www.leasesoft.biz/chinese and
      http://www.leasesoft.biz/thai.





**Status
      of New Products and Services**





*InBankingTM*





With
      the
      acquisition of Pearl Treasury System, whose product offering is now referred
      to
      as InBankingTM, the Company expands its menu of software into the banking and
      other financial areas. In 2003, NetSol acquired the intellectual property rights
      (“IPR”) of Pearl Treasury System (“PTS”). PTS was developed to 70% completion in
      the late 1990s, led by its system designer who had 30 plus years in banking
      through positions as Trader and Head of Trading, Treasury, Risk, Operations
      and
      IT for banks such as Bankers’ Trust and Mitsubishi Trust & Banking.





PTS
      was
      originally developed on two tier client server technologies and was designed
      to
      provide full process automation and decision support in the front, middle and
      back offices of treasury and capital markets operations. On an internal review
      of PTS post acquisition, it was decided to re-write the system within .NET
      technologies, bringing the system into the leading edge n-tier/browser-based
      environment. The project name for this program is InBankingTM.





The
      tremendous flexibility enabled by the comprehensive data model and multi-tier
      architectural design of InBankingTM has been fully recognized, identifying the
      potential to further develop InBankingTM beyond treasury and capital markets.
      Additionally, InBankingTM is modular and can therefore be implemented as
      best-of-breed solutions for, as an example, front-office trading, middle office
      credit or market risk, or back office settlement. InBankingTM can also be
      implemented to support all these areas, plus others, as a single fully
      integrated solution.





The
      development of the beta version of InBanking is now completed and NetSol is
      currently seeking a bank or financial institution to act as pilot development
      partners for the beta version of InBankingTM to support their specific
      requirements.





*LeaseSoft
      Portals and Modules in 2007*





Our
      EMEA
      division developed new products and modules including:





LeaseSoft
      Portal- introduced to support online access to proposals and for the foundation
      of web-based origination systems





LeaseSoft
      Document Manager- introduced to facilitate the automation production and
      distribution of proposal documentation, including indexation and branding of
      all
      outboard and inbound documents.





LeaseSoft
      Auto-Decision Engine- developed to provide automation of credit checking and
      underwriting for standards based financial products





LeaseSoft
      EDI Manager- introduced to facilitate process automation between business
      introducers and funders





Evolve-
      launched to provide an entry level software package for own book brokerages
      and
      small to medium size funders.





*LeasePak
      Productivity Suite*





In
      2005,
      McCue Systems developed the LeasePak Productivity Suite as an additional
      companion set of products to operate in conjunction with the LeasePak licensed
      software. This toolset enables the LeasePak user to leverage the power of the
      system to streamline originations, integrate the dealer/vendor network, automate
      documentation, enhance customer service, manage risk, and control infrastructure
      overhead. In 2007, LeasePak 6.0a was released for general availability and
      has
      gone into production for use at 2 major clients.




9





The
      components of the LeasePak Productivity Suite are:





Channel
      IT- A web-based front end origination channel manager, ChannelIT provides a
      browser-based origination tool for use by the remote sales force as well as
      the
      broker/dealer network and vendor partners. Using ChannelIT’s seamless interface
      to LeasePak, contract originators and operational personnel have instant access
      to credit information, terms, and conditions, reducing acceptance times and
      eliminating costly data re-entry.





Link
      IT-
      A toolkit of application interfaces to streamline the integration of the
      LeasePak lease portfolio management system with best-of-breed third-party tools
      and enterprise applications. Designed to work with web services as well as
      with
      the client-server architecture, LinkIT streamlines application integration
      and
      reduces version-maintenance overhead.





Doc
      IT-
      The integrated document generation for LeasePak auto-generates the letters
      and
      documents required to book and finalize a deal. Using customer private-label
      graphics and customer existing document formatting, LeasePak generates letters
      and documents, delivers them, and archives them for instant access throughout
      the life of the contract, asset, and customer relationship.





View
      IT-
      A complete business intelligence toolset to give the customer the information
      required to monitor its lease/loan portfolios. ViewIT provides streamlined
      strategic reporting, easy-to-use ad-hoc reporting, plus a data warehouse and
      executive dashboard to identify trends, manage risk, and assure compliance
      for
      using real-time strategic information.





Serv
      IT-
      LeasePak’s customer web portal enables users to offer customers the convenience
      of web-based account self-management. The lessor benefits from reduced help
      desk
      costs as customers use the web to, amongst other tasks, check payments, update
      account information, and request payoff quotes .





AcquireIT
      - A powerful data management and business development tool that enhances the
      ability of LeasePak users to generate business with each other. This add-on
      allows equipment leasing entities to greatly reduce the overhead in time and
      resources required to buy and sell aggregated contracts and/or portfolios,
      giving LeasePak users a competitive advantage over users of other portfolio
      management systems.





With
      the
      release of LeasePak 6.0, users have new options for navigation and reporting.
      Additionally, new capabilities have been incorporated into the
      product:




· Business
      Development
      Module: Streamlines the exchange of aggregated finance contract portfolios
      between LeasePak users.





· Commercial
      Lending Module:
      Adds core functionality for the management of commercial loans.





· Asset
      Focus Module:
      Provides new options for users to enhance asset accounting and reporting
      options.





*NetSol
      Technology Institute*





Recently
      started by the Company, and formerly NetSol Omni, the NetSol Technology
      Institute (NTI) has been started with the goal of playing a vital role in the
      transition phase of the Pakistan IT industry by creating a pool of skilled
      IT
      human resources. NTI is aimed at building a strong educational base, initially
      as an institute, then branching out either as a wholly owned chain or franchise.
      NTI offers specialized career oriented trainings and workshops on the latest
      tools and technologies. The curriculum is based on current and future industry
      needs and resource requirements. The instructors are industry practitioners
      sharing their personal experiences during the training. NTI delivers training
      on
      different platforms including in-house training and third party arrangements.
      We
      hope to enter into collaborations with international industry consortiums for
      endorsement of our trainings.




10




*Outsourcing
      Services-Extended Innovation (EI)*





In
      November 2004, the Company entered into a joint venture agreement with The
      Innovation Group (“TiG”) whereby the TIG-NetSol (Pvt) Ltd., now Extended
      Innovation (EI) a Pakistani company, provides support services enabling TiG
      to
      scale solution delivery operations in key growth markets. TiG-NetSol operations
      are centered in NetSol’s IT Village, Lahore, Pakistan. NetSol owns a majority of
      the venture. The entities share in the profits of the joint venture on the
      basis
      of their shareholding. The outsourcing model between TiG and NetSol involves
      services pertaining to business analyses, configuration, testing, software
      quality assurance (SQA), technical communication as well as project management
      for TiG software. Initiated with a 10 person outsourcing team in Lahore in
      February 2005, this arrangement has extended to a 120 person team in June 2007
      with the additional resources catering to the increased influx of outsourcing
      of
      configuration and testing assignments from TiG.





Prominent
      TiG customers being serviced from EI include Allstate Insurance Canada, Avis
      Budget Car Rental Group USA, Norwich Union UK, Hertz UK, Aviva Canada,
      Erinaceous UK amongst others. Backed up by a dedicated 4Mbps fiber optic
      link and an additional 2Mbps wireless backup link for communication and
      teleconferencing, this arrangement will allow NetSol’s human resources to
      efficiently and effectively respond to additional outsourcing and offshore
      configuration work.





*Growth
      Through Acquisition and Alliance*





On
      June
      30, 2006, NetSol completed its acquisition of McCue Systems, Inc., a California
      corporation (now NetSol McCue, Inc.). NetSol McCue has over 30 years of
      experience in developing business solutions for the equipment and vehicle
      leasing industry as a provider of lease/loan portfolio management software
      for
      banks, leasing companies and manufacturers. Its flagship product, LeasePak,
      simplifies lease/loan administration and asset management by accurately tracking
      leases, loans and equipment from origination through end-of-term and
      disposition. With common customers and common goals, we believe the acquisition
      of NetSol McCue provides a complimentary North American presence to our global
      offering of software and services to the lease and finance industry. NetSol
      McCue is expected to contribute about 25% of U.S. based revenue to the NetSol
      group revenue in 2008. Netsol now has a solid US operation based in Burlingame,
      California with over 40 key and established customers in North .America and
      a
      very seasoned team of 40 personnel led by the founder John McCue as the
      President of North American Operations.





Our
      recent acquisitions mark the implementation of our mergers and acquisition
      plan
      developed in mid-2004. In this plan, NetSol management identified mergers and
      acquisitions as potential methods of capitalizing on the demand of the Company’s
      flagship product, LeaseSoft, on infiltrating previously untapped or under-tapped
      markets, and as a means of launching its treasury banking software systems.
      The
      completion of these acquisitions now provides NetSol with positioning as the
      only software supplier in the leasing space with a global footprint of installed
      customers in each geographic region throughout the world. This, together with
      the visible turnaround in the services and outsourcing sectors in global
      markets, led to a growth strategy encompassing both organic growth and mergers
      and acquisitions. While the calendar year 2004, focused on capitalizing on
      organic growth and investing in building up the Company’s marketing and sales
      organization, the early part of 2005 saw a renewed focus on mergers and
      acquisitions.





The
      Company continues to explore mergers and acquisition opportunities with a focus
      on strategic acquisitions that provide immediate, strong, bottom line benefits.
      Management believes that an ideal target will fulfill one or many of these
      criteria: geographic synergy/providing a foot print in a market; unique and/or
      complimentary product lines; or complimentary or target customers in a
      previously untapped market. While there is no guaranty that an acquisition
      which
      appears to be sound will ultimately benefit the Company, management continues
      to
      analyze the price, value and market of any potential target. The model of
      targeting well established, profitable product companies, within NetSol’s
      domain, management believes, has proven successful with the both the CQ and
      McCue acquisition. Management believes this model can be replicated over the
      next three years.




*Growth
      through Establishing Partners Network*





NetSol
      is
      well aware that market reach is essential to effectively market IT products
      and
      services around the globe. For this purpose, the Company is looking forward
      to
      establishing a network of partners worldwide. These companies will represent
      NetSol in their respective countries and will develop business for NetSol.
      Keeping these strategic objectives in view, NetSol has entered into a mutually
      non-exclusive agreement with Singapore Computer Systems (SCS) that allows SCS
      to
      market LeaseSoft in the entire Asia Pacific region.




11





NetSol
      is
      a member of the world’s largest equipment leasing association, the Equipment
      Finance Leasing Association of North America or ELA. Boasting more than 1,000
      members, the ELA is a strong presence in this $250 billion North American
      market. Our U.S. Operations CEO, John McCue, is a member of the board of
      trustees of the Equipment Leasing and Finance Foundation, the U.S. equipment
      leasing industry’s most important reports and periodical journal.





*Strategic
      Alliances*





With
      its
      leadership position in technology and software development in Pakistan, NetSol
      has been actively involved in a number of partnerships with multiple
      international entities and corporations. These include joint ventures, systems
      integration, local services, as well as consulting for large enterprises. Some
      of NetSol’s partners in Pakistan are:




·  Oracle


·  Infor
      /
      Datastream


·  SunGard


·  Intaero


·  Intel


·  Microsoft
      Gold Partner


·  IBM


·  Sun
      Microsystems


·  HP


·  Internet
      Security Systems


·  FileNet


·  Business
      Objects


·  DaimlerChrysler
      Services


·  Innovation
      Group PLC UK





U.S.
      and
      UK partners include Field Solutions, Group 88 and Lease Dimensions.





LeaseSoft
      is recognized as a Solution Blueprint by Intel Corporation. Intel has very
      stringent technical and market potential criteria for marking a solution as
      solution blueprint. The document is also available online from Intel’s website http://www.intel.com/business/bss/solutions/blueprints/industry/finance/index.htm





NetSol
      and Intel Corporation have a strategic relationship that would potentially
      permit NetSol to market its core product, ‘LeaseSoft’, through Intel websites.
      In a joint press release made earlier in 2004, by both NetSol and Intel, both
      companies would deliver a new Solution Blueprint for its core leasing solution.
      With the collaboration to create a world-class blueprint for the leasing and
      finance industry, deployment should become even faster and smoother for our
      customers. Intel's website defines Intel’s Solution Blueprints as detailed
      technical documents that define pre-configured, repeatable solutions based
      on
      successful real-world implementations. Built on Intel® architecture and flexible
      building block components, these solutions help deliver increased customer
      satisfaction, lower operating costs, and better productivity.





DaimlerChrysler
      Services Asia Pacific has established an “Application Support Center (ASC)” in
      Singapore to facilitate the regional companies in LeaseSoft related matters.
      This support center is powered by highly qualified technical and business
      personnel. ASC LeaseSoft in conjunction with NetSol Technologies Ltd. Lahore
      are
      supporting DCS companies in seven different countries in Asia and this list
      can
      increase as other DCS companies from other countries may also opt for LeaseSoft.
      In June 2004, the Company entered into a Frame Agreement with DaimlerChrysler
      AG. This agreement, which serves as a base line agreement for use of the
      LeaseSoft products by DaimlerChrysler Services AG companies and affiliated
      companies, represents an endorsement of the LeaseSoft product line and the
      capabilities of NetSol to worldwide DaimlerChrysler Financial Services (DCFS)
      entities. This endorsement has had a tremendous impact on our perspective
      customers, it has helped our sales and Business Development personnel to market
      and sell our LeaseSoft solution to blue chip customers around the world. This
      relationship has resulted in new agreements with DCFS and has served as a
      marketing source which has resulted in agreements with companies such as Toyota
      and BMW.





EMEA’s
      strategic relationship with Field Solutions opened the Company’s opportunity to
      increase product sales of Evolve, particularly for brokers looking to start
      their own book. The Field Solutions strategic relationship has now been expanded
      through collaboration on Sales Pricing Tools to facilitate tax based leasing
      operations in the middle to big ticket market segment, further extending the
      regions’ product and market reach.




12





*Technical
      Affiliations*





The
      Company currently has technical affiliations as: a MicroSoft Certified GOLD
      Partner; a member of the Intel Solution blueprint Program; IBM Business Partner
      and, an Oracle Certified Partner.





**Marketing
      and Selling**





*The
      Marketing Program*





NetSol
      management continues its optimism that the Company will experience ever
      increasing opportunities for its product offerings in 2008 and beyond. The
      Company is aggressively growing the marketing and sales organizations in the
      United Kingdom, in conjunction with NetSol-CQ, in Pakistan and, with NetSol
      McCue, in the USA. Management believes that the year 2008 will follow 2006
      and
      2007 as a year for continued growth, the launching of footprints in new markets,
      and penetration of established markets such as North America, Asia Pacific
      and
      Europe.





While
      affiliations and partnering resulted in potential growth for the Company,
      marketing and selling remain essential to building Company revenue. The
      objective of the Company's marketing program is to create and sustain preference
      and loyalty for NetSol as a leading provider of enterprise solutions, e-services
      consulting, and software solutions. Marketing is performed at the corporate
      and
      business unit levels. The corporate marketing department has overall
      responsibility for communications, advertising, public relations and the website
      and, also engineers and oversees central marketing and communications programs
      for use by each of the business units.





A
      number
      of new marketing initiatives have either been launched or are in the pipeline.
      These programs are designed to create brand awareness and to deliver our message
      directly to our target group. As the company has evolved in the past three
      years, the number of product and service offerings has grown manifolds. The
      depth and breadth of our products and services would be more effectively
      marketed by participation in more industry events, advertising, holding
      seminars, delivering keynote addresses and creating more channel distribution.
      Our key marketing initiatives have been designed to transition the brand equity
      built by the NetSol McCue and NetSol-CQ brands to the Company as a
      whole.





Our
      dedicated marketing personnel, within the business units, undertake a variety
      of
      marketing activities, including sponsoring focused client events to demonstrate
      our skills and products, sponsoring and participating in targeted conferences
      and holding private briefings with individual companies. We believe that the
      industry focus of our sales professionals and our business unit marketing
      personnel enhances their knowledge and expertise in these industries and will
      generate additional client engagements. As the US technology market gradually
      improves, NetSol marketing teams are concentrating on the markets overseas
      with
      cautious entry into the US market.





*The
      Markets*





NetSol
      provides its services primarily to clients in global commercial industries.
      In
      the global commercial area, the Company's service offerings are marketed to
      clients in a wide array of industries including, automotive, chemical, textiles,
      Internet marketing, software, medical, banks, higher education and
      telecommunication associations, and, financial services.





Geographically,
      NetSol has operations on the West Coast of the United States, Central Asia,
      Europe, and Asia Pacific regions.




13


During
      the last two fiscal years, the Company's revenue mix by major markets was as
      follows:










2007
              
              2006Asia
                  Pacific Region (NetSol Technolgies, Ltd., NetSol TiG,
                  Abraxas)
              
              
              61.04
              %
              
              55.34
              %Europe
                  (NetSol-CQ, UK Ltd.)
              
              
              18.72
              %
              
              39.67
              %North
                  America (NetSol Technologies, Inc., NetSol McCue)
              
              
              16.92
              %
              
              0.24
              %Telecom
                  Sector (NetSol Connect)
              
              
              3.32
              %
              
              4.75
              %Total
                  Revenues
              
              
              100.00
              %
              
              100.00
              %




**Fiscal
      Year 2006-2007 Performance Overview**




The
      Company has effectively expanded its development base and technical capabilities
      by training its programmers to provide customized IT solutions in many other
      sectors and not limiting itself to the lease and finance industry.





**NetSol
      Technologies Ltd. (“PK Tech”)**





Our
      off-shore development facility continues to perform strongly and has enhanced
      its capabilities and expanded its sales and marketing activities. In May 2004,
      NetSol inaugurated its newly built Technology Campus in Lahore, Pakistan. The
      state-of-the-art, NetSol building currently houses over 600 employees and has
      become the engine of NetSol’s business model providing world class IT talent and
      a cost arbitrage that is attractive to western customers. This state of the
      art
      technology campus has become the envy of the industry as being the only and
      first CMMi level 5 company in Pakistan.





The
      Lahore operation supports the worldwide customer base of the LeaseSoft suite
      of
      products and all other product offerings. NetSol has continued to lend support
      to the Lahore subsidiary to further develop its quality initiatives and
      infrastructure. The development facility in Pakistan, being the engine which
      drives NetSol worldwide, continues to be the major source of revenue generation.
      The Pakistan operation contributed 51% of the 2007 revenues with $14.8 million
      in revenues for the current year with a net profit of $4.7 million before
      adjusting the minority interest. This was accomplished primarily through export
      of IT services and product licensed to both the domestic and overseas
      markets.





While
      available to support its product and services base on a world-wide basis, NetSol
      Technologies Ltd.’s selling and marketing efforts are focused on Asia Pacific,
      China and Middle East. In China, the company has established a business office
      in the capital city of Beijing from which it expects to have more business
      in
      the future. A new business office in Bangkok, Thailand, was added in order
      to
      provide business and technical support for the Company’s Thai based customers.





NetSol
      has signed on new customers for LeaseSoft as well as for bespoke development
      services. For LeaseSoft the following new projects were earned by the Company:





·
            11
                new implementation contracts signed during the
                year.





·
            Of
                these, 7 new contracts signed during the fourth
                quarter.





·
            New
                names in the customer list, including Fiat Automotive Finance, CNH
                Capital, and a large automotive blue chip company in
                China.





·
            The
                addition of the Fleet Management System to the LeaseSoft
                Suite.




14




The
      current LeaseSoft client base includes DaimlerChrysler Financial Services
      (Australia, Japan, New Zealand, Singapore, South Korea, Thailand, China and
      Taiwan), Mercedes-Benz Finance Japan, Yamaha Motors Finance Australia, Toyota
      Motors Finance China, Toyota Leasing Thailand, Mauritius Commercial Bank,
      Finlease Company Limited, CNH Capital Australia, Fiat Automotive Finance China,
      a Large Automotive Blue chip Company in China, and BMW Financial Services in
      China.





Information
      technology services are valuable only if they fulfill the business strategy
      and
      project objectives set forth by the customer. NetSol’s expert consultants have
      the technical knowledge and business experience to ensure the optimization
      of
      the development process in alignment with basic business principles. The Company
      offers a broad array of professional services to clients in the global
      commercial markets and specializes in the application of advanced and complex
      IT
      enterprise solutions to achieve its customers' strategic objectives. Its service
      offerings include IT Consulting & Services; NetSol Defense Division;
      Business Intelligence, Information Security, Outsourcing Services and Software
      Process Improvement Consulting; maintenance and support of existing systems;
      and, project management.





**EMEA**





NetSol
      Technologies Limited, the Company’s UK subsidiary, was formed in fiscal 2003.
      Located in the heart of London, one of the world’s major banking and finance
      centers, the subsidiary is responsible for the Company’s activities in the UK,
      Europe and Middle East, and ongoing marketing and sales of the LeaseSoft
      portfolio of leasing solutions, and NetSol’s range of on and off-shore IT
      services.





In
      February 2005, NetSol acquired 100% of CQ Systems Ltd., (“NetSol-CQ”) an IT
      products and service company based in the UK. As a result of this acquisition,
      NetSol has access to a broad European customer base using IT solutions
      complementary to NetSol’s LeaseSoft product. NetSol plans to leverage CQ’
knowledge base and strong presence in the Asset Finance market to launch
      LeaseSoft in the UK and continental Europe. CQ’s strong sales and marketing
      capability would further help NetSol gain immediate recognition and positioning
      for the LeaseSoft suite of products.





NetSol-CQ’s
      integration has included the continued leverage of the Company’s high quality
      but lower cost resources in its offshore development center in Lahore, Pakistan.
      This phase of the transition plan has been completed whereby a dedicated team
      of
      software engineers and testers have been trained on CQ product suite and most
      of
      the quality assurance, documentation and some of the CQ products core software
      development activities have been transitioned to Lahore. NetSol-CQ has been
      able
      to implement significant productivity and cost improvements which have included
      realizing the higher level of cost efficiencies of using the Lahore offshore
      facility for software development and quality assurance.





In
      November 2005, CQ was re-branded as NetSol-CQ and was launched into the UK
      market with new branding and logo. This was part of a global strategy to have
      consistency in our marketing collateral across the globe. All NetSol-CQ products
      have been re-branded as LeaseSoft and the Enterprise product would now be known
      as LeaseSoft Asset.





Like
      all
      NetSol companies, NetSol-CQ has seen its sales and revenues focus increasingly
      on total client services rather than on a purely, one-off, product based model.
      Roughly two-thirds of the new sales for NetSol-CQ came from products which
      did
      not exist when CQ was purchased by NetSol. The total client services model
      has
      seen an expansion from a solely back office based product to a greater front
      office focus. This front office focus tends to be highly customized as the
      initial interface for the customer. NetSol-CQ’s auto decision component was
      developed sooner than any competitors, and together with its web-based portal,
      is one of the many front ends solutions that NetSol-CQ is implementing.





NetSol
      will continue to manage LeaseSoft pre-sales support and deliveries by having
      two
      specialized pools of resources for each of the five products under LeaseSoft.
      One group focuses on software development required for customization and
      enhancements. The second group comprises of LeaseSoft consultants concentrating
      on implementation and onsite support. Both groups are being continually trained
      in the domain of finance and leasing, system functionality, communication
      skills, organizational behavior and client management.





The
      combined EMEA group contributed approximately $5.5 million in revenues during
      the current fiscal year or 19% of the Company’s revenues. The total net loss
      was, approximately, $832,000.




15


A
      few of
      EMEA’s recently signed agreements include:





*
      A major
      European bank agreed to acquire our premium finance broker portal in June 2007
      and is set to go live before the end of calendar year 2007.





*
      Kaupthing Singer and Friedlander (“KSFPF”) selected NetSol-CQ to develop a fully
      integrated credit card payment and refund facilities. This project went live
      in
      fiscal 2007.





**North
      America - NetSol McCue**





NetSol
      McCue (formerly McCue Systems) provides the leasing technology industry in
      the
      development of Web-enabled and Web-based tools to deliver superior customer
      service, reduce operating costs, streamline the lease management lifecycle,
      and
      support collaboration with origination channel and asset partners. LeasePak
      can
      be configured to run on HP-UX, SUN/Solaris or Linux, as well as for Oracle
      and
      Sybase users. And for scalability, NetSol McCue offers the LeasePak Bronze,
      Silver and Gold Editions for systems and portfolios of virtually all sizes
      and
      complexities. These solutions provide the equipment and vehicle leasing
      infrastructure at leading Fortune 500 banks and manufacturers, as well as for
      some of the industry’s leading independent lessors. NetSol customers include
      such companies as Cisco, Hyundai, JP Morgan/Chase, KeyCorp Leasing, City
      National Bank, Bank of Tokyo Mitsubishi, La Salle National Bank, Terex Corp.,
      National City Capital Corp., ORIX, and Volkswagen Credit.





NetSol
      McCue experienced a large number of upgrades from LeasePak to LeasePak 6.0
      by
      Volkswagen Credit, Terex Corportion, LeaseDimensions, Inc., Group 88 Consulting,
      Key Equipment Finance, a Fortune 50 Blue-Chip worldwide IT provider, a major
      Fortune 100 bank, a major Korean auto manufacturer, and a major Fortune 500
      bank.





NetSol
      McCue contributed approximately $5.0 million in revenues during the current
      fiscal year or 17% of the Company’s revenues. The total net profit was,
      approximately, $39,000.





**TIG-NetSol
      (Pvt) Limited, Joint Venture - Extended Innovation**


The
      joint
      venture of NetSol with a UK based IT solutions provider TiG, Plc. contributed
      approximately $2.6 million in revenue during the current fiscal year or 9%
      of
      the Company’s revenues. The total net profit was, approximately, $1.4 million
      before adjusting for the 49.9% minority interest in earnings.





In
      November 2004, the Company entered into a joint venture agreement with The
      Innovation Group (“TiG”) whereby the TIG-NetSol (Pvt) Ltd., now Extended
      Innovation a Pakistani company, provides support services enabling TiG to scale
      solution delivery operations in key growth markets. TiG-NetSol operations are
      centered in NetSol’s IT Village, Lahore, Pakistan. NetSol owns 50.52 percent of
      the new venture, with TiG owning the remaining 49.48 percent. The entities
      share
      in the profits of the joint venture on the basis of their shareholding. The
      outsourcing model between TiG and NetSol involves services pertaining to
      business analyses, configuration, testing, software quality assurance (SQA),
      technical communication as well as project management for TiG software.
      Initiated with a 10 person outsourcing team in Lahore in February 2005, this
      arrangement has extended to a 120 person team in June 2007 with the additional
      resources catering to the increased influx of outsourcing of configuration
      and
      testing assignments from TiG.





Prominent
      TiG customers being serviced from EI include Allstate Insurance Canada, Avis
      Budget Car Rental Group USA, Norwich Union UK, Hertz UK, Aviva Canada,
      Erinaceous UK and many others. Backed up by a dedicated 4Mbps fiber optic link
      and an additional 2Mbps wireless backup link for communication and
      teleconferencing, this arrangement will allow NetSol’s human resources to
      efficiently and effectively respond to additional outsourcing and offshore
      configuration work.




16


**NetSol
      Connect (Pvt) Limited**





In
      August
      2003, NetSol entered into an agreement with United Kingdom based Akhter Group
      PLC (Akhter). Under the terms of the agreement, Akhter Group acquired 49.9%
      of
      the Company’s subsidiary; Pakistan based NetSol Connect (Pvt) Ltd., an Internet
      service provider (ISP) in Pakistan. In fiscal year 2004, NetSol Connect steadily
      grew its presence in three cities (Karachi, Lahore and Islamabad) by acquiring
      a
      small Internet online company called Raabta Online. This created a national
      presence for wireless broadband business in key markets that have experienced
      explosive growth. NetSol Connect with its new laser and wireless technologies
      has a potential to become a major brand in Pakistan. The partnership with Akhter
      Computers is designed to rollout the services of connectivity and wireless
      to
      the Pakistani national market.





NetSol
      Connect (Pvt) Ltd. will continue to seek to grow revenues. The revenue
      contribution for NetSol Connect was $972,000 or about 3% of 2007 revenues.
      The
      total net loss was $57,000 before adjusting the minority interest in
      losses.





**LeaseSoft
      Sales**





NetSol
      has signed on new customers for LeaseSoft as well as for bespoke development
      services. For LeaseSoft the following new projects were earned by the Company:





·
            11
                new implementation contracts signed during the
                year.





·
            Of
                these, 7 new contracts signed during the fourth
                quarter.





·
            New
                names in the customer list, including Fiat Automotive Finance, CNH
                Capital, and a large automotive blue chip company in
                China.





·
            The
                addition of the Fleet Management System to the LeaseSoft
                Suite.





The
      current LeaseSoft client base includes DaimlerChrysler Financial Services
      (Australia, Japan, New Zealand, Singapore, South Korea, Thailand, China and
      Taiwan), Mercedes-Benz Finance Japan, Yamaha Motors Finance Australia, Toyota
      Motors Finance China, Toyota Leasing Thailand, Mauritius Commercial Bank,
      Finlease Company Limited, CNH Capital Australia, Fiat Automotive Finance China,
      Large Automotive Bluechip Company in China and BMW Financial Services in China.





**Technology
      Campus**





Due
      to
      the Company’s large domestic and international growth, the NetSol development
      infrastructure has required expansion. Management and the Board have approved
      the construction of a new structure behind the current NetSol tower in Lahore.
      The new building will have potential to accommodate an additional 1,000 plus
      engineers and programmers. We are at a designing and permit processing stage.
      The estimated time for completion is mid-2009 and we have budgeted for the
      capital expenditures required for this expansion. Meanwhile, we
      have acquired offices adjacent to our campus to meet the growing demand and
      backlog for next 18 months. We expect to move into this space in mid-September
      2007 to accommodate the growth in personnel.





The
      original Technology Campus was completed in May 2004 and the Lahore operations
      relocated to the facilities in May 2004. The facility was formally inaugurated
      by the Prime Minister of Pakistan H.E. Shaukat Aziz on March 4, 2005. By
      relocating the entire Lahore operation from its previously leased premises
      to
      the Campus, the Company saves approximately $150,000 annually. The campus has
      been declared a Software Technology Park by the Government of Pakistan. The
      Government has also financed the linking of the campus with the high speed
      fiber
      optic backbone capable of providing 155 MB internet bandwidth. The Internet
      bandwidth is effectively utilized to offer state of the art video conferencing
      and VOIP (Voice over IP) facilities for effective and seamless communication
      with our global customer base. Encompassing a covered area of more than 55,000
      square feet and housing over 600 professionals, this is one of the largest
      such
      facilities for IT services in the region. In addition to being the headquarters
      for NetSol’s subsidiaries in Pakistan, it also serves the NetSol group’s global
      services and products development facility. The CMMi Level 5 rated facility
      ensures quality engineering practices to its clients across the globe. The
      campus site is located in Pakistan's second largest city, Lahore, with a
      population of six million. An educational and cultural center, the city is
      home
      to most of the leading technology oriented academia of Pakistan including names
      like LUMS, NU-FAST & UET. These institutions are also the source of quality
      IT resources for the Company. Lahore is a modern city with very good
      communication and solid infrastructure and road network. The Technology campus
      is located at about a 5-minute drive from the newly constructed advanced and
      high-tech Lahore International Airport. This campus is the first purpose built
      software building with state of the art technology and communications
      infrastructure in Pakistan. The investment made by the company in developing
      this technology campus is proving to be highly effective in attracting new
      business not only from global blue chip customers but also from the fast
      developing Pakistan market.




17




**People
      and Culture**





The
      Company believes it has developed a strong corporate culture that is critical
      to
      its success. Its key values are delivering world-class quality software,
      client-focused timely delivery, leadership, long-term relationships, creativity,
      openness and transparency and professional growth. The services provided by
      NetSol require proficiency in many fields, such as software engineering, project
      management, business analysis, technical writing, sales and marketing,
      communication and presentation skills. Every one of our software developers
      is
      proficient in the English language. English is the second most spoken language
      in Pakistan and is mandatory in middle and high schools.





To
      encourage all employees to build on our core values, we reward teamwork and
      promote individuals who demonstrate these values. NetSol offers all of its
      employees the opportunity to participate in its stock option program. Also,
      the
      Company has an intensive orientation program for new employees to introduce
      our
      core values and a number of internal communications and training initiatives
      defining and promoting these core values. We believe that our growth and success
      are attributable in large part to the high caliber of our employees and our
      commitment to maintain the values on which our success has been based. NetSol
      worldwide is an equal opportunity employer. NetSol attracts professionals not
      just from Pakistan, where it is very well known, but also IT professionals
      living overseas.





Management
      believes it has been successful in capitalizing on the “Reverse Brain Drain”
phenomenon whereby it has been able to attract and retain highly qualified
      and
      suitably experienced IT and management professionals working overseas and
      returning to Pakistan. These include senior management as well as software
      development professionals that directly contribute to the organization’s
      improvement of various engineering processes and procedures at NetSol.





NetSol
      believes it has gathered, over the course of many years, a team of very loyal,
      dedicated and committed employees. Their continuous support and belief in the
      management has been demonstrated by their further investment of cash. Most
      of
      these employees have exercised their millions of stock options during very
      difficult times for the Company. Management believes that its employees are
      the
      most invaluable asset of NetSol. The Company’s survival in the most challenging
      times is due, in part, to their dedication towards continuous achievement of
      highest quality standards and customer satisfaction. With each acquisition,
      NetSol is able to combine both work forces.





Overall,
      NetSol as a global IT company has over 30% female employees with the biggest
      concentration in our development facility in Lahore and in the U.S.
      headquarters. The Company is an equal opportunity employer. Being a successful
      company with a well respected name in the business community, NetSol encourages
      its employees to actively participate and contribute to charitable contributions
      for catastrophic tragedies such as Tsunami disaster and the Gulf Coast disaster
      caused by Katrina Hurricane in the US and the October 2005 earthquake in
      Pakistan.





There
      is
      significant competition for employees with the skills required to perform the
      services we offer. The company runs an elaborate training program for different
      cadre of employees ranging from technical knowledge, business domains as well
      as
      communication, management and leadership skills. The Company believes that
      it
      has been successful in its efforts to attract and retain the highest level
      of
      talent available, in part because of the emphasis on core values, training
      and
      professional growth. We intend to continue to recruit, hire and promote
      employees who share this vision.





As
      of
      June 30, 2007, we had 766 full-time employees; comprised of 553 IT project
      and
      technical personnel in Pakistan, UK, Australia, and US; and 213 non-IT personnel
      in Pakistan, UK, Australia and US. The non-IT personnel include 59 employees
      in
      management, 49 employees in sales and marketing, 28 employees in accounting,
      18
      in customer support, and 59 in general and administration. There are a total
      of
      59 part-time employees. None of our employees are subject to a collective
      bargaining agreement. Our telecom subsidiary NetSol Connect has 113 full time
      employees based in Karachi, Pakistan, which are included in the total full-time
      employee count.





**Competition**





Neither
      a
      single company nor a small number of companies dominate the IT market in the
      space in which the Company competes. A substantial number of companies offer
      services that overlap and are competitive with those offered by NetSol. Some
      of
      these are large industrial firms, including computer manufacturers and computer
      consulting firms that have greater financial resources than NetSol and, in
      some
      cases, may have greater capacity to perform services similar to those provided
      by NetSol.




18





In
      the
      LeaseSoft business space, the barriers to entry are getting higher. The products
      are getting more cutting edge and richness in functionality is paramount. Older
      companies have prolonged the life of their legacy products by creating web-based
      front ends, while the core of the systems has not been re-engineered.





Our
      competitors have not been as active in mergers and acquisitions as NetSol.
      This
      is mostly due to lack of funding for such acquisitions as most of the companies
      are privately held. Start ups have to gain traction over several years to make
      their products more robust and scalable and therefore find it difficult to
      compete on price and functionality. Additionally, our competition mostly are
      based in high cost locations in the US, UK and Europe as opposed to NetSol
      with
      its facility in Lahore. NetSol is now the only company in the leasing and
      finance solution space that provides regional solutions in North America, Europe
      and Asia Pacific. In addition, it is the only company in this space that is
      publicly listed and provides an offshore development infrastructure with CMMi
      level 5 accreditation.




Some
      of
      the competitors of the Company are International Decisions Systems, EDW, Data
      Scan, AIPAC, CHP, KPMG, LMK Resources, Systems Innovation (Si3), Bearing Point,
      Kalsoft, Systems Limited, Oratech Pakistan, TechAccess Pakistan a few others.
      These companies are scattered worldwide geographically. In terms of offshore
      development, we are in competition with some of the Indian companies such as
      Wipro, HCL, TCS, InfoSys, Satyam Infoway and others. Many of the competitors
      of
      NetSol have longer operating history, larger client bases, and longer
      relationships with clients, greater brand or name recognition and significantly
      greater financial, technical, and public relations resources than NetSol.
      Existing or future competitors may develop or offer services that are comparable
      or superior to ours at a lower price, which could have a material adverse effect
      on our business, financial condition and results of operations.





**Customers**





Some
      of
      the customers of NetSol include: DaimlerChrysler Financial Services (Australia,
      Japan, New Zealand, Singapore, South Korea, Thailand, China and Taiwan),
      Mercedes-Benz Finance Japan, Yamaha Motors Finance Australia, Toyota Motors
      Finance China, Toyota Leasing Thailand, Mauritius Commercial Bank, Finlease
      Company Limited, CNH Capital Australia, Fiat Automotive Finance China, a large
      automotive bluechip company in China and BMW Financial Services in China. In
      addition, NetSol provides offshore development and testing services to The
      Innovation Group Plc UK and their blue chip global insurance giants like
      Allstate, Cendent, etc. NetSol is also a strategic business partner for
      DaimlerChrysler (which consists of a group of many companies), which accounts
      for approximately 2% of our revenue. Toyota
      Motors (which consists of a group of many companies) accounts for approximately
      9% of our revenues. No
      single client represents more than 10% of the revenue for the fiscal year ended
      June 30, 2007.





Some
      NetSol McCue, U.S. customers include: Volkswagen Credit U.S. & Canada; Cisco
      Capital; Hyundai Motor Finance; Keycorp Leasing; Bank of Tokyo Mitsubishi;
      Chase
      Equipment Finance; National City Commercial Credit; City National Bank; and,
      Terex Corporation. No individual NetSol McCue customer represents more than
      10%
      of the revenues for the Company for the fiscal year ended June 30,
      2007





As
      compared to the previous year, NetSol Technologies, Ltd. was able to materialize
      a number of services contracts within the local Pakistani public and defense
      sectors. An important aspect of these contracts is that not all of them were
      solely focusing on software development and engineering. This year, NetSol,
      has
      gone a step further by providing consultancy services to organizations so as
      to
      improve their quality of operations and services in addition to winning
      strategically important assignments within the E-Governance domain for
      organizations of national significance in Pakistan, including, Prime Minister’s
      office and the lower and upper houses of Parliament. These clients include
      private as well as public sector enterprises. Also, NetSol was successful in
      consolidating its standing as one of the preferred solutions provider for the
      Military sector and Defense organizations. The NetSol service portfolio has
      now
      diversified into a comprehensive supply chain of end to end services and
      solutions catering to BPR, consultancies, applications development, and systems
      engineering integration as well as other supporting processes for turnkey
      projects.





**Web
      Presence**





The
      Company is committed to regaining and extending the advantages of its direct
      model approach by moving even greater volumes of product sales, service and
      support to the Internet. The Internet provides greater convenience and
      efficiency to customers and, in turn, to the Company. The Company receives
      150,000 hits per month to www.NetSoltek.com .
      The
      Company also maintains a product specific website for LeaseSoft at www.leasesoft.biz and
      regional websites for NetSol Pakistan at www.netsolpk.com; NetSol-CQ at www.netsolcq.com ;
      and,
      NetSol McCue at www.netsol-mccue.com .





NetSol’s
      software development and SQA team as well as its clients use its web based
      customer relationship management solution (HelpDesk) for timely and direct
      communication during the support and maintenance phases of Through its Web
      sites, customers, potential customers and investors can access a wide range
      of
      information about the Company's product offerings, can configure and purchase
      systems on-line, and can access volumes of support and technical information
      about the Company. More details can be found on http://www.netsolhelp.com .




19





**Operations**





The
      Company's headquarters are in Calabasas, California. Nearly 80% of the
      production and development is carried out at NetSol’s technology campus in
      Lahore, Pakistan. The other 20% of development is conducted in the Proximity
      Development Center or "PDC" in Horsham, UK and the U.S. development facility
      located in the Silicon Valley area of California. The marketing effort is shared
      and coordinated between the primary divisions operating at NetSol Technologies
      Ltd. in Lahore, Pakistan; NetSol UK, NetSol-CQ in the UK; and NetSol McCue
      in
      the U.S. US marketing operations are conducted through the parent and NetSol
      McCue. These are the core operating companies engaged in developing and
      marketing IT solutions and software development and marketing. An initiative
      is
      underway to unify the look and feel of all advertising, branding and marketing
      material.





NetSol
      UK, together with NetSol-CQ, services and supports the clients in the UK and
      Europe. NetSol PK services and supports the customers in the Asia Pacific and
      South Asia regions. NetSol McCue, together with the parent, supports all of
      the
      North American customers.





Approximately
      80% of programming and development occurs at NetSol’s world class and state of
      the art technology campus in Lahore, Pakistan. This facility which is the engine
      and nerve center for NetSol was awarded the highest gold standard of CMMi level
      5 in 2006. Despite global unrest due to the Iraq war and international
      terrorism, as well as economic pressure due to skyrocketing oil prices, the
      economy of Pakistan has made a positive turn around. The economy of Pakistan
      has
      grown to over 8.6% in 2006 and over 8% in 2007 and it is expected to sustain
      the
      same trend for years to come. According to government figures, over the past
      four years, economic growth has averaged 7%; making Pakistan one of Asia’s
      fastest growing economies. For the first time in the history of Pakistan, the
      foreign exchange reserve has exceeded $15 billion in comparison with just below
      $2 billion in 2000. There has been a massive surge in FDI or foreign direct
      investments in Pakistan by foreigners. These investments have been in many
      sectors, including: industrial infrastructure, telecom, oil & gas, stock
      market and real estate. The stock market in Pakistan is the most bullish in
      the
      Asia Pacific region with market growth over 10 times to date (Karachi Stock
      Exchange on October 18, 2001 was at 1,103 points vs. about 12,500 recently).
      Pakistan, now a close US ally, is recognized by the western world as becoming
      very conducive and attractive for foreign collaboration and investments. The
      breakthrough ‘thawing’ of relationships between Pakistan and its biggest
      democratic neighbor, India, has stabilized the South East Asia region. This
      environment has raised the comfort and confidence of foreign investors and
      major
      US and European corporations to enhance their businesses in Pakistan. Due to
      many strategic measures and decisions by the government of Pakistan, the telecom
      sector has been privatized. Several new foreign telecom giants have made some
      serious investments in Pakistan. The biggest example is an U.A.E. based Telecom
      giant ‘EITESALAAT’ which acquired 26% or management control of ‘PTCL’ a
      government owned telecom company. Many other major state owned companies have
      been privatized attracting several big name global names such as Telenor of
      Norway and Warid Telecom of the Middle East. These companies have invested
      billions in the telecom sector in Pakistan. This reflects a true potential
      and
      tremendous growth opportunities in Pakistan. There has been a surge of
      international investors cashing on the growing privatization of some significant
      national assets and state run industries. Last year, Pakistan received a record
      $5.1 billion in foreign direct investments. A new class of entrepreneurs is
      emerging in Pakistan, adding to the country’s economic boom. This projects a
      very positive image and makes Pakistan a most conducive economy into which
      to
      invest. According to a report from World Bank ranking, most rank Pakistan as
      the
      60 th country
      in the ease of doing business ahead of both China and India.





The
      IT
      and telecommunication sector is the fastest growing sector in Pakistan mostly
      due to growing privatization, relaxed policies and a 15 year tax holiday on
      IT
      exports of services and products. These policies have strongly encouraged
      companies, like NetSol, to enhance its infrastructure and develop a solid and
      formidable team of IT professionals.





The
      Company is in an extremely strong position to continue to use this offshore
      model, which includes competitive price advantage to serve its customers. Due
      to
      all major improvements economically, politically and regionally, Pakistan’s
      perception is improving drastically in recent months. A few major names such
      as
      Microsoft, Oracle, Cisco, Tata Consulting Services (India) and many other major
      names have recently signed agreements for collaboration and alliances with
      Pakistani companies. NetSol’s few major successes achieved in 2007 were:





*  The
      continued integration of NetSol McCue and NetSolCQ




*
      5 new
      clients added in China, became the biggest single market




* A
      turnaround in our Australian market adding new names such as CNH Australia




20


*  Launch
      of
      Thailand office




* Robust
      growth of NetSol’s joint venture with TiG, over 120 programmers dedicated




* Continued
          addition of blue chip customers such as Terex Corp, Fiat, Toyota Financial,
          IBM
          Global and Investec





Major
      US
      banks and brokerage houses such as Lehman Brothers and Merrill Lynch have been
      bullish on Pakistan’s economy as a whole and its IT sector in particular. Lehman
      Brothers, in 2006-2007 issued an industry report covering IT and BPO space
      in
      the emerging markets of S.E. Asia under title ‘New New Markets’ and highlighted
      Pakistan in general and NetSol in specific as the growth and emerging markets.
      This report was based on extensive due diligence done by Lehman Brother’s
      research group. The report projects Pakistan as a more favorable place to do
      business and profiled NetSol as the best IT company. This report addresses
      the
      country risks quite fairly and rated as ‘favorable’ country to do business and
      the next emerging IT destination. Merrill Lynch repeatedly favored the
      opportunities in Pakistan and its future outlook. This is despite some recent
      political uncertainties in the country.





Some
      other US publications such as Newsweek, Asia Edition in March 2006 did an
      extensive story on ‘Pakistan Promise’ also highlighting the economic
      fundamentals and buoyancy with great optimism. NetSol was also profiled in
      this
      article as the fastest growing and the number one IT company there. In addition
      there have been some very positive editorials in the Wall Street Journal and
      other major US publications on the strong fundamentals of the Pakistan economy
      lifting confidence of foreign investors and businesses. The $300 million grant
      by the World Bank to reform the land recording system in the province of Punjab
      further endorses the confidence of prestigious agencies.





Just
      recently Moody’s International assessed Pakistan as less vulnerable than many
      countries in the Asia Pacific region. Also, Standard & Poor’s rating on
      Pakistan has been improved to positive. The present government has taken major
      bold steps to attract new foreign investment and bolster the local economy.
      The
      confidence of the local investors and foreign investors has been undoubtedly
      enhanced resulting in stronger demand of new listing in the stock markets.





The
      specific successes achieved from the acquisitions of CQ Systems and McCue
      Systems endorses the fact that Pakistan is a safe place to do business when
      compared to many other troubled spots in the Middle East. Our NetSol TiG joint
      venture represents the best example of not only NetSol’s capabilities but the
      ability of a Pakistan based company to achieve off shore business model success
      for a Western based company. This joint venture provides the major US and UK
      customers of TiG-UK with world class service from NetSol Pakistan, enhancing
      the
      client’s productivity at much more attractive prices. Despite the overall
      positive outlook for Pakistan, the company is quite prepared in any contingency
      to use alternate development facilities located in Beijing (China), Horsham
      (UK), Burlingame (USA) and Adelaide (Australia). These locations mitigate any
      underlying risk due to any geopolitical crises.





**Organization**





NetSol
      Technologies, Inc. (formerly NetSol International, Inc.) was founded in 1997
      and
      is organized as a Nevada corporation. The Company amended its Articles of
      Incorporation on March 20, 2002 to change its name to NetSol Technologies,
      Inc.





The
      success of the Company, in the near term, will depend, in large part, on the
      Company's ability to: (a) continue to grow revenues and improve profits, (b)
      raise funds for continued operations and growth; (c) make a major entry in
      the
      US market and, (d) streamline sales and marketing efforts in the Asia Pacific
      region, Europe, Japan and Australia. However, management's outlook for the
      continuing operations, which has been consolidated and has been streamlined,
      remains optimistic and bullish. With continued emphasis on a shift in product
      mix towards the higher margin consulting services, the Company anticipates
      to be
      able to continue to improve operating results at its core by reducing costs
      and
      improving gross margins. Management is very excited and positive about a
      seamless transition and integration of NetSol-CQ and NetSol McCue with NetSol
      front end and back end operations.





**Intellectual
      Property**





The
      Company relies upon a combination of nondisclosure and other contractual
      arrangements, as well as common law trade secret, copyright and trademark laws
      to protect its proprietary rights. The Company enters into confidentiality
      agreements with its employees, generally requires its consultants and clients
      to
      enter into these agreements, and limits access to and distribution of its
      proprietary information. The NetSol logo and name, as well as the LeaseSoft
      logo
      and product name have been copyrighted and trademark registered in Pakistan.
      The
      Company intends to trademark and copyright its intellectual property as
      necessary and in the appropriate jurisdictions.




21




**Governmental
      Approval and Regulation**





Current
      Company operations do not require specific governmental approvals. Like all
      companies, including those with multinational subsidiaries, we are subject
      to
      the laws of the countries in which the Company maintains subsidiaries and
      conducts operations. Pakistani law allows a tax exemption on income from exports
      of IT services and products up to 2016. While foreign based companies may invest
      in Pakistan, repatriation of their investment, in the form of dividends or
      other
      methods, requires approval of the State Bank of Pakistan. The present Pakistani
      government has effectively reformed the policies and regulations effecting
      foreign investors and multinational companies thus, making Pakistan an
      attractive and friendly country in which to do business.





**Research
      and Development**





In
      anticipation of an upcoming World Bank funded program, NetSol Pakistan has
      been
      proactively undertaking a Research and Development exercise to develop a proof
      of concept for “computerization of Land Records Management Information System
      (LRMIS)”. NetSol’s LRMIS is developed after thorough evaluations of existing
      manual system and client/user needs, detailed system analysis and process flow
      definition. It automates various land record management registers and is
      programmed to generate key reports on multiple parameters. Overall it provides
      the benefits of timely data availability, data transparency and accuracy, cost
      effectiveness, easy transaction tracking and better decision making using
      IT-enablement in a field where its need is hugely felt. As of June 30, 2007,
      the
      Company has invested approximately $888,000 on this project.




**ITEM
      2 - PROPERTIES**





*Company
      Facilities*





The
      Company’s headquarters have been located at 23901 Calabasas Road, Suite 2072,
      Calabasas, CA 91302 since 2003. It is located in approximately 1,919 rentable
      square feet, with a monthly rent of $4,754. The lease is a one-year lease
      expiring in December 2007.





Other
      leased properties as of the date of this report are as follows:


Location/Approximate
                  Square Feet
              
              
              
              Purpose/Use
              
              Monthly
                  Rental ExpenseAustralia.
              
              
              1,140
              
              
              Computer
                  and General Office
              
              $
              1,380Beijing,
                  China
              
              
              431
              
              
              General
                  Office
              
              $
              4,315Burlingame,
                  CA (NetSol McCue)
              
              
              8,089
              
              
              Computer
                  and General Office
              
              $
              16,178Horsham,
                  UK (NetSol-CQ)
              
              
              6,570
              
              
              Computer
                  and General Office
              
              $
              10,989NetSol
                  PK (Karachi Office)
              
              
              1,883
              
              
              General
                  Office
              
              $
              1,726NetSol
                  PK (Islamabad Office)
              
              
              3,240
              
              
              General
                  Office & Guest House
              
              $
              1,417NetSol
                  (Rawalpindi Office)
              
              
              1,112
              
              
              General
                  Office
              
              $
              800Thailand
              
              
              285
              
              
              Computer
                  and General Office
              
              $
              1,035





The
      Australia lease is a three-year lease that expires in May 2008 and currently
      is
      rented at the rate of $1,380 per month. The Beijing lease is a two year lease
      that expires in August 2009. The monthly rent is $4,315 per month. The Bangkok
      lease is a one year lease with monthly rent of $1,035. The NetSol-CQ System
      facilities, located in Horsham, United Kingdom, are leased until June 23, 2011
      for an annual rent of £75,000 (approximately $144,900). NetSol McCue, Inc.,
      located in Burlingame, California, premises are leased until June 30, 2009
      with
      a monthly rent of $16,178.





The
      NetSol Karachi lease is a 3 year lease that expires on December 4, 2008 and
      currently is rented at the rate of $1,726 per month. The NetSol Islamabad lease
      is a 15 year lease that expires on August 31, 2016 and currently is rented
      at
      the rate of $1,417 per month. The NetSol Rawalpindi lease is a 2 year lease
      that
      expires on January 4, 2008 and currently is rented at the rate of $800 per
      month.




22





Upon
      expiration of its leases, the Company does not anticipate any difficulty in
      obtaining renewals or alternative space.





*Lahore
      Technology Campus*





The
      newly
      built Technology Campus was inaugurated in Lahore, Pakistan in May 2004. This
      facility consists of 50,000 square feet of computer and general office space.
      This facility is state of the art, purpose-built and fully dedicated for IT
      and
      software development; the first of its kind in Pakistan. Title to this facility
      is held by NetSol Technologies Ltd. and is not subject to any mortgages. The
      Company also signed a strategic alliance agreement with the IT ministry of
      Pakistan to convert the technology campus into a technology park. By this
      agreement, the IT ministry has invested early 10 million Rupees (approximately
      $150,000) to install fiber optic lines and improve the bandwidth for the
      facility. In order to cater for future business expansion and taking advantage
      of depressing real estate market, the company purchased two new cottages
      adjacent to its main building. Total covered area of these cottages is 4,900
      sq
      feet and it cost was approximately $250,000. The management has moved its
      accounts, finance, internal audit, company secretariat and costing and budgeting
      department into these cottages. For the recreation of its valuable human
      resources, the management has also established a gymnasium there.





**ITEM
      3 - LEGAL PROCEEDINGS**




To
      the
      best knowledge of Company’s management and counsel, there is no material
      litigation pending or threatened against the Company.




**ITEM
      4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





NetSol
      conducted its annual meeting of shareholders on June 4, 2007. The following
      are
      the items that were voted upon:





1.
      Election of Directors





The
      following persons were elected directors of the Company to hold office until
      the
      next Annual General Meeting of the Shareholders. The following sets for the
      voting tabulation for each director:


Director
              
              Voted
              
              Withhold
              
              Percent
                  of Total Voted
              
              Total
                  Shares VotedNajeeb
                  Ghauri
              
              
              17,643,179
              
              
              283,037
              
              
              98.36
              
              
              17,926,216Naeem
                  Ghauri
              
              
              17,641,179
              
              
              285,037
              
              
              98.41
              
              
              17,926,216Salim
                  Ghauri
              
              
              17,627,273
              
              
              298,943
              
              
              98.33
              
              
              17,926,216Shahid
                  Burki
              
              
              17,629,232
              
              
              296,984
              
              
              98.34
              
              
              17,926,216Alexander
                  Shakow
              
              
              17,643,198
              
              
              283,018
              
              
              98.31
              
              
              17,926,216Eugen
                  Beckert
              
              
              17,622,798
              
              
              302,418
              
              
              98.31
              
              
              17,926,216Mark
                  Caton
              
              
              17,635,755
              
              
              290,461
              
              
              98.38
              
              
              17,926,216


2.
        Ratification of Appointment of Auditors
  Kabani
        & Company Inc. was appointed as Auditors for the Company to hold office
        until the close of the next annual general meeting of the Company. The directors
        were authorized to fix the remuneration to be paid to the auditors. The
        following sets forth the tabulation of the shares voting for this matter.


Total
                  Shares Voted
              
              
              For
              
              
              Against
              
              
              Abstain
              
              
              Percent17,926,216
              
              
              17,650,809
              
              
              297,302
              
              
              25,534
              
              
              98.46
              %


23


**PART
      II**





**ITEM
      5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS;
      RECENT SALES OF UNREGISTERED SECURITIES**





(a)
      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





MARKET
      INFORMATION - Common stock of NetSol Technologies, Inc. is listed and traded
      on
      NASDAQ Capital Market under the ticker symbol "NTWK."





The
      table
      shows the high and low intra-day prices of the Company's common stock as
      reported on the composite tape of the NASDAQ for each quarter during the last
      two fiscal years.


Fiscal
              
              2005-2006
              
              
              
              2004-2005Quarter
              
              
              High
              
              
              Low
              
              
              High
              
              
              Low1st
                  (ended September 30)
              
              
              2.22
              
              
              1.42
              
              
              2.36
              
              
              1.652nd
                  (ended December 31)
              
              
              1.94
              
              
              1.32
              
              
              2.39
              
              
              1.703rd
                  (ended March 31)
              
              
              2.00
              
              
              1.31
              
              
              2.19
              
              
              1.754th
                  (ended June 30)
              
              
              2.05
              
              
              1.50
              
              
              2.40
              
              
              1.63


RECORD
      HOLDERS - As of September 13, 2007, the number of holders of record of the
      Company's common stock was 227. As of September 13, 2007, there were 21,374,922
      shares of common stock issued and outstanding.





DIVIDENDS
      - The Company has not paid dividends on its Common Stock in the past two fiscal
      years.





SECURITIES
      AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN





The
      table
      shows information related to our equity compensation plans as of June 30, 2007:


Number
                  of
                securities
                  to
                be
                  issued
                upon
                exercise
                  of
                outstanding
                options,
                warrants
                and
                  rights
              
              Weighted-average
                exercise
                  price of
                outstanding
                options,
                  warrants
                and
                  rights
              
              Number
                  of securities
                remaining
                available
                  for
                future
                  issuance
                under
                  equity
                compensation
                plans
                (excluding
                securities
                reflected
                  in
                column
                  (a))Equity
                  Compensation
                Plans
                  approved by
                Security
                  holders
              
              
              7,102,363
              (1)
              $
              2.45
              (2)
              
              4,032,148
              (3)Equity
                  Compensation
                Plans
                  not approved by
                Security
                  holders
              
              
              None
              
              
              None
              
              
              NoneTotal
              
              
              7,102,363
              
              $
              2.45
              
              
              4,032,148





(1)
            Consists
                of 31,000 under the 2001 Incentive and Nonstatutory Stock Option
                Plan;
                972,000 under the 2002 Incentive and Nonstatutory Stock Option Plan;
                745,000 under the 2003 Incentive and Nonstatutory Stock Option Plan;
                3,574,363 under the 2004 Incentive and Nonstatutory Stock Option
                Plan; and
                1,780,000 under the 2005 Incentive and Nonstatutory Stock Option
                Plan.





(2)
            The
                weighted average of the options is
                $2.60.





(3)
            Represents
                812,148 available for issuance under the 2003 Incentive and Nonstatutory
                Stock Option Plan; and, 3,220,000 available for issuance under the
                2005
                Incentive and Nonstatutory Stock Option Plan.





24


(b)
      RECENT SALES OF UNREGISTERED SECURITIES





In
      April
      2007, the Company issued a total of 37,896 shares of common stock to two
      consultants in exchange for services rendered. These shares were issued in
      reliance on an exemption from registration available under Regulation S of
      the
      Securities Act of 1933, as amended.





During
      the quarter ended June 30, 2007, holders of our Series A 7% Cumulative
      Convertible Preferred Stock converted a total of 895 shares of preferred stock
      into 587,878 shares of common stock. These shares were issued in reliance on
      exemptions from registration available under Regulation D and Regulation S
      of
      the Securities Act of 1933, as amended.





During
      the quarter ended June 30, 2007, holders of our Series A 7% Cumulative
      Convertible Preferred Stock received 54,209 shares of common stock as payment
      of
      dividends due under the terms of the Certificate of Designation. These shares
      were issued in reliance on exemptions from registration available under
      Regulation S and D of the Securities Act of 1933, as amended.





During
      the quarter ended June 30, 2007, the Company issued 397,700 shares of restricted
      common stock to the shareholders of McCue Systems, Inc. for the second
      installment payment due for the acquisition.





During
      the fiscal years ended June 30, 2007 and 2006, employees exercised options
      to
      acquire 574,273 and 285,383 shares of common stock in exchange for a total
      exercise price of $2,590,473 and $390,632 respectively.





**ITEM
      6 - MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS**





The
      following discussion is intended to assist in an understanding of NetSol’s
      financial position and results of operations for the year ended June 30, 2007.




*Forward
      Looking Information*





This
      report contains certain forward-looking statements and information relating
      to
      NetSol that is based on the beliefs of management as well as assumptions made
      by
      and information currently available to its management. When used in this report,
      the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, and
      similar expressions as they relate to NetSol or its management, are intended
      to
      identify forward-looking statements. These statements reflect management’s
      current view of NetSol with respect to future events and are subject to certain
      risks, uncertainties and assumptions. Should any of these risks or uncertainties
      materialize, or should underlying assumptions prove inaccurate, actual results
      may vary materially from those described in this report as anticipated,
      estimated or expected. NetSol’s realization of its business aims could be
      materially and adversely affected by any technical or other problems in, or
      difficulties with, planned funding and technologies, third party technologies
      which render NetSol’s technologies obsolete, the unavailability of required
      third party technology licenses on commercially reasonable terms, the loss
      of
      key research and development personnel, the inability or failure to recruit
      and
      retain qualified research and development personnel, or the adoption of
      technology standards which are different from technologies around which the
      Company’s business is built. NetSol does not intend to update these
      forward-looking statements.





The
      change of senior management on October 1, 2006 resulted in the creation of
      three
      new geographic regions. The division of the Company into regions is designed
      for
      better accountability, ownership and results. The regions are comprised of
      North
      America, EMEA and APAC. This restructuring is designed to provide better
      visibility and direction to NetSol’s global operation.





NetSol
      also restructured the global business in two groups: Global Products and Global
      Services. This is a major change to provide much more focused ownership,
      visibility, pipeline and targeted results. The plan is to create very strong
      sales and marketing organizations which will work with our key resources spread
      out across many countries generating stronger and better coordinated
      results.





Management
      has set the following new goals for NetSol for the next 12 months:


·
              Fully
                  integrate management, customers, and regional products of NetSol,
                  NetSol-CQ, and NetSol McCue.
 
 ·
              Launch
                  IT services model in the US by leveraging the offshore low-cost
                  development capabilities.
 
 ·
              Introduce
                  and market two LeaseSoft modules: WSF and CAPS in the US
                  markets.
 
 ·
              Expand
                  product portfolio by enhancing current products and new releases
                  to cater
                  to wider global markets.




25


·Enhance software design, engineering and service delivery capabilities by increasing investment in training.·Continue to invest in research and development in an amount between 7-10% of yearly budgets in financial, banking and various other domains within NetSol’s core competencies.·Recruit new sales personnel in US to grow the penetration in North American markets.·Aggressively penetrate the booming Chinese market and continue to exploit NetSol’s presence in China.·Migrate up to 50% of development costs of US and UK operations to Lahore.·Increase Capex, to enhance communications and development infrastructure. Roll out a second phase of construction of technology campus in Lahore to respond to a growth of new orders and customers.·Market aggressively on a regional basis the Company’s tri-product solutions by broader marketing efforts for LeaseSoft in APAC and untapped markets; aggressively grow LeasePak solutions in North America; and, further establish NetSol-CQ Enterprise solution in the European markets.Top Line Growth through Investment in organic marketing activities. NetSol marketing activities will continue to:


·
              Expand
                  the marketing and distributions of regional products solutions
                  in four
                  continents: North America, Europe, Asia Pacific and
                  Africa.


·
              Expand
                  relationships with all 40 customers in the US, Europe and Asia
                  Pacific by
                  offering enhanced product offerings.


·
              Product
                  positioning through alliances and partnership.


·
              Capitalize
                  on NetSol, McCue and NetSol-CQ affiliations with ELA (Equipment
                  Leasing
                  Association of N.A.) and European leasing
                  forums.


·
              Become
                  a leading IT company in APAC in asset-based applications and capitalize
                  on
                  the surge in demand of NetSol
                  products.


·
              Joint
                  Ventures and new alliances.


·
              Be
                  a dominant IT solutions provider in Pakistan amidst of explosive
                  growth in
                  the economy and automation in private and public sectors.


·
            Hold
                frequent users group meetings in North America and Asia Pacific and
                customers road shows to attract bigger value new
                contracts.





Funding
      and Investor Relations:




·
              Retained
                  a new IR and communications firm in New York to position NetSol
                  as a
                  strong IT company with unlimited growth and upside
                  outlook.


·
              NetSol
                  management was invited on Sep 13, 2006 to closing bell at NASDAQ
                  Sock
                  Exchange.


·
              Adequately
                  capitalize NetSol to face challenges and opportunities presented
                  through
                  the most economical means and vehicles creating further stability
                  and
                  sustainability.


·
              Focus
                  each division level to achieve optimum profitability and efficiencies
                  to
                  reduce the need for new external capital other than to fund major
                  new
                  initiatives.


·
              Aggressive
                  marketing campaign on Wall Street to get the story of NetSol known
                  to
                  retail, institutions, micro cap funds and analysts.


·
              Infuse
                  new capital from potential exercise of outstanding investors’ warrants,
                  employees’ options and debt financing for business development and
                  enhancement of infrastructures.


·
              Continuing
                  to efficiently and prudently manage cash flow and budgets. Subsidiaries
                  will contribute to support the headquarters and corporate
                  overheads.


·
              Expose
                  NetSol to various small cap and technology investors’ forum across North
                  America.


·
              Make
                  every effort to enhance NetSol’s market capitalization in the
                  US.


·
            Reorganize
                the divisions globally for seamless integration to achieve better
                productivity, efficiency and leverage offshore capabilities to enhance
                margins.




Improving
      the Bottom Line:





·
              Grow
                  topline, enhance gross profit margins to 65% by leveraging the
                  low-cost
                  development facility in Lahore.


·
              Generate
                  much higher revenues per developer and service group, enhance productivity
                  and lower cost per employee
                  overall.


·
            Consolidate
                subsidiaries and integrate and combine entities to reduce overheads
                and
                employ economies of scale.






26




·
              Continue
                  to review costs at every level to consolidate and enhance operating
                  efficiencies.


·
              Grow
                  process automation and leverage the best practices of CMMi level
                  5.


·
              Created
                  3 new geographic regions: North America, EMEA and APAC to leverage
                  the
                  infrastructure and resources and to drive direct ownership based
                  on
                  revenue and the bottom line. Also broke the company’s business in two
                  business groups: Global Product Group and Global Services
                  Group.


·
              More
                  local empowerment and profit and loss ownership in each country
                  office.
                  Institute performance based compensation structure through three
                  areas
                  that includes both top-line and bottom-line
                  targets.


·
              Cost
                  efficient management of every operation and continue further consolidation
                  to improve bottom line.


·
            Initiated
                steps to consolidate some of the new lines of services businesses
                to
                improve bottom line.





Management
      continues to be focused on building its delivery capability and has achieved
      key
      milestones in that respect. Key projects are being delivered on time and on
      budget, quality initiatives are succeeding, especially in maturing internal
      processes. Management believes that further leverage was provided by the
      development ‘engine’ of NetSol, which became CMMi Level 2 in early 2002. In a
      quest to continuously improve its quality standards, NetSol reached CMMi
      Level 5 on August 11, 2006. The Company is expecting a growing demand for
      its products and alliances from blue chip companies worldwide. NetSol plans
      to
      further enhance its capabilities by creating similar development engines in
      other Southeast Asian countries with CMMi levels quality standards. This would
      make NetSol much more competitive in the industry and provide the capabilities
      for development in multiple locations. Increases in the number of development
      locations with these CMMi levels of quality standards will provide customers
      with options and flexibility based on costs and broader access to skills and
      technology. NetSol PK has already launched implementation of ISO 27001, a global
      standard and a set of best practices for Information Security
      Management





MATERIAL
      TRENDS AFFECTING NETSOL





NetSol
      has identified the following material trends affecting NetSol





Positive
      trends:





·
              Outsourcing
                  of services and software development is growing
                  worldwide.


·
              The
                  leasing and finance industry in North America has increased $260
                  billion
                  and about the same size for the rest of
                  world.


·
              Recent
                  outpouring of very positive US press and research coverage by major
                  banks
                  such as Lehman Brothers and Merrill Lynch on Pakistan outlook and
                  NetSol
                  growing image and name.


·
              The
                  influx of US companies and investors in addition to investors from
                  all
                  other parts of world to Pakistan. The US ranked to be the largest
                  investors in Pakistan economy in current fiscal year
                  2007.


·
              The
                  levy of Indian IT sector excise tax of 35% (NASSCOM) on software
                  exports
                  is very positive for NetSol. In Pakistan there is a 15 year tax
                  holiday on
                  IT exports of services. There are 10 more years remaining on this
                  tax
                  incentive.


·
              Cost
                  arbitrage, labor costs still very competitive and attractive when
                  compared
                  with India. Pakistan is significantly under priced for IT services
                  and
                  programmers as compared to India.


·
              Pakistan
                  is one of the fastest growing IT destinations from emerging and
                  new
                  markets.


·
              Chinese
                  market is burgeoning and wide open for NetSol’s ‘niche’ products and
                  services. NetSol is gaining a strong foothold in this
                  market.


·
              Only
                  a handful of IT solutions providers in the world with global distribution
                  network, complete end-to-end solution, and presence in the world’s key and
                  strategic markets.


·
              One
                  of the few global IT companies in the leasing and finance domain
                  with gold
                  standard CMMi level 5
                  accreditation.


·
              NetSol
                  and NetSol PK are both listed in one of the most visible stock
                  indexes in
                  their respective markets.


·
              NetSol
                  majority owned subsidiary NetSol PK listed on KSE (Karachi Stock
                  Exchange)
                  has traded at record price of Rs. 118 in July 2007. The IPO price
                  was Rs.
                  25 in August 2005.


·
              Overall
                  economic expansion worldwide and explosive growth in the emerging
                  markets
                  specifically.


·
              Continuous
                  improvement of US and Indian relationships with
                  Pakistan.


·
            Economic
                turnaround in Pakistan including: a steady increase in gross domestic
                product; much stronger dollar reserves, which is at an all time high
                of
                over $15 billion; stabilizing reforms of government and financial
                institutions; improved credit ratings in the western markets, and
                elimination of corruption at the highest
                level.




27




·
            Robust
                growth in outsourcing globally and investment of major US and European
                corporations in the developing countries. As demonstrated by the
                book ‘The
                World is Flat’ by Tom Friedman, there is a need for western companies to
                expand their businesses in emerging markets. Both Pakistan and China
                are
                in the forefront.





Negative
      trends:


.


**·**
              The
                  disturbance in Middle East and rising terrorist activities post
                  9/11
                  worldwide have resulted in issuance of travel advisory in some
                  of the most
                  opportunistic markets. In addition, travel restrictions and new
                  immigration laws provide delays and limitations on business travel.


**·**
              Negative
                  perception and image created by extremism and terrorism in the
                  South Asian
                  region.


**·**
              Instability
                  of oil prices and uncertainty about the geo-political landscape
                  in the
                  Middle East.


**·**
              Continuous
                  impact of Iraq war on US and global
                  economy.


**·**
            Political
                instability and uncertainty in Pakistan due to the pending government
                elections.





**CRITICAL
      ACCOUNTING POLICIES**





Our
      financial statements and related public financial information are based on
      the
      application of accounting principles generally accepted in the United States
      (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and
      subjective interpretations of accounting principles that have an impact on
      the
      assets, liabilities, and expense amounts reported. These estimates can also
      affect supplemental information contained in the external disclosures of NetSol
      including information regarding contingencies, risk and financial condition.
      Management believes our use of estimates and underlying accounting assumptions
      adhere to GAAP and are consistently and conservatively applied. Valuations
      based
      on estimates are reviewed for reasonableness and conservatism on a consistent
      basis throughout NetSol. Primary areas where our financial information is
      subject to the use of estimates, assumptions and the application of judgment
      include our evaluation of impairments of intangible assets, and the
      recoverability of deferred tax assets, which must be assessed as to whether
      these assets are likely to be recovered by us through future operations. We
      base
      our estimates on historical experience and on various other assumptions that
      we
      believe to be reasonable under the circumstances. Actual results may differ
      materially from these estimates under different assumptions or conditions.
      We
      continue to monitor significant estimates made during the preparation of our
      financial statements.





**VALUATION
      OF LONG-LIVED AND INTANGIBLE ASSETS**





The
      recoverability of these assets requires considerable judgment and is evaluated
      on an annual basis or more frequently if events or circumstances indicate that
      the assets may be impaired. As it relates to definite life intangible assets,
      we
      apply the impairment rules as required by SFAS No. 121, “Accounting for the
      Impairment of Long-Lived Assets and Assets to Be Disposed Of” which requires
      significant judgment and assumptions related to the expected future cash flows
      attributable to the intangible asset. The impact of modifying any of these
      assumptions can have a significant impact on the estimate of fair value and,
      thus, the recoverability of the asset.





**INCOME
      TAXES**





We
      recognize deferred tax assets and liabilities based on the differences between
      the financial statement carrying amounts and the tax bases of assets and
      liabilities. Deferred income taxes are reported using the liability method.
      Deferred tax assets are recognized for deductible temporary differences and
      deferred tax liabilities are recognized for taxable temporary differences.
      Temporary differences are the differences between the reported amounts of assets
      and liabilities and their tax bases. Deferred tax assets generated by the
      Company or any of its subsidiaries are reduced by a valuation allowance when,
      in
      the opinion of management, it is more likely than not that some portion or
      all
      of the deferred tax assets will not be realized. Deferred tax assets and
      liabilities are adjusted for the effects of changes in tax laws and rates on
      the
      date of enactment. Deferred tax assets resulting from the net operating losses
      are reduced in part by a valuation allowance. We regularly review our deferred
      tax assets for recoverability and establish a valuation allowance based upon
      historical losses, projected future taxable income and the expected timing
      of
      the reversals of existing temporary differences. During the fiscal years ended
      June 30, 2007 and 2006, we estimated the allowance on net deferred tax assets
      to
      be one hundred percent of the net deferred tax assets





**CASH
      RESOURCES**





We
      were
      successful in improving our cash position by the end of our fiscal year, June
      30, 2007 with $4.0 million in cash worldwide. In addition, $1.0 million was
      injected by the exercise of options by several employees in 2007 and $1.25
      million was injected from a sale of restricted common stock in a private
      placement.




28





**CHANGE
      IN MANAGEMENT AND BOARD OF DIRECTORS**





Chief
      Executive Officer and Presidents of Global Regions





In
      October 2006, Mr. Naeem Ghauri resigned from his position of Chief Executive
      Officer and was appointed President of the European Middle East and Africa
      (EMEA) region as well as President of the Global Products Division. Mr. Ghauri
      retains his position on the board of directors. Mr. Najeeb Ghauri was named
      Chief Executive Officer while retaining his position as Chairman of the Board.
      Mr. Salim Ghauri was named President of the Asia Pacific (APAC) region and
      retains his position as Chief Executive Officer of NetSol Technologies Ltd.
      and
      his position on the board of directors.





Board
      of
      Directors





At
      the
      2007 Annual Shareholders Meeting a seven member board was elected. The
      shareholders voted for the following slate of directors: Mr. Najeeb U. Ghauri,
      Mr. Salim Ghauri, Mr. Eugen Beckert, Mr. Naeem U. Ghauri, Mr. Shahid Burki,
      Mr.
      Mark Caton and Mr. Alexander Shakow.





Committees





The
      Audit
      committee is made up of Mr. Shahid Burki as Chairman, Mr. Caton, Mr. Beckert
      and
      Mr. Shakow as members. The Compensation committee consists of Mr. Caton as
      its
      Chairman and Mr. Beckert, Mr. Burki, and Mr. Shakow as its members. The
      Nominating and Corporate Governance Committee consists of Mr. Beckert as
      chairman and Mr. Burki, Mr. Caton and Mr. Shakow as members.





**RESULTS
      OF OPERATIONS**





**THE
      YEAR ENDED JUNE 30, 2007 COMPARED TO THE YEAR ENDED JUNE 30, 2006**





Net
      revenues for the year ended June 30, 2007 were $29,282,086 as compared to
      $18,690,412 for the year ended June 30, 2006. Net revenues are broken out among
      the subsidiaries as follows:












29


2007
              
              
              
              2006North
                  America:Netsol
                  USA
              
              $
              4,500
              
              
              0.02
              %
              $
              45,250
              
              
              0.24
              %Netsol
                  McCue
              
              
              4,948,583
              
              
              16.90
              %
              
              -
              
              
              0.00
              %4,953,083
              
              
              16.92
              %
              
              45,250
              
              
              0.24
              %Europe:Netsol
                  UK
              
              
              138,656
              
              
              0.47
              %
              
              2,038,533
              
              
              10.91
              %Netsol-CQ
              
              
              5,344,316
              
              
              18.25
              %
              
              5,376,427
              
              
              28.77
              %5,482,972
              
              
              18.72
              %
              
              7,414,960
              
              
              39.67
              %Asia-Pacific:Netsol
                  Tech (1)
              
              
              14,796,001
              
              
              50.53
              %
              
              8,424,630
              
              
              45.07
              %Netsol
                  Connect
              
              
              972,095
              
              
              3.32
              %
              
              887,290
              
              
              4.75
              %Netsol-TiG
              
              
              2,622,318
              
              
              8.96
              %
              
              1,642,256
              
              
              8.79
              %Netsol-Omni
              
              
              44,151
              
              
              0.15
              %
              
              43,837
              
              
              0.23
              %Netsol-Abraxas
                  Australia
              
              
              411,466
              
              
              1.41
              %
              
              232,189
              
              
              1.24
              %18,846,031
              
              
              64.36
              %
              
              11,230,202
              
              
              60.09
              %Total
                  Net Revenues
              
              $
              29,282,086
              
              
              100.00
              %
              $
              18,690,412
              
              
              100.00
              %


(1)  Refers
        to
        NetSol Technologies Limited





The
      following table sets forth the items in our consolidated statement of operations
      for the years ended June 30, 2007 and 2006 as a percentage of
      revenues.




30




For
                  the Years EndedJune
                  30, 2007
              
              June
                  30, 2006**Revenues:**
              
              
              
              
              
              %
                  of sales
              
              
              
              
              
              %
                  of salesLicence
                  fees
              
              $
              9,788,266
              
              
              33.43
              %
              $
              5,192,371
              
              
              27.78
              %Maintenance
                  fees
              
              
              5,441,339
              
              
              18.58
              %
              
              2,444,075
              
              
              13.08
              %Services
              
              
              14,052,481
              
              
              47.99
              %
              
              11,053,966
              
              
              59.14
              %Total
                  revenues
              
              
              29,282,086
              
              
              100.00
              %
              
              18,690,412
              
              
              100.00
              %**Cost
                  of revenues:**Salaries
                  and consultants
              
              
              8,812,934
              
              
              30.10
              %
              
              6,117,886
              
              
              32.73
              %Depreciation
                  and amortization
              
              
              652,669
              
              
              2.23
              %
              
              733,370
              
              
              3.92
              %Travel,
                  communication, and other
              
              
              4,193,376
              
              
              14.32
              %
              
              2,169,262
              
              
              11.61
              %Total
                  cost of sales
              
              
              13,658,979
              
              
              46.65
              %
              
              9,020,518
              
              
              48.26
              %**Gross
                  profit**
              
              
              15,623,107
              
              
              53.35
              %
              
              9,669,894
              
              
              51.74
              %**Operating
                  expenses:**Selling
                  and marketing
              
              
              2,356,831
              
              
              8.05
              %
              
              1,789,349
              
              
              9.57
              %Depreciation
                  and amortization
              
              
              1,988,603
              
              
              6.79
              %
              
              2,286,678
              
              
              12.23
              %Salaries
                  and wages
              
              
              4,294,368
              
              
              14.67
              %
              
              2,557,648
              
              
              13.68
              %Professional
                  services
              
              
              1,067,702
              
              
              3.65
              %
              
              607,706
              
              
              3.25
              %Bad
                  debt expense
              
              
              189,873
              
              
              0.65
              %
              
              30,218
              
              
              0.16
              %General
                  and adminstrative
              
              
              3,078,862
              
              
              10.51
              %
              
              2,657,642
              
              
              14.22
              %Total
                  operating expenses
              
              
              12,976,239
              
              
              44.31
              %
              
              9,929,241
              
              
              53.12
              %**Income
                  (loss) from operations**
              
              
              2,646,868
              
              
              9.04
              %
              
              (259,347
              )
              
              -1.39
              %**Other
                  income and (expenses)**Gain/(Loss)
                  on sale of assets
              
              
              (2,977
              )
              
              -0.01
              %
              
              (35,090
              )
              
              -0.19
              %Beneficial
                  conversion feature
              
              
              (2,208,334
              )
              
              -7.54
              %
              
              (14,389
              )
              
              -0.08
              %Amortization
                  of debt discount
              
              
              (2,803,691
              )
              
              -9.57
              %
              
              -
              
              
              0.00
              %Liquidation
                  damages
              
              
              (180,890
              )
              
              -0.62
              %
              
              -
              
              
              0.00
              %Fair
                  market value of warrants issued
              
              
              (68,411
              )
              
              -0.23
              %
              
              (21,505
              )
              
              -0.12
              %Gain
                  on forgiveness of debt
              
              
              -
              
              
              0.00
              %
              
              8,294
              
              
              0.04
              %Interest
                  expense
              
              
              (617,818
              )
              
              -2.11
              %
              
              (442,887
              )
              
              -2.37
              %Interest
                  income
              
              
              339,164
              
              
              1.16
              %
              
              280,276
              
              
              1.50
              %Other
                  income and (expenses)
              
              
              114,423
              
              
              0.39
              %
              
              191,736
              
              
              1.03
              %Income
                  taxes
              
              
              (160,306
              )
              
              -0.55
              %
              
              (106,021
              )
              
              -0.57
              %Total
                  other expenses
              
              
              (5,588,840
              )
              
              -19.09
              %
              
              (139,586
              )
              
              -0.75
              %**Net
                  loss before minority interest in subsidiary**
              
              
              (2,941,972
              )
              
              -10.05
              %
              
              (398,933
              )
              
              -2.13
              %**Minority
                  interests in earnings of subsidiary**
              
              
              (1,935,589
              )
              
              -6.61
              %
              
              (954,120
              )
              
              -5.10
              %***Net
                  loss***
              
              
              (4,877,561
              )
              
              -16.66
              %
              
              (1,353,053
              )
              
              -7.24
              %Dividend
                  required for preferred stockholders
              
              
              (237,326
              )
              
              -0.81
              %
              
              -
              
              
              0.00
              %Bonus
                  stock dividend (minority holders portion)
              
              
              (345,415
              )
              
              -1.18
              %
              
              -
              
              
              0.00
              %***Net
                  loss applicable to common shareholders***
              
              
              (5,460,302
              )
              
              -18.65
              %
              
              (1,353,053
              )
              
              -7.24
              %




The
      total
      consolidated net revenue for fiscal year 2007 was $29,282,086 compared to
      $18,690,412 in fiscal year 2006. This is a nearly 57% increase in revenue.
      Maintenance fee revenue increased 123% from $2,444,075 to $5,441,339. Revenue
      from services, which includes consulting and implementation, increased 27% from
      $11,053,966 to $14,052,481. The increase is attributable mostly to growth in
      services business, several new license sales of LeaseSoft in China, a full
      year
      of revenues attributed by NetSol McCue in the USA, growing outsourcing business
      of NetSol-TIG (JV) and additional maintenance work. In addition, several new
      business divisions were formed the latter part of last year in Lahore. The
      Company has experienced solid and consistent demand for IT services in the
      domestic sectors of Pakistan. The Company had hoped to close at least two major
      service contracts in Pakistan (with an approximate value of $3 million). This
      is
      now expected to occur in within the next two quarters. Organic sales, sales
      without the contribution from NetSol McCue, increased 30% or $5,643,091 to
      $24,333,503 during the fiscal year. NetSol in Pakistan has been pre-qualified
      to
      participate in several public sector projects. The most significant is the
      World
      Bank funded Land Record Management Information Systems or LRMIS. This project
      has a World bank grant of $300 million in Pakistan and NetSol was given a pilot
      project in the province of Punjab early 2007 and we anticipate to win the key
      projects in this area in next few quarters.




The
      fiscal year ended June 30, 2007 was a very busy and exciting period for NetSol
      worldwide. The activities for NetSol’s new license sales for LeaseSoft is
      increasingly on the rise. The current pipeline boasts over 30 plus captive
      auto
      manufacturers and non-captives globally at an advance stage of closing or
      decision making.




31





The
      Company added over 12 new customers in US, APAC and EMEA regions including
      several new license sales, upgrades, and a few new services clients. We added
      2
      new major auto-captive customers in China in addition to Daimler Chrysler and
      Toyota Leasing. In addition, many new customers were added in Pakistan in both
      the public and private sectors. NetSol signed many new alliances and
      partnerships in fiscal year 2007.





NetSol
      made a significant move by acquiring 100% of a US based software company McCue
      Systems Inc., (now “NetSol McCue”) in June 2006. The acquisition of NetSol McCue
      has provided the Company with a very strong and seasoned management team with
      a
      mature, profitable, business which contributes strongly to our top and bottom
      lines. In this first year of integration, they contributed $4,948,583 in
      revenues and $38,510 in net profits. The challenge and increased costs of
      integration into a global, publicly-held organization has caused the lower
      profit margin during the fiscal year.





Due
      to
      the revision in our pricing policy, NetSol LeaseSoft license value in APAC
      is in
      the range of $500,000 to $1.5 million, without factoring in services maintenance
      and implementation fees. Normally, NetSol negotiates 25-30% yearly maintenance
      contracts with customers. A number of large leasing companies will be looking
      to
      renew legacy applications. This places NetSol in a very strong position to
      capitalize on any upturn in IT spending by these companies. NetSol is well
      positioned to sell several new licenses in the second half of fiscal year 2007
      that could potentially increase the sales and bottom line. As the Company
      continues to sell more of these licenses, management believes it is possible
      that the margins could increase to upward of 60%.





We
      have
      added the following new business divisions in Pakistan to expand our
      operations:





·
              BI
                  Consulting: a consulting division with the initial objective of
                  targeting
                  the banking industry. The implementation of the new International
                  Basel II
                  Accord by local banks has created a huge demand for solutions that
                  allow
                  banks to accurately quantify their risks of incurring losses. This
                  is a
                  predictive capability offered by business intelligence software;
                  and, for
                  that purpose we’ve aligned ourselves with the largest financial services
                  software company, SunGard, which is also among the top ten software
                  companies globally.


·
              Information
                  Security (INFOSEC): in recognition of the ever growing awareness
                  of highly
                  publicized IT Security problems, NetSol has established a new business
                  unit**.**The
                  unit will provide services to secure all corporate information
                  and their
                  supporting processes, systems and networks. INFOSEC is designed
                  to ensure*"The
                  right information to the right people at the right time".*NetSol
                  is partnering with a recognized global leader in information security
                  (ISS
                  - Internet Security Systems) to execute this business
                  plan.


·
              NetSol
                  Defense Division (NDD): in light of our coordination with the Pakistan
                  Defense Sector, NetSol established its very own Defense Division
                  to cater
                  specifically to the growing demands in this domain and to deliver
                  services
                  with the professionalism and reliability that epitomizes NetSol’s CMMi
                  Level 5 standing.


·
            Enterprise
                Business Solutions (EBS): due to the dynamic nature of the business
                environment and the increasing demand for operational efficiency
                in
                today’s world, NetSol has built its own Enterprise Business Solutions
                (EBS) division partnering with Oracle and DataStream. With EBS,
                NetSolgives companies the ability to manage, maintain and track assets,
                plus the ability to use this data to drive decision-making in areas
                such
                as Maintenance, Inventory, Warranty, Up-time Reliability & Risk
                Management.





The
      gross
      profit was $15,623,107 for year ended June 30, 2007 as compared with $9,669,894
      for the same period of the previous year. This is a 62% increase. The gross
      profit percentage was 53% for the current fiscal year and 52% in the prior
      year.
      The cost of sales was $13,658,979 in the current year compared to $9,020,518
      in
      the prior year. Although salaries and consultant fees increased $2,695,048
      from
      $6,117,886 in the prior year to $8,812,934, as a percentage of sales, it
      decreased 3% from 33% in the prior year to 30% in the current year. The company
      hired over 84 new programmers and engineers to meet the growing demand,
      including 14 for the new acquisition, NetSol McCue. The current fiscal year
      includes the added costs of the new acquisition of McCue Systems. In addition,
      the Company has added several new business divisions in Pakistan hiring the
      best
      talent in these specialized areas. It takes between 18-24 months for these
      new
      business units to fully develop their offerings and begin generating revenues.
      A
      few of these units are now producing revenues at the close of fiscal year end
      2007. The rest of the divisions are anticipated to start generating revenues
      in
      the next two quarters. With the addition of NetSol-CQ and NetSol McCue, several
      new programmers have been hired in Lahore to learn the systems, and at the
      end
      of the current fiscal year these programmers were just beginning to finish
      their
      training period and become productive. Even with the additional costs, as a
      percentage of sales, the cost of sales decreased from 48% to 47%. The gross
      profit margin is expected to continue to improve as the integration of both
      the
      operations in Horsham, UK and Burlingame, US are fully integrated and cost
      savings are achieved. The Company has invested heavily in its infrastructure,
      both in people and equipment during the current fiscal year as it situated
      itself for increased growth organically and from the acquisitions of NetSol-CQ
      in February 2005 and NetSol McCue in June 2006.




32





Operating
      expenses were $12,976,239 for the year ended June 30, 2007 as compared to
      $9,929,241 for the year ended June 30, 2006. The increase is mainly attributable
      to increased selling and marketing activities, additional employees and an
      increase in overall activities due to our increased marketing efforts. Also
      contributing to the higher costs was the full integration of NetSol McCue.
      As a
      percentage of sales, operating expenses decreased 9% from 53% to 44% for fiscal
      2006 and 2007, respectively.





During
      the years ended June 30, 2007 and 2006, the Company issued 57,755 and 67,255
      restricted common shares in exchange for services rendered, respectively. The
      Company recorded this non-cash compensation expense of $89,350 and $136,117
      for
      the years ended June 30, 2007 and 2006, respectively. Total professional service
      expense, including non-cash compensation, was $1,067,702 and $607,706 for the
      years ended June 30, 2007 and 2006, respectively. During the years ended June
      30, 2007 and 2006, the Company recorded depreciation and amortization expense
      of
      $1,988,603 and $2,286,678.. Salaries and wages expenses were $4,294,368 and
      $2,557,648 for the years ended June 30, 2007 and 2006, respectively, or an
      increase of $1,736,720, or 68%. Included in this increase is an additional
      33
      employees. As a percentage of sales, salaries only increased 1% to 14.67%
      compared to 13.68% in the prior year. General and administrative expenses were
      $3,078,862 and $2,657,642 for the years ended June 30, 2007 and 2006,
      respectively, an increase of $421,220 or 16%. As a percentage of sales, these
      expenses decreased 4% to 10.51% in the current year compared to 14.22% in the
      prior year. The increase in costs is due to the addition of the new subsidiary,
      NetSol McCue, three new sales offices in Pakistan, the sales office in China,
      increased board fees, increased travel and other expenses that supporting a
      large workforce entail. As of June 30, 2007, we had 825 employees world-wide.





Selling
      and marketing expenses increased to $2,356,831 for the year ended June 30,
      2007
      as compared to $1,789,379 for the year ended June 30, 2006, reflecting the
      growing sales activity of the Company and the addition of the new subsidiary,
      NetSol McCue and the new sales offices in Pakistan and China. As a percentage
      of
      sales, these expenses decreased 2% to 8.05% in the current year compared to
      9.57% in the prior year. The Company wrote-off, as uncollectible, bad debts
      of
      $189,873 and $30,218, during the years ended June 30, 2007 and 2006,
      respectively.





The
      income from operations in fiscal year 2007 was $2,646,868 compared to loss
      of
      $259,347 in fiscal year 2006. Included in these amounts are non-cash charges
      of
      depreciation and amortization of $1,988,603 and $2,286,678 settlement expenses
      of $15,953 and $43,200 and bad debt expense of $30,218 and $13,118,
      respectively.





Net
      loss
      in fiscal year 2007 was $4,877,561 compared to $1,353,053 in fiscal year 2006
      or
      $3,524,508 decrease **.** In
      addition, the Company was required to pay a dividend to the preferred
      stockholders of $237,326 and our subsidiary PK Tech which is listed on the
      Karachi Stock Exchange issued a dividend of bonus shares to its shareholders.
      The net value issued to the minority holders was $345,415. These increased
      the
      net loss applicable to common shareholders to $5,460,302. The current fiscal
      year amount includes a net reduction for the minority interest in earnings
      of
      $1,935,589 compared to a reduction of $954,120 in the prior year for the 49.9%
      minority interest in NetSol Connect and TIG-NetSol, and the 28.13% of NetSol
      Tech owned by unaffiliated parties. The Company also recognized non-recurring
      expenses including $2,208,334 and $14,389 expense for the beneficial conversion
      feature on notes payable and convertible debenture, $2,803,691 and $0 of
      amortized costs of debt, $180,890 and $0 of liquidation damages, and a gain
      of
      $0 and $8,294 from the settlement of a debt, respectively. In addition, the
      Company recorded an expense of $68,411 and $21,505 for the fair market value
      of
      options and warrants granted for the years ended June 30, 2007 and 2006,
      respectively. The net loss per share was $0.27 in 2006 compared to net income
      of
      $0.09 in 2006. The total weighted average of shares outstanding basic and
      dilutive was 18.2 million against 14.6 million basic and diluted shares in
      2006.





The
      net
      EBITDA loss was $1,417,368 compared to income of $2,215,903 after amortization
      and depreciation charges of $2,641,272 and $3,020,048, income taxes of $160,306
      and 106,021, and interest expense of $658,615 and $442,887 respectively. With
      the addition of the non-cash charge for the amortized costs of debt of
      $2,803,691 and the beneficial conversion feature expense of $2,208,334 the
      adjusted pro forma EBITDA income would be $3,594,657 for the fiscal year ended
      June 30, 2007 and the adjusted pro forma EBITDA earnings per share, basic and
      diluted, would be $0.20. Although the net EBITDA income is a non-GAAP measure
      of
      performance, we are providing it because we believe it to be an important
      supplemental measure of our performance that is commonly used by securities
      analysts, investors, and other interested parties in the evaluation of companies
      in our industry. It should not be considered as an alternative to net income,
      operating income or any other financial measures calculated and presented,
      nor
      as an alternative to cash flow from operating activities as a measure of our
      liquidity. It may not be indicative of the Company’s historical operating
      results nor is it intended to be predictive of potential future
      results.




33





**Quarterly
      Results of Operations for the quarter ended June 30, 2007 and June 30,
      2006**





Net
      revenues for the quarter ended June 30, 2007 and 2006 are broken out among
      the
      subsidiaries as follows:


2007
              
              
              
              2006North
                  America:Netsol
                  USA
              
              $
              -
              
              
              0.00
              %
              $
              -
              
              
              0.00
              %NetSol
                  McCue
              
              
              1,693,383
              
              
              19.74
              %
              
              -
              
              
              0.00
              %1,693,383
              
              
              19.74
              %
              
              -
              
              
              0.00
              %Europe:Netsol
                  UK
              
              
              44,052
              
              
              0.51
              %
              
              108,867
              
              
              2.34
              %Netsol-CQ
              
              
              1,341,162
              
              
              15.64
              %
              
              1,200,128
              
              
              25.81
              %1,385,214
              
              
              16.15
              %
              
              1,308,995
              
              
              28.15
              %Asia-Pacific:Netsol
                  Tech
              
              
              4,307,370
              
              
              50.22
              %
              
              2,536,188
              
              
              54.54
              %Netsol
                  Connect
              
              
              232,261
              
              
              2.71
              %
              
              210,334
              
              
              4.52
              %Netsol-TiG
              
              
              918,336
              
              
              10.71
              %
              
              519,469
              
              
              11.17
              %Netsol-Omni
              
              
              167
              
              
              0.00
              %
              
              35,188
              
              
              0.76
              %Netsol-Abraxas
                  Australia
              
              
              39,708
              
              
              0.46
              %
              
              40,053
              
              
              0.86
              %5,497,842
              
              
              64.10
              %
              
              3,341,232
              
              
              71.85
              %Total
                  Net Revenues
              
              $
              8,576,439
              
              
              100.00
              %
              $
              4,650,227
              
              
              100.00
              %







34




The
      following table presents our unaudited quarterly results of operations for
      the
      quarters ended June 30, 2007 and 2006. You should read the following table
      together with the consolidated financial statements and related notes contained
      elsewhere in this report. We have prepared the unaudited information on the
      same
      basis as our audited consolidated financial statements. This table includes
      normal recurring adjustments that we consider necessary for the fair
      presentation of our financial position and operating results for the quarters
      presented. Operating results for any quarter are not necessarily indicative
      of
      results for any future quarters or for a full year.


For
                  the Three Months EndedJune
                  30, 2007
              
              June
                  30, 2006**Revenues:**
              
              
              
              
              
              %
                  of sales
              
              
              
              
              
              %
                  of salesLicence
                  fees
              
              $
              2,936,770
              
              
              34.24
              %
              $
              1,239,984
              
              
              26.67
              %Maintenance
                  fees
              
              
              1,451,243
              
              
              16.92
              %
              
              735,537
              
              
              15.82
              %Services
              
              
              4,188,426
              
              
              48.84
              %
              
              2,674,706
              
              
              57.52
              %Total
                  revenues
              
              
              8,576,439
              
              
              100.00
              %
              
              4,650,227
              
              
              100.00
              %**Cost
                  of revenues:**Salaries
                  and consultants
              
              
              2,204,328
              
              
              25.70
              %
              
              2,020,271
              
              
              43.44
              %Depreciation
                  and amortization
              
              
              60,404
              
              
              0.70
              %
              
              239,356
              
              
              5.15
              %Travel,
                  communication, and other
              
              
              985,568
              
              
              11.49
              %
              
              797,978
              
              
              17.16
              %Total
                  cost of sales
              
              
              3,250,300
              
              
              37.90
              %
              
              3,057,605
              
              
              65.75
              %**Gross
                  profit**
              
              
              5,326,139
              
              
              62.10
              %
              
              1,592,622
              
              
              34.25
              %**Operating
                  expenses:**Selling
                  and marketing
              
              
              811,328
              
              
              9.46
              %
              
              598,443
              
              
              12.87
              %Depreciation
                  and amortization
              
              
              497,461
              
              
              5.80
              %
              
              574,907
              
              
              12.36
              %Salaries
                  and wages
              
              
              895,610
              
              
              10.44
              %
              
              870,922
              
              
              18.73
              %Professional
                  services
              
              
              293,499
              
              
              3.42
              %
              
              242,554
              
              
              5.22
              %Bad
                  debt expense
              
              
              72,606
              
              
              0.85
              %
              
              2,929
              
              
              0.06
              %General
                  and adminstrative
              
              
              866,220
              
              
              10.10
              %
              
              790,804
              
              
              17.01
              %Total
                  operating expenses
              
              
              3,436,724
              
              
              40.07
              %
              
              3,080,559
              
              
              66.25
              %**Income
                  (loss) from operations**
              
              
              1,889,415
              
              
              22.03
              %
              
              (1,487,937
              )
              
              -32.00
              %**Other
                  income and (expenses)**Gain/(Loss)
                  on sale of assets
              
              
              16,090
              
              
              0.19
              %
              
              (1,076
              )
              
              -0.02
              %Beneficial
                  conversion feature
              
              
              -
              
              
              0.00
              %
              
              -
              
              
              0.00
              %Amortization
                  of debt discount and capitalized cost of debt
              
              
              -
              
              
              0.00
              %
              
              -
              
              
              0.00
              %Liquidation
                  damages
              
              
              -
              
              
              0.00
              %
              
              -
              
              
              0.00
              %Fair
                  market value of warrants issued
              
              
              (34,424
              )
              
              -0.40
              %
              
              -
              
              
              0.00
              %Gain
                  on forgiveness of debt
              
              
              -
              
              
              0.00
              %
              
              -
              
              
              0.00
              %Interest
                  expense
              
              
              (74,476
              )
              
              -0.87
              %
              
              (201,987
              )
              
              -4.34
              %Interest
                  income
              
              
              73,248
              
              
              0.85
              %
              
              10,391
              
              
              0.22
              %Other
                  income and (expenses)
              
              
              25,488
              
              
              0.30
              %
              
              246,333
              
              
              5.30
              %Income
                  taxes
              
              
              (33,686
              )
              
              -0.39
              %
              
              (15,130
              )
              
              -0.33
              %Total
                  other expenses
              
              
              (27,760
              )
              
              -0.32
              %
              
              38,531
              
              
              0.83
              %**Net
                  income (loss) before minority interest in
                  subsidiary**
              
              
              1,861,655
              
              
              21.71
              %
              
              (1,449,406
              )
              
              -31.17
              %**Minority
                  interests in earnings of subsidiary**
              
              
              (561,508
              )
              
              -6.55
              %
              
              (254,248
              )
              
              -5.47
              %***Net
                  income (loss)***
              
              
              1,300,147
              
              
              15.16
              %
              
              (1,703,654
              )
              
              -36.64
              %Dividend
                  required for preferred stockholders
              
              
              (77,640
              )
              
              -0.91
              %
              
              -
              
              
              0.00
              %Bonus
                  stock dividend (minority holders portion)
              
              
              (345,415
              )
              
              -4.03
              %
              
              -
              
              
              0.00
              %***Net
                  income (loss) applicable to common
                  shareholders***
              
              
              877,092
              
              
              10.23
              %
              
              (1,703,654
              )
              
              -36.64
              %**Other
                  comprehensive (loss)/gain:**Translation
                  adjustment
              
              
              (259,113
              )
              
              
              
              
              (100,069
              )**Comprehensive
                  income (loss)**
              
              $
              617,979
              
              
              
              
              $
              (1,803,723
              )**Net
                  income (loss) per share:**Basic
              
              $
              0.07
              
              
              
              
              $
              (0.11
              )Diluted
              
              $
              0.07
              
              
              
              
              $
              (0.11
              )Weighted
                  average number of shares outstandingBasic
              
              
              19,706,920
              
              
              
              
              
              15,468,248Diluted
              
              
              19,835,177
              
              
              
              
              
              15,468,248




35




**Liquidity
      and Capital Resources**





The
      Company's cash position was $4,010,164 at June 30, 2007 compared to $2,493,768
      at June 30, 2006. In 2006, the Company had $1,739,851 in certificates of
      deposit. The total cash position, including the certificates of deposits, was
      $4,010,164 as of June 30, 2007 compared to $4,233,619 as of June 30, 2006.
      In
      addition, the Company had $4,533,555 in restricted cash as of June 30, 2006.
      The
      cash was restricted insofar as it was dedicated to specific uses as described
      in
      the financing completed in June 2006.




The
      Company’s current assets, as of June 30, 2007, totaled $23,237,058 and were
      46.92% of total assets, a decrease of 4.8% from $22,230,443 or 51.74% as of
      June
      30, 2006. As of June 30, 2007, the Company's working capital (current assets
      less current liabilities) totaled $11,449,252 compared to $10,710,791 as of
      June
      30, 2006, an increase of $738,461. As of June 30, 2007, the Company had over
      $8.4 million in accounts receivable and $8.5 million in revenues in excess
      of
      billings.




Net
      cash
      used by operating activities amounted to $123,528 for the year ended June 30,
      2007, as compared to $1,691,918 for the comparable period last fiscal year.
      The
      decrease is mainly due to an increase in accounts receivable and other assets
      offset by an increase in accounts payable. The increase in sales has resulted
      in
      an increase in accounts receivable and revenues in excess of billings. We expect
      to receive payments on these accounts within the next fiscal year.




Net
      cash
      used in investing activities amounted to $7,639,916 for the year ended June
      30,
      2007, as compared to $4,410,130 for the comparable period last fiscal year.
      The
      difference lies primarily in the purchase of NetSol-CQ and NetSol McCue Systems
      and the related increase in intangible assets acquired as well as an increase
      in
      purchases of fixed assets. During the current fiscal year, this amount included
      the second installment for NetSol McCue, while in the prior year the amount
      included the final payment for NetSol-CQ and the initial payment for NetSol
      McCue. The Company had purchases of property and equipment of $2,420,470
      compared to $2,709,569 for the comparable period last fiscal year.




Net
      cash
      provided by financing activities amounted to $9,173,555 and $7,149,478 for
      years
      ended June 30, 2007, and 2006, respectively. The current fiscal year included
      the cash inflow of $1,030,093 from the sale of common stock and $1,008,250
      from
      the exercising of stock options and warrants, compared to $1,400,000 and
      $669,382 in the prior year, respectively. In the current fiscal year, the
      Company had net proceeds from loans and capital leases of $1,697,267 as compared
      to $82,650 in the comparable period last year. In addition, the Company had
      dividends payable to preferred stock holders of $77,640 in the current year.
      In
      the prior year, the Company received net proceeds of $4,031,001 from the sale
      of
      a subsidiary’s common stock in an IPO on the Karachi Stock Exchange and the
      Company obtained a $5,500,000 convertible note payable to facilitate the closing
      of the NetSol McCue acquisition and the final cash payment of the NetSol-CQ
      acquisition and had $4,533,555 in restricted cash. Again, the cash is deemed
      restricted in that it is designated for use in the NetSol McCue acquisition,
      the
      NetSol-CQ acquisition and as working capital according to the terms of the
      June
      2006 financing.




The
      Company plans on pursuing various and feasible means of raising new funding
      to
      expand its infrastructure, enhance product offerings and strengthen marketing
      and sales activities in strategic markets. The strong growth in earnings and
      the
      signing of larger contracts with Fortune 500 customers largely depends on the
      financial strength of NetSol. Generally, the bigger name clients and new
      prospects diligently analyze and take into consideration a stronger balance
      sheet before awarding big projects to vendors. Therefore, NetSol would continue
      its effort to further enhance its financial resources in order to continue
      to
      attract large name customers and big value contracts. The company attracted
      5
      new institutional investors in 2006 that invested $5.5 million, raising its
      institutional investor base to over 15%. There are over 7.1 million employees
      and officers options unexercised and over 3 million investor warrants remaining
      to be exercised.





As
      a
      growing company, we have on-going capital expenditure needs based on our short
      term and long term business plans. Although our requirements for capital
      expenses vary from time to time, for the next 12 months, we have the following
      capital needs:





·
            The
                third payment of NetSol McCue would be due based on the ‘earn out’
                formula. This could be in the range of $1.0 million to $2.0 million
                in
                cash and common stock. This is based on an earn out structure and
                the
                Company expects to fund it through internal cash
                flow;





·
            Notes
                payable and related interest for approximately $887,000;





·
            Liquidity
                damages owed to convertible note holders of approximately
                $12,223;





·
            Working
                capital of $1.0 million for US and UK business expansion, new business
                development activities and infrastructure
                enhancements.




36




While
      there is no guarantee that any of these methods will result in raising
      sufficient funds to meet our capital needs or that even if available will be
      on
      terms acceptable to the Company, we will consider raising capital through equity
      based financing and, warrant and option exercises. We would, however, use some
      of our internal cash flow to meet certain obligations as mentioned above.
      However, the Company is very conscious of the dilutive effect and price
      pressures in raising equity-based capital.





The
      methods of raising funds for capital needs may differ based on the following:





·
            Stock
                volatility due to market conditions in general and NetSol stock
                performance in particular. This may cause a shift in our approach
                to
                raising new capital through other sources such as secured long term
                debt.





·
            Analysis
                of the cost of raising capital in the U.S., Europe or emerging markets.
                By
                way of example only, if the cost of raising capital is high in one
                market
                and it may negatively affect the company’s stock performance, we may
                explore options available in other markets.





Should
      global or other general macro economic factors cause an adverse climate, we
      would defer new financing and use internal cash flow for capital
      expenditures.





**Dividends
      and Redemption**





It
      has
      been the Company's policy to invest earnings in the growth of the Company rather
      than distribute earnings as dividends. This policy, under which common stock
      dividends have not been paid since the Company's inception and is expected
      to
      continue, but is subject to regular review by the Board of Directors.





**ITEM
      7. FINANCIAL STATEMENTS**





The
      Consolidated Financial Statements that constitute Item 7 are included at the
      end
      of this report on page F-1.





**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





Kabani
      & Company’s report on NetSol’s financial statements for the fiscal years
      ended June 30, 2006 and June 30, 2007, did not contain an adverse opinion or
      disclaimer of opinion, and was not qualified or modified as to uncertainty,
      audit scope, or accounting principles.





In
      connection with the audit of NetSol's financial statements for the fiscal years
      ended June 30, 2006 and June 30, 2007 there were no disagreements, disputes,
      or
      differences of opinion with Kabani & Company on any matters of accounting
      principles or practices, financial statement disclosure, or auditing scope
      and
      procedures, which, if not resolved to the satisfaction of Kabani & Company
      would have caused Kabani & Company to make reference to the matter in its
      report.





**ITEM
      8A. CONTROLS AND PROCEDURES**





Management,
      under the supervision and with the participation of the chief executive officer
      and chief financial officer, conducted an evaluation of the disclosure controls
      and procedures as defined in Rule 13a-15(e) as of the fiscal quarter ended
      on
      June 30, 2007. Based
      upon that evaluation, the Chairman, Chief Financial
      Officer and Chief Executive Officer concluded that our disclosure controls
      and
      procedures are effective.




There
      has
      been no change, including corrective actions with regard to deficiencies or
      weaknesses in the Company’s internal controls or in other factors that has
      materially affected, or is reasonably likely to materially affect, these
      internal controls over financial reporting.





**ITEM
      8B. OTHER MATTERS**





Effective
      September 18, 2007, the Board of Directors adopted the following
      amendments/modifications to its committee charters and Code of
      Ethics:





Audit
      Committee Charter. The Charter has been amended to permit the committee chair
      to
      cast a deciding vote in the event of a tie vote by the committee. A provision
      has been added permitting the committee to evaluate its own performance.
      Finally, the physical address of the Corporate Secretary has been added to
      Annex
      A which explains the procedures for submitting claims or complaints.




37





Compensation
      Committee Charter. The Charter has been amended to permit the committee chair
      to
      cast a deciding vote in the event of a tie vote by the committee.





Nominating
      and Corporate Governance Charter. The Charter has been amended to permit the
      committee chair to cast a deciding vote in the event of a tie vote by the
      committee. Further, the Charter has been amended to augment the Company’s
      insider trading policy by establishing a black-out trading period during the
      periods from the end of a quarterly period until the Company’s quarterly reports
      are filed with the SEC and from 30 days prior to the filing of the Company’s
      annual report with the SEC. This additional policy does not, in any way, modify
      or lesson the continued insider trading prohibitions and policies set forth
      in
      the Charter.





Code
      of
      Ethics. The Code of Ethics has been amended to augment the Company’s insider
      trading policy by establishing a black-out trading period during the periods
      from the end of a quarterly period until the Company’s quarterly reports are
      filed with the SEC and from 30 days prior to the filing of the Company’s annual
      report with the SEC. This additional policy does not, in any way, modify or
      lesson the continued insider trading prohibitions and policies set forth in
      the
      Code.




The
      amended charters have been posted on the Company’s website, www.netsoltek.com and the
      amended Code of Ethics is filed as an exhibit to this report.


38


**PART
      III**





**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
      WITH
      SECTION 16(a) OF THE EXCHANGE ACT**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires that the
      Company's directors and executive officers and persons owning more than 10%
      of
      the outstanding Common Stock, file reports of ownership and changes in ownership
      with the Securities and Exchange Commission ("SEC"). Executive officers,
      directors and beneficial owners of more than 10% of the Company's Common Stock
      are required by SEC regulation to furnish the Company with copies of all Section
      16(a) forms they file.





Based
      solely on copies of such forms furnished as provided above, or written
      representations that no Forms 5 were required, the Company believes that during
      the fiscal year ended June 30, 2007, all Section 16(a) filing requirements
      applicable to its executive officers, directors and beneficial owners of more
      than 10% of its Common Stock were complied with.





**DIRECTORS
      AND EXECUTIVE OFFICERS**





The
      following table sets forth the names and ages of the current directors and
      executive officers of the Company, the principal offices and positions with
      the
      Company held by each person and the date such person became a director or
      executive officer of the Company. The Board of Directors elects the executive
      officers of the Company annually. Each year the stockholders elect the Board
      of
      Directors. The executive officers serve terms of one year or until their death,
      resignation or removal by the Board of Directors. In addition, there was no
      arrangement or understanding between any executive officer and any other person
      pursuant to which any person was selected as an executive officer.





The
      directors and executive officers of the Company are as follows:


Name
              
              Year
                  First Elected As an Officer or Director
              
              Age
              
              Position
                  Held with the Registrant
              
              Family
                  RelationshipNajeeb
                  Ghauri
              
              1997
              
              53
              
              Director
                  and Chairman
              
              Brother
                  to Naeem and Salim GhauriSalim
                  Ghauri
              
              1999
              
              52
              
              President
                  and Director
              
              Brother
                  to Naeem and Najeeb GhauriNaeem
                  Ghauri
              
              1999
              
              50
              
              Chief
                  Executive Officer, Director
              
              Brother
                  to Najeeb and Salim GhauriTina
                  Gilger
              
              2005
              
              45
              
              Chief
                  Financial Officer
              
              NonePatti
                  L. W. McGlasson
              
              2004
              
              42
              
              Secretary,
                  General Counsel
              
              NoneShahid
                  Javed Burki
              
              2000
              
              69
              
              Director
              
              NoneEugen
                  Beckert
              
              2001
              
              60
              
              Director
              
              NoneMark
                  Caton
              
              2002
              
              58
              
              Director
              
              NoneAlexander
                  Shakow
              
              2007
              
              70
              
              Director
              
              None





Business
      Experience of Officers and Directors:




NAJEEB
      U.
      GHAURI is the Chief Executive Officer and Chairman of NetSol. He has been a
      Director of the Company since 1997, Chairman since 2003 and Chief Executive
      Officer since October 2006. Mr. Ghauri is the co founder of
      NetSol Technologies, Inc. He was responsible for NetSol listing on
      NASDAQ in 1999 and NetSol subsidiary listing on KSE (Karachi Stock
      Exchange) in 2005.  Mr. Ghauri was most instrumental in transforming
      NetSol (formerly Mirage Holdings, Inc.) from a clothing/ apparel business to
      a
      fully focused global IT company. Mr. Ghauri served as the Company's Chief
      Executive Officer from 1999 to 2001 and as the Chief Financial Officer from
      2001
      to 2005.  As CEO, Mr. Ghauri is responsible for managing the
      day-to-day operations of the Company, as well as the Company's overall growth
      and expansion plan.   In addition to numerous accomplishments at
      NetSol, Mr. Ghauri was honored to ring the closing bell at NASDAQ
      Stock Exchange in September 2006. Prior to joining the Company, Mr. Ghauri
      was part of the marketing team of Atlantic Richfield Company (ARCO) (now
      acquired by BP), a Fortune 500 company, from 1987-1997. Prior to ARCO, he spent
      nearly 5 years with Unilever as brand and sales managers. Mr. Ghauri received
      his Bachelor of Science degree in Management/Economics from Eastern Illinois
      University in 1979, and his M.B.A. in Marketing Management from Claremont
      Graduate School in California in 1982.   Mr. Ghauri was elected
      Vice Chairman of US Pakistan Business Council in 2006. A Washington D.C. based
      council of US Chamber of Commerce. He is also very active in several
      philanthropic activities in emerging markets and is a founding director Pakistan
      Human Development Fund, a non-profit organization, a partnership with UNDP
      to
      promote literacy, health services and poverty alleviation in Pakistan.




SALIM
      GHAURI has been with the Company since 1999 as the President and Director of
      the
      Company. Mr. Ghauri is currently the Chairman and CEO of NetSol Technologies
      Limited and President of the Asia Pacific Region and CEO of Global Services
      Group. Mr. Ghauri was the founder of Network Solutions (Pvt.) Ltd. in 1995,
      Later NetSol Technologies (Pvt) Limited. Built under his leadership, NetSol
      gradually built a strong team of IT professionals and infrastructure in Pakistan
      and became the first software house in Pakistan certified as ISO 9001 and CMMi
      Level 5 assessed. Mr. Ghauri received his Bachelor of Science degree in Computer
      Science from University of Punjab in Lahore, Pakistan. Before NetSol
      Technologies Ltd., Mr. Ghauri was employed with BHP in Sydney, Australia from
      1987-1995, where he commenced his employment as a consultant. Mr. Ghauri was
      appointed in 2007 as an Honorary Consul for Australia-Punjab
      Region.




39





NAEEM
      GHAURI has been a Director of the Company since 1999 and was the Company’s Chief
      Executive Officer from August 2001 to October 2006. Mr. Ghauri serves as the
      Managing Director of NetSol (UK) Ltd., a wholly owned subsidiary of the Company
      located in London, England. Mr. Ghauri was responsible for the launch of NetSol
      Connect in Pakistan. Prior to joining the Company, Mr. Ghauri was Project
      Director for Mercedes-Benz Finance Ltd., a subsidiary of DaimlerChrysler,
      Germany from 1994-1999. Mr. Ghauri supervised over 200 project managers,
      developers, analysis and users in nine European Countries. Mr. Ghauri earned
      his
      degree in Computer Science from Brighton University, England. Mr. Ghauri serves
      on the board of NetSol CQ, a subsidiary of the Company.





TINA
      GILGER jointed NetSol as Chief Financial Officer in July 2005. Ms.
      Gilger has acted as a consultant to the Company since October 2003 in the
      capacity of controller. In the three years prior to becoming NetSol’s CFO, Ms.
      Gilger acted as an audit liaison for six reporting public companies, of which
      one was NetSol. From 2000 to 2002, Ms. Gilger acted as audit liaison for a
      public company specializing in reverse mergers for public companies listed
      on
      the OTC:BB. Ms. Gilger received her degree in Accounting, with an emphasis
      in
      Business Management from the University of Utah in 1990. Ms. Gilger was licensed
      as a Certified Public Accountant by the State of California in 1992, passing
      all
      four parts of the exam on the first attempt.





PATTI
      L.
      W. MCGLASSON joined NetSol as General Counsel in January 2004 and was elected
      to
      the position of Secretary in March 2004. Prior to joining NetSol, Ms. McGlasson
      practiced at Vogt & Resnick, law corporation, where her practice focused on
      corporate, securities and business transactions. As part of her Masters in
      Law
      in Transnational Business, she interned at the law firm of Loeff Claeys Verbeke
      in Rotterdam, the Netherlands in 1991. Ms. McGlasson was admitted to practice
      in
      California in 1991. She received her Bachelor of Arts in Political Science
      in
      1987 from the University of California, San Diego and, her Juris Doctor and
      Masters in Law in Transnational Business from the University of the Pacific,
      McGeorge School of Law, in 1991 and 1993, respectively.





EUGEN
      BECKERT was appointed to the Board of Directors in August 2001 to fill a vacancy
      and continues to serve on the Board. A native of Germany, Mr. Beckert received
      his masters in Engineering and Economics from the University of Karlsruhe,
      Germany. Mr. Beckert was with Mercedes-Benz AG/Daimler Benz AG from 1973,
      working in technology and systems development. In 1992, he was appointed
      director of Global IT (CIO) for Debis Financial Services, the services division
      of Daimler Benz. From 1996 to 2000, he acted as director of Processes and
      Systems (CIO) for Financial Services of DaimlerChrysler Asia Pacific Services. During
      this period he was instrumental to having the LEASESOFT products of NetSol
      developed and introduced in several countries as a pilot customer. From
      2001 to 2004, he served as Vice President in the Japanese company of DCS. Mr.
      Beckert retired from DaimlerChrysler in November 2006. Mr. Beckert is chairman
      of the Nominating and Corporate Governance Committee and a member of the Audit
      and Compensation Committees.





SHAHID
      JAVED BURKI was appointed to the Board of Directors in February 2003. He had
      a
      distinguished career with World Bank at various high level positions from 1974
      to 1999. He was a Director of Chief Policy Planning with World Bank from
      1974-1981. He was also a Director of International Relations from 1981-1987.
      Mr.
      Burki served as Director of China Development from 1987-1994 and, Vice President
      of Latin America with the World Bank from 1994-1999. In between, he briefly
      served as the Finance Minister of Pakistan from 1996-1997. Mr. Burki also served
      as the CEO of the Washington based investment firm EMP Financial Advisors from
      1992-2002. Presently, he is the Chairman of Pak Investment & Finance
      Corporation. He was awarded a Rhodes scholarship in 1962 and M.A in Economics
      from Oxford University in 1963. He also earned a Master of Public Administration
      degree from Harvard University, Cambridge, MA in 1968. Most recently, he
      attended Harvard University and completed an Executive Development Program
      in
      1998. During his lifetime, Mr. Burki has authored many books and articles
      including: *China's
      Commerce* (Published by Harvard in 1969) and *Accelerated
      Growth in Latin America* (Published by World Bank in 1998). Mr. Burki is a chairman of the Compensation
      Committee and a member of the Audit and Nominating and Corporate Governance
      Committees.





MARK
      CATON joined the board of directors of NetSol on January 1, 2007 to fill a
      vacancy and was elected to the board in June 2007.  Mr. Caton is currently
      President of Centela Systems, Inc. a distributor of computer peripheral
      solutions in the multimedia and digital electronic market segment, a position
      he
      has held since 2003. Prior to joining Centela, Mr. Caton was President of NetSol
      Technologies USA, responsible for US sales, from June 2002 to December 2003.
      Mr.
      Caton was employed by ePlus from 1997 to 2002 as Senior Account Representative.
      He was a member of the UCLA Alumni Association Board of Directors and served
      on
      the Board of Directors of NetSol from 2002-2003. Mr. Caton is a Chairman of
      the
      Compensation Committee and a member of the Audit and Nominating Committees.
      Mr.
      Caton received his BA from UCLA in psychology in 1971.




40




ALEXANDER
      SHAKOW joined the board on June 4, 2007.  Mr. Shakow had a distinguished
      career with the World Bank where he held various high level positions from
      1981-2002.  Since 2002, he has been an independent consultant for various
      international organizations.   From 1968-1981, Mr. Shakow  held
      many senior positions at the United States Agency for International Development,
      including Assistant Administrator for Program and Policy; Director -Office
      of
      Development and Planning, Bureau for Asia; and, Director - Indonesia,
      Malaysia and Singapore affairs.  Mr. Shakow was also a staff member
      of the United States Peace Corps from 1963-1968, including director in
      Indonesia.  Mr. Shakow received his PhD from the London School of Economics
      and Political Science in 1962.  He earned his undergraduate degree with
      honors from Swarthmore College in 1958.  Mr. Shakow is listed in *Who’s
      Who in America* and *Who’s
      Who in the World* ;
      and
      currently is a member of the Board of Trustees of EnterpriseWorks/VITA. 
Mr. Shakow is a member of the Audit, Compensation and Nominating and Corporate
      Governance Committees.





**ITEM
      10-EXECUTIVE COMPENSATION**





**Compensation
      Discussion and Analysis**




***Compensation
      Philosophy and Objectives***




The
      Compensation Committee believes that the most effective executive compensation
      program is one that is designed to reward the achievement of specific annual,
      long-term and strategic goals by the Company, and which aligns executives’
interests with those of the stockholders by rewarding performance at or above
      established goals, with the ultimate objective of increasing stockholder value.
      The philosophy of the Compensation Committee is to evaluate both performance
      and
      compensation to ensure that we maintain our ability to attract and retain
      superior employees in key positions and that compensation provided to key
      employees remains competitive relative to the compensation paid to similarly
      situated executives of our peer companies. To that end, the Compensation
      Committee believes executive compensation packages should include both cash
      and
      equity-based compensation that reward performance as measured against
      established goals.




***Setting
      Executive Compensation***




Management
      develops our compensation plans by utilizing publicly available compensation
      data in the media services and technology industries. We believe that the
      practices of these groups of companies provide us with appropriate compensation
      benchmarks, because these groups of companies are in similar businesses and
      tend
      to compete with us for executives and other employees. For benchmarking
      executive compensation, we typically review the compensation data we have
      collected from these groups of companies, as well as a subset of the data from
      those companies that have a similar number of employees as the Company. For
      purposes of determining executive compensation, we have not engaged consultants
      to help us analyze this data or to compare our compensation programs with the
      practices of the companies represented in the compensation data we review.




Based
      on
      management's analyses and recommendations, the Compensation Committee has
      approved a pay-for-performance compensation philosophy, which is intended to
      establish base salaries and total executive compensation (taking into
      consideration the executive's experience and abilities) that are competitive
      with those companies with a similar number of employees represented in the
      compensation data we review.




We
      work
      within the framework of this pay-for-performance compensation philosophy to
      determine each component of an executive's initial compensation package based
      on
      numerous factors, including:




·
            the
                individual's particular background, track record and circumstances,
                including training and prior relevant work experience;





·
            the
                individual's role with us and the compensation paid to similar persons
                in
                the companies represented in the compensation data that we review;





·
            the
                demand for individuals with the individual's specific expertise and
                experience;





·
            performance
                goals and other expectations for the position;
                and,




41




·
            uniqueness
                of industry skills.




The
      terms
      of each executive officer's compensation are derived from employment agreements
      negotiated between the Company and the executive. Each executive's employment
      agreement is generally negotiated to cover a one to three-year period, and
      prescribes the base salary and other annual payments, if any, to the executive.
      Employment agreements for all executive officers are approved by the Board
      of
      Directors and the Compensation Committee. Employment agreements for other
      executives are approved by the Company's Chief Executive Officer.




***2007
      Executive Compensation Components***




For
      the
      fiscal year ended June 30, 2007, the principal components of compensation that
      our named executive officers were eligible to receive were:




·
            Base
                salary;




·
            Long
                Term Equity Incentive Compensation;




·
            Performance-based
                incentive compensation (discretionary bonus);
                and,




·
            Perquisites
                and other personal benefits.




***Base
      Salary***




An
      executive's base salary is evaluated together with components of the executive's
      other compensation to ensure that the executive's total compensation is
      consistent with our overall compensation philosophy.




The
      base
      salaries were established in arms-length negotiations between the executive
      and
      the Company, taking into account their extensive experience, knowledge of the
      industry, track record, and achievements on behalf of the Company.




Base
      salaries are adjusted annually by the Compensation Committee.




***Annual
      Bonus***




Our
      compensation program includes eligibility for bonuses as rewarded by the
      Compensation Committee. All
      executives are eligible for annual performance-based cash bonuses in accordance
      with Company policies.




During
      our fiscal year ended 2007, Mr. Najeeb Ghauri was awarded a cash bonus of
      $50,000. Ms. Gilger was awarded a cash bonus of $7,004. Ms. McGlasson was
      awarded a cash bonus of $6,536. Mr. Salim Ghauri was awarded a cash bonus of
      $50,000 and Mr. Naeem Ghauri was awarded a cash bonus of $50,000.




***Long-Term
      Equity Incentive Compensation***




We
      believe that long-term performance is achieved through an ownership culture
      that
      encourages long-term participation by our executives in equity-based awards.
      Our
      various Employee Stock Option Plans allow us to grant stock options to
      employees. We currently make initial equity awards of stock options to new
      executives and certain non-executive employees in connection with their
      employment with the Company. Annual grants of options, if any, are approved
      by
      the Compensation Committee *.*




*Equity
      Incentives.* Executives
      and certain non-executive employees who join us may be awarded stock option
      grants after they join the Company. These grants have an exercise price equal
      to
      the fair market value of our common stock on the grant date. The stock option
      awards are intended to provide the executive with incentive to build value
      in
      the organization over an extended period of time. The size of the stock option
      award is also reviewed in light of the executive's track record, base salary,
      other compensation and other factors to ensure that the executive's total
      compensation is in line with our overall compensation philosophy. A review
      of
      all components of compensation is conducted when determining equity awards
      to
      ensure that total compensation conforms to our overall philosophy and
      objectives.




***Perquisites
      and Other Personal Benefits***




We
      provide named executive officers with perquisites and other personal benefits
      that we and the Compensation Committee believe are reasonable and consistent
      with our overall compensation program to better enable the Company to attract
      and retain superior employees for key positions. The Compensation Committee
      periodically reviews the levels of perquisites and other personal benefits
      provided to executive officers.




42




We
      maintain benefits and perquisites that are offered to all employees, including
      health insurance and dental insurance. Benefits and perquisites may vary in
      different country locations and are consistent with local practices and
      regulations.




***Termination
      Based Compensation***




Upon
      termination of employment, all executive officers are entitled to receive
      severance payments under their employment agreements. In determining whether
      to
      approve, and as part of the process of setting the terms of, such severance
      arrangements, the Compensation Committee recognizes that executives and officers
      often face challenges securing new employment following termination. Further,
      the Committee recognizes that many of the named executives and officers have
      participated in the Company since its founding and that this participation
      has
      not resulted in a return on their investments. Termination and Change in Control
      Payments considered both the risk and the dedication of these executives’
service to the Company.




Our
      Chief
      Executive Officer, President of EMEA and President of APAC have employment
      agreements that provide, if his employment is terminated without cause or if
      the
      executive terminates the agreement with Good Reason, he is entitled to
      (a) all remaining salary to the end of the date of termination, plus salary
      from the end of the employment term through the end of the third anniversary
      of
      the date of termination, and (b) the continuation by the Company of medical
      and dental insurance coverage for him and his family until the end of the
      employment term and through the end of the third anniversary of the date of
      termination. Provided, however, if such benefits can not be continued for this
      extended period, the Executive shall receive cash
      (including a tax-equivalency payment for Federal, state and local income and
      payroll taxes assuming Executive is in the maximum tax bracket for all such
      purposes) where such benefits may not be continued .
      These
      agreements further provide for vesting of all options and restrictive stock
      grants, if any.




The
      Secretary of the Company has an employment agreement that provides, if she
      is
      terminated without cause or if the executive terminates the agreement with
      Good
      Reason, she is entitled to (a) all remaining salary to the end of the date
      of termination, plus salary from the end of the employment term through the
      end
      of the first anniversary of the date of termination, and (b) the
      continuation by the Company of medical and dental insurance coverage for her
      and
      her family until the end of the employment term and through the end of the
      first
      anniversary of the date of termination. Provided, however, if such benefits
      can
      not be continued for this extended period, the Executive shall receive cash
      (including a tax-equivalency payment for Federal, state and local income and
      payroll taxes assuming Executive is in the maximum tax bracket for all such
      purposes) where such benefits may not be continued .
      These
      agreements further provide for vesting of all options and restrictive stock
      grants, if any.




**Tax
      and Accounting Implications**




***Deductibility
      of Executive Compensation***




As
      part
      of its role, the Compensation Committee reviews and considers the deductibility
      of executive compensation under Section 162(m) of the Internal Revenue
      Code, which provides that we may not deduct compensation of more than $1,000,000
      that is paid to certain individuals. We believe that compensation paid under
      the
      management incentive plans are generally fully deductible for federal income
      tax
      purposes.




***Accounting
      for Stock-Based Compensation***




Beginning
      on July 1, 2006, we began accounting for stock-based payments, including awards
      under our Employee Stock Option Plans, in accordance with the requirements
      of
      Statement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based
      Payment,* or
      SFAS 123(R).


43




**Summary
      Compensation Table**




The
      following table shows the compensation for the fiscal year ended June 30, 2007
      earned by our Chairman and Chief Executive Officer, our Chief Financial Officer
      who is our Principal Financial and Accounting Officer, and others considered
      to
      be executive officers of the Company.





Name
                  and Principle Position
              
              
              Fiscal
                    Year
                    Ended
              
              
              Salary
                  ($)
              
              
              Bonus
                  ($)
              
              
              Stock
                      Awards
                      ($)
                        (1)
              
              
              
              
              Option
                    Awards
                    ($)\
              
              
              
              
              All
                      Other
                    Compensation
                    ($)
              
              
              
              
              Total
                  ($)Najeeb
                  Ghauri
              
              
              2007
              
              $
              275,000
              
              $
              50,000
              
              $
              -
              
              
              
              $
              -
              
              (3)
              
              $
              46,700
              
              (5)
              
              $
              371,700Chief
                  Executive Officer,
              
              
              2006
              
              $
              250,000
              
              $
              -
              
              $
              -
              
              
              
              $
              -
              
              (4)
              
              $
              26,656
              
              (5)
              
              $
              276,656ChairmanNaeem
                  Ghauri
              
              
              2007
              
              $
              225,000
              
              $
              50,000
              
              $
              -
              
              
              
              $
              -
              
              (3)
              
              $
              34,660
              
              (6)
              
              $
              309,660Chief
                  Executive Officer,
              
              
              2006
              
              $
              280,000
              
              $
              -
              
              $
              -
              
              
              
              $
              -
              
              (4)
              
              $
              31,903
              
              (6)
              
              $
              311,903Global
                  Products DivisionSalim
                  Ghauri
              
              
              2007
              
              $
              175,000
              
              $
              50,000
              
              $
              -
              
              
              
              $
              -
              
              (3)
              
              $
              -
              
              (7)
              
              $
              225,000Chief
                  Executive Officer,
              
              
              2006
              
              $
              150,000
              
              $
              -
              
              $
              -
              
              
              
              $
              -
              
              (4)
              
              $
              -
              
              (7)
              
              $
              150,000Global
                  Services DivisionTina
                  Gilger
              
              
              2007
              
              $
              95,000
              
              $
              7,004
              
              $
              -
              
              
              
              $
              -
              
              (3)
              
              $
              17,587
              
              (8)
              
              $
              119,591Chief
                  Financial Officer
              
              
              2006
              
              $
              95,000
              
              $
              7,096
              
              $
              -
              
              
              
              $
              -
              
              (4)
              
              $
              12,188
              
              (8)
              
              $
              114,284Patti
                  L. W. McGlasson
              
              
              2007
              
              $
              110,000
              
              $
              6,536
              
              $
              -
              
              
              
              $
              -
              
              (3)
              
              $
              -
              
              (9)
              
              $
              116,536Secretary,
                  General Counsel
              
              
              2006
              
              $
              110,000
              
              $
              -
              
              $
              19,397
              
              (2)
              
              $
              -
              
              (4)
              
              $
              -
              
              (9)
              
              $
              129,397




(1)  No
      stock
      was awarded to any officer during the fiscal year ended June 30, 2007 and
      therefore, no expense was recognized in the consolidated financial statements.





(2)
      For
      the fiscal year ended June 30, 2006, 10,000 shares of common stock were awarded
      to Ms. McGlasson for compensation in her role as general counsel. Based on
      the
      fair market value at the date of issuance the Company recorded $19,397 in
      expense for the stock awarded. No other officer was awarded stock during the
      fiscal year.





(3)
      No
      options were awarded to any officer during the fiscal year ended June 30, 2007
      and therefore, no expense was recognized in the consolidated financial
      statements.




44




(4)
        See
        Note 11 to our Consolidated Financial Statements included herein as to the
        assumptions used to determine the fair value of our option awards. During
        fiscal
        year ended June 30, 2006, FAS 123R was not effective for the Company and
        therefore, the Company did not record any expense for the options awarded.
        The
        following table reflects the options granted to each officer and the amount
        the
        Company would have been required to record had FAS 123R been
        effective:




Options
        Granted FYE 2006
  BLACKEXERCISE
              
              
              SCHOLES
              
              
              FAIRNAME
              
              
              #
                  SHARES
              
              
              PRICE
              
              
              VALUE
              
              
              VALUENajeeb
                  Ghauri
              
              
              250,000
              
              $
              1.83
              
              $
              1.676
              
              $
              419,000250,000
              
              $
              2.50
              
              $
              2.323
              
              $
              580,750Naeem
                  Ghauri
              
              
              250,000
              
              $
              1.83
              
              $
              1.676
              
              $
              419,000250,000
              
              $
              2.50
              
              $
              2.323
              
              $
              580,750Salim
                  Ghauri
              
              
              250,000
              
              $
              1.83
              
              $
              1.676
              
              $
              419,000250,000
              
              $
              2.50
              
              $
              2.323
              
              $
              580,750Tina
                  Gilger
              
              
              10,000
              
              $
              1.86
              
              $
              1.249
              
              $
              12,49010,000
              
              $
              2.79
              
              $
              1.106
              
              $
              11,06020,000
              
              $
              1.65
              
              $
              1.108
              
              $
              22,16020,000
              
              $
              2.25
              
              $
              1.012
              
              $
              20,240Patti
                  McGlasson
              
              
              20,000
              
              $
              1.65
              
              $
              1.108
              
              $
              22,16020,000
              
              $
              2.25
              
              $
              1.012
              
              $
              20,240


(5)
      Consists of $29,000 and $12,000 paid for automobile and travel allowance and
      $17,856 and $14,656 paid for medical and dental insurance premiums paid by
      the
      Company for participation in the health insurance program for the fiscal years
      ended June 30, 2007 and 2006, respectively.





(6)
      Consists of $31,876 and $29,340 paid for automobile and travel allowance and
      $2,784 and $2,562 paid for private medical insurance premiums paid by the
      Company for the fiscal years ended June 30, 2007 and 2006,
      respectively.





(7)
      The
      amount paid to the officer was in aggregate less than $10,000 for the fiscal
      years ended June 30, 2007 and 2006, respectively.





(8)
      Consists of $17,587 and $12,188 paid for medical and dental insurance premiums
      paid by the Company for participation in the health insurance program for the
      fiscal years ended June 30, 2007 and 2006, respectively.





(9)
      The
      amount paid to the officer was in aggregate less than $10,000 for the fiscal
      years ended June 30, 2007 and 2006, respectively.





**Grants
      of Plan-Based Awards**




There
      were no options granted to the named executives during the fiscal year ended
      June 30, 2007.




**Discussion
      of Summary Compensation Table**




The
      terms
      of our executive officers' compensation are derived from our employment
      agreements with them and the annual performance review by our Compensation
      Committee. The terms of Mr. Najeeb Ghauri, Mr. Naeem Ghauri and Mr. Salim
      Ghauri’s employment agreements with the Company were the result of negotiations
      between the Company and the executives and were approved by our Compensation
      Committee and Board of Directors. The terms of Ms. McGlasson’s employment
      agreement with the Company were the result of negotiations between our Chief
      Executive Officer and Ms. McGlasson and were approved by our Compensation
      Committee and Board of Directors. The terms of Ms. Gilger’s employment were
      the result of negotiations between our Chief Executive Officer and
      Ms. Gilger and were approved by our Compensation Committee and Board of
      Directors.




***Employment
      Agreement with Najeeb Ghauri***




Effective
      January 1, 2007, the Company entered into an Employment Agreement with our
      Chief
      Executive Officer, Najeeb Ghauri. Pursuant to the Employment Agreement between
      Mr. Ghauri and the Company (the "CEO Agreement"), the Company agreed to
      employ Mr. Ghauri as its Chief Executive Officer from the date of the CEO
      Agreement through December 31, 2009. Under the CEO Agreement, Mr. Ghauri is
      entitled to an annualized base salary of $275,000 and is eligible for annual
      bonuses at the discretion of the Compensation Committee. The Company retained
      the right to
      increase the base compensation as it deems necessary. In addition,
      Mr. Ghauri is entitled to participate in the Company's stock option plans,
      is entitled to two weeks of paid vacation per calendar year and is to receive
      a
      car allowance totaling $3,000 per month for the term of the CEO Agreement.
      Finally, during the term of the CEO Agreement, the Company shall pay the amount
      of premiums or other costs incurred for the coverage of Mr. Ghauri, his
      spouse and dependent family members under the Company's health and related
      benefit plans.




45




The
      CEO
      Agreement also includes provisions respecting severance, non-solicitation,
      non-competition, and confidentiality obligations. Pursuant to the CEO Agreement,
      if he terminates his employment for Good Reason (as described below), or, is
      terminated prior to the end of the employment term by the Company other than
      for
      Cause (as described below) or death, he shall be entitled to all remaining
      salary from the termination date until 36 months thereafter, at the rate of
      salary in effect on the date of termination, immediate vesting of all options
      and, continuation of all health related plan benefits for a period of 36 months.
      He shall have no obligation to seek other employment and any income so earned
      shall not reduce the foregoing amounts. If he is terminated by the Company
      for
      Cause (as described below), or at the end of the employment term, he shall
      not
      be entitled to further compensation. Under the CEO Agreement, Good Reason
      includes the assignment of duties inconsistent with his title, a material
      reduction in salary and perquisites, the relocation of the Company's principal
      office by 30 miles, if the Company asks him to perform any act which is illegal,
      including the commission of a crime or act of moral turpitude, or a material
      breach of the CEO Agreement by the Company. Under the CEO Agreement, Cause
      includes conviction of crime involving moral turpitude, failure to perform
      his
      duties to the Company, engaging in activities which are directly competitive
      to
      or intentionally injurious to the Company, or any material breach of the CEO
      Agreement by Mr. Ghauri.




The
      above
      summary of the CEO Agreement is qualified in its entirety by reference to the
      full text of the CEO Agreement, a copy of which was filed as an exhibit to
      this
      report.




***Employment
      Agreement with Naeem Ghauri***




Effective
      January 1, 2007, the Company entered into an Employment Agreement with our
      President of the EMEA Region and Chief Executive Officer of the Global Products
      Division, Naeem Ghauri. Pursuant to the Employment Agreement between
      Mr. Ghauri and the Company (the "President EMEA Agreement"), the Company
      agreed to employ Mr. Ghauri as its President of the EMEA region and Chief
      Executive Officer of the Global Products Division from the date of the President
      EMEA Agreement through December 31, 2009. Under the President EMEA Agreement,
      Mr. Ghauri is entitled to an annualized base salary of $225,000 and is
      eligible for annual bonuses at the discretion of the Compensation Committee.
      The
      Company retained the right to increase the base compensation as it deems
      necessary. In addition, Mr. Ghauri is entitled to participate in the
      Company's stock option plans, is entitled to two weeks of paid vacation per
      calendar year and is to receive a car allowance totaling $2,000 per month for
      the term of the President EMEA Agreement. Finally, during the term of the
      President EMEA Agreement, the Company shall pay the amount of premiums or other
      costs incurred for the coverage of Mr. Ghauri, his spouse and dependent
      family members under the Company's health and related benefit plans.




The
      President EMEA Agreement also includes provisions respecting severance,
      non-solicitation, non-competition, and confidentiality obligations. Pursuant
      to
      the President EMEA Agreement, if he terminates his employment for Good Reason
      (as described below), or, is terminated prior to the end of the employment
      term
      by the Company other than for Cause (as described below) or death, he shall
      be
      entitled to all remaining salary from the termination date until 36 months
      thereafter, at the rate of salary in effect on the date of termination,
      immediate vesting of all options and, continuation of all health related plan
      benefits for a period of 36 months. He shall have no obligation to seek other
      employment and any income so earned shall not reduce the foregoing amounts.
      If
      he is terminated by the Company for Cause (as described below), or at the end
      of
      the employment term, he shall not be entitled to further compensation. Under
      the
      President EMEA Agreement, Good Reason includes the assignment of duties
      inconsistent with his title, a material reduction in salary and perquisites,
      the
      relocation of the Company's principal office by 30 miles, if the Company asks
      him to perform any act which is illegal, including the commission of a crime
      or
      act of moral turpitude, or a material breach of the President EMEA Agreement
      by
      the Company. Under the President EMEA Agreement, Cause includes conviction
      of
      crime involving moral turpitude, failure to perform his duties to the Company,
      engaging in activities which are directly competitive to or intentionally
      injurious to the Company, or any material breach of the President EMEA Agreement
      by Mr. Ghauri.




The
      above
      summary of the President EMEA Agreement is qualified in its entirety by
      reference to the full text of the President EMEA Agreement, a copy of which
      was
      filed as an exhibit to this report.




46


***Employment
      Agreement with Salim Ghauri***




Effective
      January 1, 2007, the Company entered into an Employment Agreement with our
      President of the APAC Region and Chief Executive Officer of the Global Services
      Division, Mr. Salim Ghauri. Pursuant to the Employment Agreement between
      Mr. Ghauri and the Company (the "President APAC Agreement"), the Company
      agreed to employ Mr. Ghauri as its President APAC and Chief Executive
      Officer of the Global Services Division from the date of the President APAC
      Agreement through December 31, 2009. Under the President APAC Agreement,
      Mr. Ghauri is entitled to an annualized base salary of $175,000 and is
      eligible for annual bonuses at the discretion of the Compensation Committee.
      The
      Company retained the right to increase the base compensation as it deems
      necessary. In addition, Mr. Ghauri is entitled to participate in the
      Company's stock option plans, is entitled to two weeks of paid vacation per
      calendar year. Finally, during the term of the President APAC Agreement, the
      Company shall pay the amount of premiums or other costs incurred for the
      coverage of Mr. Ghauri, his spouse and dependent family members under the
      Company's health and related benefit plans.




The
      President APAC Agreement also includes provisions respecting severance,
      non-solicitation, non-competition, and confidentiality obligations. Pursuant
      to
      the President APAC Agreement, if he terminates his employment for Good Reason
      (as described below), or, is terminated prior to the end of the employment
      term
      by the Company other than for Cause (as described below) or death, he shall
      be
      entitled to all remaining salary from the termination date until 36 months
      thereafter, at the rate of salary in effect on the date of termination,
      immediate vesting of all options and, continuation of all health related plan
      benefits for a period of 36 months. He shall have no obligation to seek other
      employment and any income so earned shall not reduce the foregoing amounts.
      If
      he is terminated by the Company for Cause (as described below), or at the end
      of
      the employment term, he shall not be entitled to further compensation. Under
      the
      President APAC Agreement, Good Reason includes the assignment of duties
      inconsistent with his title, a material reduction in salary and perquisites,
      the
      relocation of the Company's principal office by 30 miles, if the Company asks
      him to perform any act which is illegal, including the commission of a crime
      or
      act of moral turpitude, or a material breach of the President APAC Agreement
      by
      the Company. Under the President APAC Agreement, Cause includes conviction
      of
      crime involving moral turpitude, failure to perform his duties to the Company,
      engaging in activities which are directly competitive to or intentionally
      injurious to the Company, or any material breach of the President APAC Agreement
      by Mr. Ghauri.




The
      above
      summary of the President APAC Agreement is qualified in its entirety by
      reference to the full text of the President APAC Agreement, a copy of which
      was
      filed as an exhibit to this report.




***Employment
      Agreement with Patti L. W. McGlasson***




Effective
      May 1, 2006, the Company entered into an Employment Agreement with our Secretary
      and General Counsel, Ms. Patti L. W. McGlasson. Pursuant to the Employment
      Agreement between Ms. McGlasson and the Company (the "General Counsel
      Agreement"), the Company agreed to employ Ms. McGlasson as its Secretary
      and General Counsel from the date of the General Counsel Agreement through
      April
      30, 2008. Under the General Counsel Agreement, Ms. McGlasson was entitled
      to an annualized base salary of $110,000 and is eligible for annual bonuses
      at
      the discretion of the Chief Executive Officer. Effective August 1, 2007, Ms.
      McGlasson’s annualized salary was raised to $130,000. The Company retained the
      right to increase the base compensation as it deems necessary. In addition,
      Ms. McGlasson is entitled to participate in the Company's stock option
      plans and, is entitled to two weeks of paid vacation per calendar year. Finally,
      during the term of the General Counsel Agreement, the Company shall pay the
      amount of premiums or other costs incurred for the coverage of Ms. Ghauri,
      hers spouse and dependent family members under the Company's health and related
      benefit plans.




The
      General Counsel Agreement also includes provisions respecting severance,
      non-solicitation, non-competition, and confidentiality obligations. Pursuant
      to
      the General Counsel Agreement, if she terminates her employment for Good Reason
      (as described below), or, is terminated prior to the end of the employment
      term
      by the Company other than for Cause (as described below) or death, she shall
      be
      entitled to all remaining salary from the termination date until 12 months
      thereafter, at the rate of salary in effect on the date of termination,
      immediate vesting of all options and, continuation of all health related plan
      benefits for a period of 12 months. She shall have no obligation to seek other
      employment and any income so earned shall not reduce the foregoing amounts.
      If
      she is terminated by the Company for Cause (as described below), or at the
      end
      of the employment term, she shall not be entitled to further compensation.
      Under
      the General Counsel Agreement, Good Reason includes the assignment of duties
      inconsistent with her title, a material reduction in salary and perquisites,
      the
      relocation of the Company's principal office by 60 miles, if the Company asks
      him to perform any act which is illegal, including the commission of a crime
      or
      act of moral turpitude, or a material breach of the President APAC Agreement
      by
      the Company. Under the General Counsel Agreement, Cause includes conviction
      of
      crime involving moral turpitude, failure to perform his duties to the Company,
      engaging in activities which are directly competitive to or intentionally
      injurious to the Company, or any material breach of the General Counsel
      Agreement by Ms. McGlasson.




47




The
      above
      summary of the General Counsel Agreement is qualified in its entirety by
      reference to the full text of the General Counsel Agreement, a copy of which
      was
      filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30,
      2006 on September 27, 2006.




**Outstanding
      Equity Awards at Fiscal Year-End**




The
      following table shows grants of stock options and grants of unvested stock
      awards outstanding on June 30, 2007, the last day of our fiscal year, to each
      of
      the individuals named in the Summary Compensation Table.


NUMBER
                  OF
              
              NUMBER
                  OFSECURITIES
              
              SECURITIESUNDERLYING
              
              UNDERLYING
              
              OPTION
              
              OPTIONOPTIONS
                  (#)
              
              OPTIONS
                  (#)
              
              EXERCISE
              
              EXPIRATIONNAME
              
              EXERCISABLE
              
              UNEXERCISABLE
              
              PRICE
                  ($)
              
              DATENajeeb
                  Ghauri
              
              
              100,000
              
              
              -
              
              
              2.21
              
              
              1/1/14100,000
              
              
              
              
              
              3.75
              
              
              1/1/1450,000
              
              
              
              
              
              5.00
              
              
              1/1/1420,000
              
              
              
              
              
              2.64
              
              
              3/26/1430,000
              
              
              
              
              
              5.00
              
              
              3/26/14374,227
              
              
              
              
              
              1.94
              
              
              4/1/15500,000
              
              
              
              
              
              2.91
              
              
              4/1/15250,000
              
              
              
              
              
              1.83
              
              
              6/2/16250,000
              
              
              
              
              
              2.50
              
              
              6/2/16Naeem
                  Ghauri
              
              
              100,000
              
              
              -
              
              
              2.21
              
              
              1/2/14100,000
              
              
              
              
              
              3.75
              
              
              1/2/1450,000
              
              
              
              
              
              5.00
              
              
              1/2/1420,000
              
              
              
              
              
              2.64
              
              
              3/26/1430,000
              
              
              
              
              
              5.00
              
              
              3/26/1410,000
              
              
              
              
              
              2.50
              
              
              2/16/12374,227
              
              
              
              
              
              1.94
              
              
              4/1/15500,000
              
              
              
              
              
              2.91
              
              
              4/1/15250,000
              
              
              
              
              
              1.83
              
              
              6/2/16250,000
              
              
              
              
              
              2.50
              
              
              6/2/16Salim
                  Ghauri
              
              
              100,000
              
              
              -
              
              
              2.21
              
              
              1/2/14100,000
              
              
              
              
              
              3.75
              
              
              1/2/1450,000
              
              
              
              
              
              5.00
              
              
              3/26/1420,000
              
              
              
              
              
              2.64
              
              
              3/26/1430,000
              
              
              
              
              
              5.00
              
              
              3/26/1420,000
              
              
              
              
              
              2.50
              
              
              2/16/12374,227
              
              
              
              
              
              1.94
              
              
              4/1/15500,000
              
              
              
              
              
              2.91
              
              
              4/1/15250,000
              
              
              
              
              
              1.83
              
              
              6/2/16250,000
              
              
              
              
              
              2.50
              
              
              6/2/16Tina
                  Gilger
              
              
              10,000
              
              
              -
              
              
              1.86
              
              
              7/20/1510,000
              
              
              
              
              
              2.79
              
              
              7/20/1520,000
              
              
              
              
              
              1.65
              
              
              7/7/1520,000
              
              
              
              
              
              2.25
              
              
              7/7/15Patti
                  L. W. McGlasson
              
              
              10,000
              
              
              -
              
              
              3.00
              
              
              1/1/1420,000
              
              
              
              
              
              2.64
              
              
              3/26/1430,000
              
              
              
              
              
              5.00
              
              
              3/26/1420,000
              
              
              
              
              
              1.65
              
              
              7/7/1520,000
              
              
              
              
              
              2.25
              
              
              7/7/15




48




**Option
      Exercises and Stock Vested**




Mr.
      Najeeb Ghauri exercised options to acquire 125,773 shares of common stock of
      the
      Company at the exercise price of $1.94 per share during the last fiscal year.




Mr.
      Naeem
      Ghauri exercised options to acquire 125,773 shares of common stock of the
      Company at the exercise price of $1.94 per share during the last fiscal year.




Mr.
      Salim
      Ghauri exercised options to acquire 125,773 shares of common stock of the
      Company at the exercise price of $1.94 per share during the last fiscal year.




**Pension
      Benefits**




We
      do not
      have any qualified or non-qualified defined benefit plans.




**Potential
      Payments upon Termination or Change of Control**




Generally,
      regardless of the manner in which a named executive officer's employment
      terminates, he is entitled to receive amounts earned during his term of
      employment. Such amounts include the portion of the executive's base salary
      that
      has accrued prior to any termination and not yet been paid and  unused
      vacation pay.




In
      addition, we are required to make the additional payments and/or provide
      additional benefits to the individuals named in the Summary Compensation Table
      in the event of a termination of employment or a change of control, as set
      forth
      below.




**Change-in-Control
      Payments**




***Najeeb
      Ghauri, Chairman and Chief Executive Officer***




In
      the
      event that Mr. Ghauri is terminated as a result of a change in control (defined
      below), he is entitled to all payments due in the event of a termination for
      Cause or Good Reason and: (a) a one time payment equal to the product of 2.99
      and his salary during the preceding 12 months; (b) a one-time payment equal
      to
      the higher of (i) Executive’s bonus for the previous year and (ii) one percent
      of the Company’s consolidated gross revenues for the previous twelve (12)
      months; and, at the election of the Executive, (c) a one-time cash payment
      equal
      to the cash value of all shares eligible for exercise upon the exercise of
      Executive’s Options then currently outstanding and exercisable as if they had
      been exercised in full (the “Change of Control Termination Payment”). In the
      event Executive elects to receive the cash value of the shares underlying
      Executive’s options, he shall so notify the Company of his intent.




The
      following table summarizes the potential payments to Mr. Ghauri assuming
      his employment with us was terminated or a change of control occurred on June
      30, 2007, the last day of our most recently completed fiscal year.


TERMINATIONBY
                  USWITHOUTTERMINATION
              
              
              CAUSE
                  OR BYCHANGE
              
              
              UPON
                  DEATH
              
              
              EXECUTIVEOF
              
              
              OR
              
              
              FOR
                  GOODBENEFITS
                  AND PAYMENTS
              
              
              CONTROL
              
              
              DISABILITY
              
              
              CAUSEBase
                  Salary
              
              $
              878,103
              
              $
              -
              
              $
              878,103Bonus
              
              
              50,000Salary
                  Multiple Pay-out
              
              
              822,250Bonus
                  or Revenue One-time Pay-Out
              
              
              292,821Net
                  Cash Value of Options
              
              
              1,399,145Total
              
              $
              3,442,319
              
              $
              -
              
              $
              878,103




49




***Naeem
      Ghauri, President EMEA and Chief Executive Officer of Global Products Division***




In
      the
      event that Mr. Ghauri is terminated as a result of a change in control (defined
      below), he is entitled to all payments due in the event of a termination for
      Cause or Good Reason and: (a) a one time payment equal to the product of 2.99
      and his salary during the preceding 12 months; (b) a one-time payment equal
      to
      the higher of (i) Executive’s bonus for the previous year and (ii) one percent
      of the Company’s consolidated gross revenues for the previous twelve (12)
      months; and, at the election of the Executive, (c) a one-time cash payment
      equal
      to the cash value of all shares eligible for exercise upon the exercise of
      Executive’s Options then currently outstanding and exercisable as if they had
      been exercised in full (the “Change of Control Termination Payment”). In the
      event Executive elects to receive the cash value of the shares underlying
      Executive’s options, he shall so notify the Company of his intent.




The
      following table summarizes the potential payments to Mr. Ghauri assuming
      his employment with us was terminated or a change of control occurred on June
      30, 2007, the last day of our most recently completed fiscal year.


TERMINATIONBY
                  USWITHOUTTERMINATION
              
              CAUSE
                  OR BYCHANGE
              
              UPON
                  DEATH
              
              EXECUTIVEOF
              
              OR
              
              FOR
                  GOODBENEFITS
                    AND PAYMENTS
              
              CONTROL
              
              DISABILITY
              
              CAUSEBase
                  Salary
              
              $
              675,000
              
              $
              -
              
              $
              675,000Bonus
              
              
              50,000Salary
                  Multiple Pay-out
              
              
              672,750Bonus
                  or Revenue One-time Pay-Out
              
              
              292,821Net
                  Cash Value of Options
              
              
              1,406,745Total
              
              $
              3,097,316
              
              $
              -
              
              $
              675,000




***Salim
      Ghauri, President APAC and Chief Executive Officer of Global Services Division***




In
      the
      event that Mr. Ghauri is terminated as a result of a change in control (defined
      below), he is entitled to all payments due in the event of a termination for
      Cause or Good Reason and: (a) a one time payment equal to the product of 2.99
      and his salary during the preceding 12 months; (b) a one-time payment equal
      to
      the higher of (i) Executive’s bonus for the previous year and (ii) one percent
      of the Company’s consolidated gross revenues for the previous twelve (12)
      months; and, at the election of the Executive, (c) a one-time cash payment
      equal
      to the cash value of all shares eligible for exercise upon the exercise of
      Executive’s Options then currently outstanding and exercisable as if they had
      been exercised in full (the “Change of Control Termination Payment”). In the
      event Executive elects to receive the cash value of the shares underlying
      Executive’s options, he shall so notify the Company of his intent.




The
      following table summarizes the potential payments to Mr. Ghauri assuming
      his employment with us was terminated or a change of control occurred on June
      30, 2007, the last day of our most recently completed fiscal year.






50


BENEFITS
                  AND PAYMENTS
              
              CHANGE
                OF
                CONTROL
              
              TERMINATION
                UPON
                  DEATH
                OR
                DISABILITY
              
              TERMINATION
                  BY US
                  WITHOUT
                    CAUSE OR BY EXECUTIVE
                  FOR
                    GOOD
                  CAUSEBase
                  Salary
              
              $
              525,000
              
              $
              -
              
              $
              525,000Bonus
              
              
              50,000Salary
                  Multiple Pay-out
              
              
              523,250Bonus
                  or Revenue One-time Pay-Out
              
              
              292,821Net
                  Cash Value of Options
              
              
              1,414,345Total
              
              $
              2,805,416
              
              $
              -
              
              $
              525,000




***Patti
      L. W. McGlasson, Secretary and General Counsel***




In
      the
      event that Ms. McGlasson is terminated as a result of a change in control
      (defined below), she is entitled to all payments due in the event of a
      termination for Cause or Good Reason and: (a) a one time payment equal to the
      product of 2.99 and her salary during the preceding 12 months; (b) a one-time
      payment equal to the higher of (i) Executive’s bonus for the previous year and
      (ii) one-half of one percent of the Company’s consolidated gross revenues for
      the previous twelve (12) months; and, at the election of the Executive, (c)
      a
      one-time cash payment equal to the cash value of all shares eligible for
      exercise upon the exercise of Executive’s Options then currently outstanding and
      exercisable as if they had been exercised in full (the “Change of Control
      Termination Payment”). In the event Executive elects to receive the cash value
      of the shares underlying Executive’s options, she shall so notify the Company of
      her intent.




The
      following table summarizes the potential payments to Ms. McGlasson assuming
      her employment with us was terminated or a change of control occurred on June
      30, 2007, the last day of our most recently completed fiscal year.


BENEFITS
                  AND PAYMENTS
              
              CHANGE
                  OF
                  CONTROL
              
              TERMINATION
                  UPON
                    DEATH
                  OR
                  DISABILITY
              
              TERMINATION
                  BY US WITHOUT CAUSE OR BY EXECUTIVE
                FOR
                  GOOD
                CAUSEBase
                  Salary
              
              $
              110,000
              
              $
              -
              
              $
              110,000Bonus
              
              
              6,536Salary
                  Multiple Pay-out
              
              
              328,900Bonus
                  or Revenue One-time Pay-Out
              
              
              146,410Net
                  Cash Value of Options
              
              
              136,800Total
              
              $
              728,646
              
              $
              -
              
              $
              110,000




51




**Director
      Compensation**




***Director
      Compensation Table***




The
      following table sets forth a summary of the compensation earned by our Directors
      and/or paid to certain of our Directors pursuant to the Company's compensation
      policies for the fiscal year ended June 30, 2007, other than Najeeb Ghauri,
      Naeem Ghauri and Salim Ghauri who are executives and directors.


FEESEARNEDOR
                  PAID
              
              OPTIONIN
                  CASH
              
              AWARDS
              
              TOTALNAME
              
              ($)
              
              ($)
                  (1)
              
              ($)Eugen
                  Beckert
              
              
              24,500
              
              
              -
              
              
              24,500Shahid
                  Javed Burki
              
              
              26,750
              
              
              -
              
              
              26,750Mark
                  Caton
              
              
              8,000
              
              
              -
              
              
              8,000Alexander
                  Shakow (2)
              
              
              1,333
              
              
              -
              
              
              1,333Jim
                  Moody (3)
              
              
              11,250
              
              
              -
              
              
              11,250Derek
                  Soper (4)
              
              
              14,667
              
              
              -
              
              
              14,667




(1)
            There
                were no options awarded during fiscal year ended June 30, 2007


(2)
              Mr.
                  Shakow joined the board upon his election by the Board of Directors
                  on
                  June 4, 2007.


(3)
              Mr.
                  Moody resigned from our Board of Directors effective December 31,
                  2007.


(4)
              Mr.
                  Soper did not stand for re-election to our Board of Directors and
                  his term
                  concluded on June 4, 2007.




***Director
      Compensation Policy***




Messrs. Ghauri
      are not paid any fees or other compensation for services as members of our
      Board
      of Directors.




The
      non-employee members of our Board of Directors received as compensation for
      services as directors as well as reimbursement for documented reasonable
      expenses incurred in connection with attendance at meetings of our Board of
      Directors and the committees thereof. The Company paid the following amounts
      to
      members of the Board of Directors for the activities shown during the fiscal
      year ended June 30, 2007


CASHBOARD
                  ACTIVITY
              
              PAYMENTSAnnual
                  Cash Retainer
              
              $
              10,000Committee
                  Membership
              
              $
              2,000Chairperson
                  for Audit Committee
              
              $
              15,000Chairperson
                  for Compensation Committee
              
              $
              12,000Chairperson
                  for Nominating and Corporate Governance Committee
              
              $
              9,000




Members
      of our Board of Directors are also eligible to receive stock option grants
      both
      upon joining the Board of Directors and on an annual basis in line with
      recommendations by the Compensation Committee, which grants are non-qualified
      stock options under our Employee Stock Option Plans. Further, from time to
      time,
      the non-employee members of the Board of Directors are eligible to receive
      stock
      grants that may be granted if and only if approved by the shareholders of the
      Company.




**Compensation
      Committee Interlocks and Insider Participation**




The
      current members of the Compensation Committee are Messrs. Caton (Chairman),
      Mr. Beckert, Mr. Burki and Mr. Shakow. During the fiscal year ended June 30,
      2007, the Chairman of the Compensation Committee was Mr. Beckert. From June
      30,
      2006, the Compensation Committee consisted of Mr. Beckert, Mr. Burki, Mr. Moody
      and Mr. Soper. Mr. Moody resigned effective December 31, 2007. Mr. Moody was
      replaced on the committee by Mr. Caton. Mr. Soper did not stand for reelection
      to the board and accordingly, his committee membership concluded on June 4,
      2007. There were no other members of the committee during the fiscal year ended
      June 30, 2007. All current members of the Compensation Committee are
      "independent directors" as defined under the Nasdaq Marketplace Rules. None
      of
      these individuals were at any time during the fiscal year ended June 30, 2007,
      or at any other time, an officer or employee of the Company.




52




No
      executive officer of the Company serves as a member of the board of directors
      or
      compensation committee of any entity that has one or more executive officers
      serving as a member of the Company's Board of Directors or Compensation
      Committee.




**Employee
      Stock Option Plans**





The
      2001
      plan authorizes the issuance of up to 2,000,000 options to purchase common
      stock
      of which 2,000,000 have been granted. The grant prices range between $.75 and
      $2.50.





The
      2002
      plan authorizes the issuance of up to 2,000,000 options to purchase common
      stock
      of which 2,000,000 options have been granted. The grant prices range between
      $.75 and $5.00.





In
      March
      2004, our shareholders approved the 2003 stock option plan. This plan authorizes
      up to 2,000,000 options to purchase common stock of which 1,189,606 have been
      granted. The grant prices range between $1.00 and $5.00.





In
      March
      2005, our shareholders approved the 2004 stock option plan. This plan authorizes
      up to 5,000,000 options to purchase common stock of which 4,998,246 have been
      granted. The grant prices range between $1.50 and $3.00.





In
      April
      2006, our shareholders approved the 2005 stock option plan. This plan authorizes
      up to 5,000,000 options to purchase common stock of which 1,780,000 have been
      granted. The grant prices range between $1.70 and $2.55.





**ITEM
      11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The
      following table sets forth certain information regarding the beneficial
      ownership of the Company's Common Stock, its only class of outstanding voting
      securities as of September 13, 2007, by (i) each person who is known to the
      Company to own beneficially more than 5% of the outstanding common Stock with
      the address of each such person, (ii) each of the Company's present directors
      and officers, and (iii) all officers and directors as a group:


PercentageName
                  and
              
              Number
                  of
              
              BeneficiallyAddress
              
              Shares(1)(2)
              
              owned(4)Najeeb
                  Ghauri (3)
              
              
              2,412,650
              
              
              11.28
              %Naeem
                  Ghauri (3)
              
              
              2,261,367
              
              
              10.58
              %Salim
                  Ghauri (3)
              
              
              2,377,416
              
              
              11.12
              %Eugen
                  Beckert (3)
              
              
              223,900
              
              
              *Shahid
                  Javed Burki (3)
              
              
              204,000
              
              
              *Mark
                  Caton (3)
              
              
              6,000
              
              
              *Alexander
                  Shakow (3)
              
              
              0
              
              
              *Patti
                  McGlasson (3)
              
              
              140,000
              
              
              *Tina
                  Gilger (3)
              
              
              86,731
              
              
              *The
                  Tail Wind Fund Ltd.(5)(6)
              
              
              2,116,117
              
              
              9.9
              %All
                  officers and directorsas
                  a group (nine persons)
              
              
              7,572,064
              
              
              35.42
              %





*
      Less
      than one percent





(1)
      Except as otherwise indicated, the Company believes that the beneficial owners
      of the common stock listed below, based on information furnished by such owners,
      have sole investment and voting power with respect to such shares, subject
      to
      community property laws where applicable. Beneficial ownership is determined
      in
      accordance with the rules of the Securities and Exchange Commission and
      generally includes voting or investment power with respect to securities.





(2)
      Beneficial ownership is determined in accordance with the rules of the
      Commission and generally includes voting or investment power with respect to
      securities. Shares of common stock relating to options currently exercisable
      or
      exercisable within 60 days of September 19, 2007 **** are
      deemed outstanding for computing the percentage of the person holding such
      securities but are not deemed outstanding for computing the percentage of any
      other person. Except as indicated by footnote, and subject to community property
      laws where applicable, the persons named in the table above have sole voting
      and
      investment power with respect to all shares shown as beneficially owned by
      them.
      Includes shares issuable upon exercise of options exercisable within 60 days,
      as
      follows: Mr. Najeeb Ghauri, 1,774,227; Mr. Naeem Ghauri, 1,784,227; Mr. Salim
      Ghauri, 1,774,227; Mr. Eugen Beckert, 135,000; Mr. Shahid Burki, 150,000; Ms.
      Tina Gilger, 75,000; and Ms. Patti McGlasson, 115,000.




53





(3)
      Address c/o NetSol Technologies, Inc. at 23901 Calabasas Road, Suite 2072,
      Calabasas, CA 91302.





(4)
      Shares issued and outstanding as of September 13, 2007 were 21,374,922.





(5)
      Address: The Bank of Nova Scotia Trust Company (Bahamas) Ltd., Windermere House,
      404 East Bay Street, P.O. Box SS-5539, Nassau, Bahamas. Tail Wind Advisory
&
Management Ltd., a UK corporation authorized and regulated by the Financial
      Services Authority of Great Britain (“TWAM”), is the investment manager for The
      Tail Wind Fund Ltd., and David Crook is the CEO and controlling shareholder
      of
      TWAM. Each of TWAM and David Crook expressly disclaims any equitable or
      beneficial ownership of the shares being referred to hereunder and held by
      The
      Tail Wind Fund Ltd.





(6)
      Subject to the Ownership Limitation (defined below), The Tail Wind Fund Ltd.
      (“Tail Wind”) would own a total of 4,281,411 shares of Common Stock, including:
      2,141,515 shares of Common Stock issuable upon conversion of shares of preferred
      stock issued to Tail Wind (“the Preferred Stock”); 833,334 shares of Common
      Stock issuable upon exercise of Warrants issued to Tail Wind on such date
      (“Warrants”); 804,795 shares of common stock issued s part of a private
      placement in June 2007; warrants to acquire 303,030 shares of Common Stock
      issued as part of the June 2007 private placement; 83,306 issued as dividend
      payments on the Preferred Stock; and 115,431 as interest on the Note issued
      in
      June 2006 and converted into preferred stock in October 2006. The private
      placement was also subject to the Ownership Limitation. In accordance with
      Rule
      13d-4 under the Securities Exchange Act of 1934, as amended, because the number
      of shares of Common Stock into which the Reporting Person's Notes and Warrants
      are convertible and exercisable is limited, pursuant to the terms of such
      instruments, to that number of shares of Common Stock which would result in
      the
      Reporting Person having beneficial ownership of 9.9% of the total issued and
      outstanding shares of Common Stock (the "Ownership Limitation"), Tail Wind
      Fund
      Ltd. disclaims beneficial ownership of any and all shares of Common Stock that
      would cause the Reporting Person's beneficial ownership to exceed the Ownership
      Limitation. In accordance with the Ownership Limitation, Tail Wind, based upon
      21,374,922 shares of common stock outstanding, beneficially owns 4,281,411
      shares of Common Stock and disclaims beneficial ownership of
      1,966,557 **** shares
      of
      Common Stock.




**ITEM
      12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**





In
      July
      2007, the board approved compensation for service on the Audit, Compensation
      and
      Nominating and Corporate Governance Committees. This compensation is discussed
      in the sections entitled “Compensation of Directors” beginning on page
      32.





In
      July
      2007, the board approved compensation for service on the board of directors,
      the
      Audit, Compensation and Nominating and Corporate Governance Committees. This
      compensation is discussed in the sections entitled “Compensation of Directors”
beginning on page 43.


54





**PART
      IV**





**ITEM
      13 - EXHIBITS AND REPORTS ON FORM 8-K**





(a)
      Exhibits





3.1
            Articles
                of Incorporation of Mirage Holdings, Inc., a Nevada corporation,
                dated
                March 18, 1997,incorporated
                by reference as Exhibit 3.1 to NetSol’s Registration Statement No.
                333-28861 filed onForm
                SB-2 filed June 10, 1997.*




3.2
            Amendment
                to Articles of Incorporation dated May 21, 1999, incorporated by
                reference
                as Exhibit 3.2 to NetSol’s Annual Report for the fiscal year ended June
                30, 1999 on Form 10K-SB filed September 28,
                1999.*




3.3
            Amendment
                to the Articles of Incorporation of NetSol International, Inc. dated
                March
                20, 2002 incorporated by reference as Exhibit 3.3 to NetSol’s Annual
                Report on Form 10-KSB/A filed on February 2,
                2001.*




3.4
            Amendment
                to the Articles of Incorporation of NetSol Technologies, Inc. dated
                August
                20, 2003 filed as Exhibit A to NetSol’s Definitive Proxy Statement filed
                June 27, 2003.*




3.5
            Amendment
                to the Articles of Incorporation of NetSol Technologies, Inc. dated
                March
                14, 2005 filed as Exhibit 3.0 to NetSol’s quarterly report filed on Form
                10-QSB for the period ended March 31,
                2005.*




3.6
            Amendment
                to the Articles of Incorporation dated October 18,
                2006(1)




3.7
            Bylaws
                of Mirage Holdings, Inc., as amended and restated as of November
                28, 2000
                incorporated by reference as Exhibit 3.3 to NetSol’s Annual Report for the
                fiscal year ending in June 30, 2000 on Form 10K-SB/A filed on February
                2,
                2001.*




3.8
            Amendment
                to the Bylaws of NetSol Technologies, Inc. dated February 16, 2002
                incorporated by reference as Exhibit 3.5 to NetSol’s Registration
                Statement filed on Form S-8 filed on March 27,
                2002.*




4.1
            Form
                of Common Stock Certificate*




4.2
            Form
                of Warrant*.




4.3
            Form
                of Series A 7% Cumulative Preferred Stock filed as Annex E to NetSol’s
                Definitive Proxy Statement filed September 18,
                2006*.




10.1
            Lease
                Agreement for Calabasas executive offices dated December 3, 2003
                incorporated by reference as Exhibit 99.1 to NetSol’s Current Report filed
                on Form 8-K filed on December 24,
                2003.*




10.2
            Company
                Stock Option Plan dated May 18, 1999 incorporated by reference as
                Exhibit
                10.2 to the Company’s Annual Report for the Fiscal Year Ended June 30,
                1999 on Form 10K-SB filed September 28,
                1999.*




10.3
              CompanyStock
                  Option Plan dated April 1, 1997 incorporated by reference as Exhibit
                  10.5
                  to NetSol’s Registration Statement No. 333-28861 on Form SB-2 filed June
                  10, 1997*




10.4
            Company
                2003 Incentive and Nonstatutory incorporated by reference as Exhibit
                99.1
                to NetSol’s Definitive Proxy Statement filed February 6,
                2004.*




10.5
            Company
                2001 Stock Options Plan dated March 27, 2002 incorporated by reference
                as
                Exhibit 5.1 to NetSol’s Registration Statement on Form S-8 filed on March
                27, 2002.*




10.6
            Frame
                Agreement by and between DaimlerChrysler Services AG and NetSol
                Technologies dated June 4, 2004 incorporated by reference as Exhibit
                10.13
                to NetSol’s Annual Report for the year ended June 30, 2005 on Form 10-KSB
                filed on September 15, 2005.*




10.7
            Share
                Purchase Agreement dated as of January 19, 2005 by and between the
                Company
                and the shareholders of CQ Systems Ltd.incorporated by reference as Exhibit 2.1 to NetSol’s Current Report filed
                on form 8-K on January 25, 2005.*




10.8
            Stock
                Purchase Agreement dated May 6, 2006 by and between the Company,
                McCue
                Systems, Inc. and the shareholders of McCue Systems, Inc. incorporated
                by
                reference as Exhibit 2.1 to NetSol’s Current Report filed on form 8-K on
                May 8, 2006.*




10.9
            Employment
                Agreement by and between NetSol Technologies, Inc. and Patti L. W.
                McGlasson dated May 1, 2006 incorporated by reference as Exhibit
                10.20 to
                NetSol’s Annual Report on form 10-KSB dated September 18, 2006*.




10.10
            Employment
                Agreement by and between NetSol Technologies, Inc. and John McCue
                dated
                June 30, 2006 incorporated by reference as Exhibit 10.21 to NetSol’s
                Annual Report on form 10-KSB dated September 18,
                2006*




10.11.
            Employment
                Agreement by and between the Company and Najeeb Ghauri dated January
                1,
                2007(1)




10.12
            Employment
                Agreement by and between the Company and Naeem Ghauri dated January
                1,
                2007(1).




10.13
            Employment
                Agreement by and between the Company and Salim Ghauri dated January
                1,
                2007(1).




10.14
            Employment
                Agreement by and between the Company and Tina Gilger dated August
                1,
                2007(1).




10.15
            Lease
                Agreement by and between McCue Systems, Inc. and Sea Breeze 1 Venture
                dated April 29, 2003*.




10.16
            Amendment
                to Lease Agreement by and between McCue Systems, Inc. and Sea Breeze
                1
                Venture dated June 25, 2007(1).




10.17
            Lease
                Agreement by and between NetSol Pvt Limited and Civic Centres Company
                (PVT) Limited dated May 28, 2001 incorporated by this reference as
                Exhi
                bit 10.23 to NetSol’s Annual Report on form 10-KSB dated September 18,
                2006.*.




55




10.18
            Lease
                Agreement by and between NetSol Pvt Limited and Mrs.Rameeza Zobairi
                dated
                December 5, 2005 incorporated by this reference as Exhibit 10.24
                to
                NetSol’s Annual Report on form 10-KSB dated September 18,
                2006.*.




10.19
            Lease
                Agreement by and between NetSol Pvt Limited and Mr. Nisar Ahmed dated
                May
                4, 2006 incorporated by this reference as Exhibit 10.25 to NetSol’s Annual
                Report on form 10-KSB dated September 18,
                2006.*




10.20
            Lease
                Agreement by and between NetSol Technologies, Ltd. and Argyll Business
                Centres Limited dated April 28, 2006 incorporated by this reference
                as
                Exhibit 10. 26 to NetSol’s Annual Report on form 10-KSB dated September
                18, 2006.*




10.21
            Tenancy
                Agreement by and between NetSol Technologies, Ltd. and Beijing Lucky
                Goldstar Building Development Co. Ltd. dated June 26,
                2007.(1)




10.22
            Company
                2005 Stock Option Plan incorporated by reference as Exhibit 99.1
                to
                NetSol’s Definitive Proxy Statement filed on March 3,
                2006.*




10.23
            Company
                2004 Stock Option Plan incorporated by reference as Exhibit 99.1
                to
                NetSol’s Definitive Proxy Statement filed on February 7,
                2005.*




10.24
            Working
                area sublease by and between NetSol Technologies, Ltd. and Toyota
                Leasing
                (Thailand) Co. Ltd., dated June 21,
                2007.(1)




14.1
            Amended
                and Restated Code of Ethics (1)





21.1
            A
                list of all subsidiaries of the
                Company(1)




31.1
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
                (CEO)(1)




31.2
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
                (CFO)(1)




32.1
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002
                (CEO)(1)




32.2
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley act of 2002
                (CFO)(1)




*Previously
      Filed




(1)
      Filed
      Herewith





(b)
      Reports on Form 8-K





1)
            On
                April 30, 2007, the Company filed a current report including its
                press
                release dated April 30, 2007 which announced the results of operations
                and
                financial conditions for its Pakistani subsidiary, NetSol Technologies,
                Ltd. for the quarter ended March 31,
                2007.





2)
            On
                May 8, 2007, the Company filed a current report including its press
                release dated May 8, 2007 and Financial Results Presentation dated
                May 8,
                2007 which announced the results of operations and financial conditions
                for the quarter ended March 31,
                2007.




3)
            On
                June 7, 2007 the Company filed a current report announcing the decision
                of
                Derek Soper not to stand for reelection and the election, at the
                Company’s
                annual shareholders’ meeting, of the current board of
                directors.




56


**Item
      14 Principal Accountant Fees and Services**




**Audit
      Fees**




Kabani
      & Co. audited the Company’s financial statements for the fiscal years ended
      June 30, 2007 and June 30, 2006. The aggregate fees billed by
      Kabani & Co. for the annual audit and review of financial statements
      included in the Company’s Form 10-KSB or services that are normally provided by
      Kabani & Company that are normally provided by the accountant in connection
      with statutory and regulatory filings or engagements for the year ended June
      30,
      2007 was $105,000, and for the year ended June 30, 2006 was $135,500.




**Audit
      Related Fees**




The
      aggregate fees billed by Kabani & Co. during fiscal 2007 including
      assurance and related audit services not covered in the preceding paragraph
      was
      $40,000. These “Audit Related Fees” were primarily for services in connection
      with the review of quarterly financial statements and the Company’s filing of a
      Registration Statement and amendments thereto on Form S-3. The aggregate
      fees billed by Kabani & Company during fiscal 2006 including assurance and
      related audit services not covered in the preceding paragraph was $31,500.
      These
“Audit Related Fees” were primarily for services in connection with the review
      of quarterly financial statements and the Company’s filing of a Registration
      Statement on Form S-8.




**Tax
      Fees**




Tax
      fees
      for fiscal year 2007 were $12,500 and consisted of the preparation of the
      Company’s federal and state tax returns for the fiscal years 2006. Tax fees for
      fiscal year 2006 were $21,500 and consisted of the preparation of the Company’s
      federal and state tax returns for the fiscal years 2004 and 2005.




**All
      Other Fees**




There
      were no other fees billed by Kabani & Co. or services rendered to
      NetSol during the fiscal years ended June 30, 2007 and 2006, other than as
      described above.




**Pre-Approval
      Procedures**




The
      Audit
      Committee and the Board of Directors are responsible for the engagement of
      the
      independent auditors and for approving, in advance, all auditing services and
      permitted non-audit services to be provided by the independent auditors. The
      Audit Committee maintains a policy for the engagement of the independent
      auditors that is intended to maintain the independent auditor’s independence
      from NetSol. In adopting the policy, the Audit Committee considered the various
      services that the independent auditors have historically performed or may be
      needed to perform in the future. The policy, which is to be reviewed and
      re-adopted at least annually by the Audit Committee:




(i)
            Approves
                the performance by the independent auditors of certain types of service
                (principally audit-related and tax), subject to restrictions in some
                cases, based on the Committee’s determination that this would not be
                likely to impair the independent auditors’ independence from
                NetSol;





(ii)
            Requires
                that management obtain the specific prior approval of the Audit Committee
                for each engagement of the independent auditors to perform other
                types of
                permitted services; and,





(iii)
            Prohibits
                the performance by the independent auditors of certain types of services
                due to the likelihood that their independence would be
                impaired.




Any
      approval required under the policy must be given by the Audit Committee, by
      the
      Chairman of the Committee in office at the time, or by any other Committee
      member to whom the Committee has delegated that authority. The Audit Committee
      does not delegate its responsibilities to approve services performed by the
      independent auditors to any member of management.




The
      standard applied by the Audit Committee in determining whether to grant approval
      of an engagement of the independent auditors is whether the services to be
      performed, the compensation to be paid therefore and other related factors
      are
      consistent with the independent auditors’ independence under guidelines of the
      Securities and Exchange Commission and applicable professional standards.
      Relevant considerations include, but are not limited to, whether the work
      product is likely to be subject to, or implicated in, audit procedures during
      the audit of NetSol’s financial statements; whether the independent auditors
      would be functioning in the role of management or in an advocacy role; whether
      performance of the service by the independent auditors would enhance NetSol’s
      ability to manage or control risk or improve audit quality; whether performance
      of the service by the independent auditors would increase efficiency because
      of
      their familiarity with NetSol’s business, personnel, culture, systems, risk
      profile and other factors; and whether the amount of fees involved, or the
      proportion of the total fees payable to the independent auditors in the period
      that is for tax and other non-audit services, would tend to reduce the
      independent auditors’ ability to exercise independent judgment in performing the
      audit.




57







**SIGNATURES**





In
      accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.


NetSol
                Technologies, Inc.Date:
                September
                20, 2007
              BY:
              /S/
                NAJEEB GHAURINajeeb
                GhauriChief Executive
                Officer
 Date:
                September
                20, 2007
              BY:
              /S/
                Tina
                GilgerTina
                GilgerChief
                Financial
                Officer


58


In
      accordance with the Exchange Act, this amended report has been signed below
      by
      the following persons on behalf of the Registrant and in the capacities and
      on
      the dates indicated.


Date:
              September 20, 2007
            BY:
            /S/
              NAJEEB U. GHAURINajeeb
                U. Ghauri
              Chief
                Executive Officer
              Director,
                Chairman


Date:
              September 20, 2007
            BY:
            /S/
              SALIM GHAURISalim
                  Ghauri
                President,
                  APAC
                Director


Date:
              September 20, 2007
            BY:
            /S/
              EUGEN BECKERTEugen
                    Beckert
                  Director


Date:
                September 20, 2007
              BY:
              /S/
                SHAHID JAVED BURKIShahid
                      Javed Burki
                    Director
 Date:
                September 20, 2007
              BY:
              /S/
                MARK
                CATONMark
                        Caton
                      Director


Date:
                September 20, 2007
              BY:
              /S/
                ALEXANDER SHAKOWAlexander
                        Shakow
                      Director


59




NETSOL
      TECHNOLOGIES, INC. AND SUBSIDIARIES





INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS





Description
            
            PageReport
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Balance Sheet as of June 30, 2007
            
            F-3Consolidated
                Statements of Operations for the Years Ended June 30, 2007 and
                2006
            
            F-4Consolidated
                Statements of Stockholders’ Equity for the Years EndedJune
                30, 2007 and 2006
            
            F-5Consolidated
                Statements of Cash Flows for the Years Ended June 30, 2007 and
                2006
            
            F-7Notes
                to Consolidated Financial Statements
            
            F-9






F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors


NetSol
      Technologies, Inc. and subsidiaries


Calabasas,
      California





We
      have
      audited the accompanying consolidated balance sheet of NetSol Technologies,
      Inc.
      and subsidiaries as of June 30, 2007, and the related consolidated statements
      of
      operations, stockholders’ equity and cash flows for the years ended June 30,
      2007 and 2006. These financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audits.





We
      conducted our audits of these statements in accordance with the standards of
      the
      Public Company Accounting Oversight Board (United States). Those standards
      require that we plan and perform the audit to obtain reasonable assurance about
      whether the financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements. An audit also includes assessing the
      accounting principles used and significant estimates made by management, as
      well
      as evaluating the overall financial statement presentation. We believe that
      our
      audit and the report of the other auditors provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of NetSol
      Technologies, Inc. and subsidiaries as of June 30, 2007 and the results of
      its
      consolidated operations and its cash flows for the years ended June 30, 2007
      and
      2006 in conformity with accounting principles generally accepted in the United
      States of America.




/s/
      Kabani & Company, Inc.


CERTIFIED
      PUBLIC ACCOUNTANTS





Los
      Angeles, California


September
      10, 2007





F-2


NETSOL
      TECHNOLOGIES INC AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEET


JUNE
      30,
      2007


**ASSETS****Current
                assets:**Cash
                and cash equivalents
            
            $
            4,010,164Accounts
                receivable, net of allowance for doubtful accounts of
                $106,090
            
            
            7,937,686Revenues
                in excess of billings
            
            
            8,501,769Other
                current assets
            
            
            2,278,749Total
                current assets
            
            
            
            
            
            22,728,368**Property
                and equipment**,
                net of accumulated depreciation
            
            
            
            
            
            7,583,752**Other
                assets, long-term**
            
            
            
            
            
            1,308,267**Intangibles:**Product
                licenses, renewals, enhancements, copyrights,trademarks,
                and tradenames, net
            
            
            7,772,848Customer
                lists, net
            
            
            2,427,405Goodwill
            
            
            7,708,501Total
                intangibles
            
            
            
            
            
            17,908,754**Total
                assets**
            
            
            
            
            $
            49,529,141**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities:**Accounts
                payable and accrued expenses
            
            $
            3,590,652Current
                portion of notes and obligations under capitalized leases
            
            
            887,098Other
                payables - acquisitions
            
            
            962,406Unearned
                revenues
            
            
            2,815,660Due
                to officers
            
            
            356,422Dividend
                to preferred stockholders payable
            
            
            77,640Loans
                payable, bank
            
            
            3,097,928Total
                current liabilities
            
            
            
            
            
            11,787,806**Obligations
                under capitalized leases,**less
                current maturities
            
            
            
            
            
            339,759**Total
                liabilities**
            
            
            
            
            
            12,127,565**Minority
                interest**
            
            
            
            
            
            3,552,635**Commitments
                and contingencies****Stockholders'
                equity:**Preferred
                stock, 5,000,000 shares authorized;4,130
                issued and outstanding
            
            
            4,130,000Common
                stock, $.001 par value; 45,000,000 shares authorized;20,556,553
                issued and outstanding
            
            
            20,556Additional
                paid-in-capital
            
            
            66,988,147Treasury
                stock
            
            
            (10,194
            )Accumulated
                deficit
            
            
            (37,132,343
            )Stock
                subscription receivable
            
            
            (1,001,407
            )Common
                stock to be issued
            
            
            1,329,612Other
                comprehensive loss
            
            
            (475,430
            )**Total
                stockholders' equity**
            
            
            
            
            
            33,848,941**Total
                liabilities and stockholders' equity**
            
            
            
            
            $
            49,529,141




See
        accompanying notes to these consolidated financial
        statements.




F-3


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF OPERATIONS




For
                the Years EndedJune
                30, 2007
            
            June
                30, 2006**Revenues:**Licence
                fees
            
            $
            9,788,266
            
            $
            5,192,371Maintenance
                fees
            
            
            5,441,339
            
            
            2,444,075Services
            
            
            14,052,481
            
            
            11,053,966Total
                revenues
            
            
            29,282,086
            
            
            18,690,412**Cost
                of revenues:**Salaries
                and consultants
            
            
            8,812,934
            
            
            6,117,886Travel
                and entertainment
            
            
            1,529,796
            
            
            756,880Communication
            
            
            161,128
            
            
            129,741Depreciation
                and amortization
            
            
            652,669
            
            
            733,370Other
            
            
            2,502,452
            
            
            1,282,641Total
                cost of sales
            
            
            13,658,979
            
            
            9,020,518**Gross
                profit**
            
            
            15,623,107
            
            
            9,669,894**Operating
                expenses:**Selling
                and marketing
            
            
            2,356,831
            
            
            1,789,349Depreciation
                and amortization
            
            
            1,988,603
            
            
            2,286,678Salaries
                and wages
            
            
            4,294,368
            
            
            2,557,648Professional
                services, including non-cash compensation
            
            
            1,067,702
            
            
            607,706Bad
                debt expense
            
            
            189,873
            
            
            30,218General
                and adminstrative
            
            
            3,078,862
            
            
            2,657,642Total
                operating expenses
            
            
            12,976,239
            
            
            9,929,241**Income
                (loss) from operations**
            
            
            2,646,868
            
            
            (259,347
            )**Other
                income and (expenses)**Loss
                on sale of assets
            
            
            (2,977
            )
            
            (35,090
            )Beneficial
                conversion feature
            
            
            (2,208,334
            )
            
            (14,389
            )Amortization
                of debt discount and capitalized cost of debt
            
            
            (2,803,691
            )
            
            -Liquidation
                damages
            
            
            (180,890
            )
            
            -Fair
                market value of warrants issued
            
            
            (68,411
            )
            
            (21,505
            )Gain
                on forgiveness of debt
            
            
            -
            
            
            8,294Interest
                expense
            
            
            (617,818
            )
            
            (442,887
            )Interest
                income
            
            
            339,164
            
            
            280,276Other
                income and (expenses)
            
            
            114,423
            
            
            191,736Total
                other expenses
            
            
            (5,428,534
            )
            
            (33,565
            )**Net
                loss before taxes and minority interest in
                subsidiary**
            
            
            (2,781,666
            )
            
            (292,912
            )**Minority
                interest in earnings of subsidiary**
            
            
            (1,935,589
            )
            
            (954,120
            )**Income
                taxes**
            
            
            (160,306
            )
            
            (106,021
            )***Net
                loss***
            
            
            (4,877,561
            )
            
            (1,353,053
            )Dividend
                required for preferred stockholders
            
            
            (237,326
            )
            
            -Bonus
                stock dividend (minority holders portion)
            
            
            (345,415
            )
            
            -***Net
                loss applicable to common shareholders***
            
            
            (5,460,302
            )
            
            (1,353,053
            )**Other
                comprehensive (loss) gain:**Translation
                adjustment
            
            
            (55,770
            )
            
            101,031**Comprehensive
                loss**
            
            $
            (5,516,072
            )
            $
            (1,252,022
            )**Net
                loss per share:**Basic
            
            $
            (0.27
            )
            $
            (0.09
            )Diluted
            
            $
            (0.27
            )
            $
            (0.09
            )Weighted
                average number of shares outstandingBasic
            
            
            18,189,590
            
            
            14,567,007Diluted
            
            
            18,189,590
            
            
            14,567,007


See
        accompanying notes to these consolidated financial
        statements.


F-4


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY
 FOR
        THE
        YEARS ENDED JUNE 30, 2006 AND 2007




OtherStock
              
              
              
              Capitalized
              
              Compre-Additional
              
              
              
              Sub-
              
              
              
              Finance
              
              hensive
              
              
              
              TotalCommon
                  Stock
              
              Paid-in
              
              Treasury
              
              scriptions
              
              Shares
                  to
              
              Costs
              
              Income/
              
              Accumulated
              
              Stockholders'Shares
              
              Amount
              
              Capital
              
              Shares
              
              Receivable
              
              be
                  Issued
              
              of
                  Debt
              
              (Loss)
              
              Deficit
              
              EquityBalance
                  at June 30, 2005
              
              
              13,830,884
              
              $
              13,831
              
              $
              46,610,746
              
              $
              (27,197
              )
              $
              (616,650
              )
              $
              108,500
              
              $
              -
              
              $
              (520,691
              )
              $
              (30,318,988
              )
              $
              15,249,551Issuance
                  of common stock for cash
              
              
              933,334
              
              
              933
              
              
              1,399,067
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,400,000Issuance
                  of common stock for services
              
              
              67,255
              
              
              67
              
              
              111,548
              
              
              
              
              
              
              
              
              7,500
              
              
              
              
              
              
              
              
              
              
              
              119,115Excercise
                  of common stock options
              
              
              285,383
              
              
              285
              
              
              346,697
              
              
              
              
              
              317,400
              
              
              5,000
              
              
              
              
              
              
              
              
              
              
              
              669,382Issuance
                  of common stock inexchange
                  for notes payable & interest
              
              
              36,607
              
              
              37
              
              
              70,981
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              71,018Issuance
                  of common stock forconversion
                  of convertible debentures
              
              
              80,646
              
              
              81
              
              
              149,919
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              150,000Issuance
                  of common stock inexchange
                  for purchase of CQ Systems
              
              
              884,535
              
              
              885
              
              
              1,847,795
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,848,680Issuance
                  of common stock inexchange
                  for purchase of McCue Systems
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              
              1,628,979
              
              
              
              
              
              
              
              
              
              
              
              1,628,979Issuance
                  of common stock inexchange
                  for accrued expenses
              
              
              42,231
              
              
              42
              
              
              64,036
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              64,078Issuance
                  of treasury shares for services
              
              
              
              
              
              
              
              
              
              
              
              17,003
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              17,003Capital
                  contribution from issuance ofsubsidiary
                  stock on foreign exchange
              
              
              -
              
              
              -
              
              
              4,031,002
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,031,002Fair
                  market value of warrants and options issued
              
              
              -
              
              
              -
              
              
              2,474,751
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,474,751Capitalized
                  finance costs of debt
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              (326,599
              )
              
              
              
              
              
              
              
              (326,599
              )Foreign
                  currency translation adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              101,031
              
              
              
              
              
              101,031Net
                  loss for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,353,053
              )
              
              (1,353,053
              )Balance
                  at June 30, 2006
              
              
              16,160,875
              
              $
              16,161
              
              $
              57,106,542
              
              $
              (10,194
              )
              $
              (299,250
              )
              $
              1,749,979
              
              $
              (326,599
              )
              $
              (419,660
              )
              $
              (31,672,041
              )
              $
              26,144,938





Continued




See
        accompanying notes to these consolidated financial
        statements.


F-5


NETSOL
          TECHNOLOGIES INC AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF STOCKHOLDERS’ EQUITY - Continued
 FOR
          THE
          YEARS ENDED JUNE 30, 2006 AND 2007
 OtherStock
                    
                    
                    
                    Capitalized
                    
                    Compre-Additional
                    
                    
                    
                    Sub-
                    
                    
                    
                    Finance
                    
                    hensive
                    
                    
                    
                    TotalPreferred
                        Stock
                    
                    Common
                        Stock
                    
                    Paid-in
                    
                    Treasury
                    
                    scriptions
                    
                    Shares
                        to
                    
                    Costs
                    
                    Income/
                    
                    Accumulated
                    
                    Stockholders'Shares
                    
                    Amount
                    
                    Shares
                    
                    Amount
                    
                    Capital
                    
                    Shares
                    
                    Receivable
                    
                    be
                        Issued
                    
                    of
                        Debt
                    
                    (Loss)
                    
                    Deficit
                    
                    EquityBalance
                        at June 30, 2006
                    
                    -
                    
                    $
                    -
                    
                    
                    16,160,875
                    
                    $
                    16,161
                    
                    $
                    57,106,542
                    
                    $
                    (10,194
                    )
                    $
                    (299,250
                    )
                    $
                    1,749,979
                    
                    $
                    (326,599
                    )
                    $
                    (419,660
                    )
                    $
                    (31,672,041
                    )
                    $
                    26,144,938Preferred
                        Stock issuedfor
                        conversion ofconvertible
                        note
                    
                    5,500
                    
                    
                    5,500,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,500,000Excercise
                        of commonstock
                        options
                    
                    
                    
                    
                    
                    
                    
                    1,525,030
                    
                    
                    1,525
                    
                    
                    2,548,198
                    
                    
                    
                    
                    
                    (517,250
                    )
                    
                    (5,000
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,027,473Common
                        stock issued for:Cash
                    
                    
                    
                    
                    
                    
                    
                    103,333
                    
                    
                    104
                    
                    
                    108,396
                    
                    
                    
                    
                    
                    (219,907
                    )
                    
                    1,141,500
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,030,093Services
                    
                    
                    
                    
                    
                    
                    
                    261,984
                    
                    
                    261
                    
                    
                    390,216
                    
                    
                    
                    
                    
                    35,000
                    
                    
                    7,500
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    432,977Conversion
                        ofpreferred
                        stock
                    
                    (1,370
                    )
                    
                    (1,370,000
                    )
                    
                    830,302
                    
                    
                    830
                    
                    
                    1,369,170
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Payment
                        of dividendon
                        preferred stock
                    
                    
                    
                    
                    
                    
                    
                    105,589
                    
                    
                    105
                    
                    
                    159,579
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    159,684Common
                        stock issuedin
                        exhange for:Notes
                        payable andrelated
                        interest
                    
                    
                    
                    
                    
                    
                    
                    230,863
                    
                    
                    231
                    
                    
                    339,137
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    339,368Purchase
                        ofMcCue
                        Systems
                    
                    
                    
                    
                    
                    
                    
                    1,329,470
                    
                    
                    1,330
                    
                    
                    2,274,677
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,564,367
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    711,640Beneficial
                        conversionfeature
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,208,334
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,208,334Repricing
                        of warrants
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    11,667
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    11,667Bonus
                        shares issued bysubsidiary
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    345,415
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    345,415Adjustment
                        tostockholder
                        list
                    
                    
                    
                    
                    
                    
                    
                    9,107
                    
                    
                    9
                    
                    
                    (9
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Fair
                        market valueof
                        warrants andoptions
                        issued
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    -
                    
                    
                    136,571
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    136,571Finance
                        costsof
                        capital raised
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (9,746
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    326,599
                    
                    
                    
                    
                    
                    
                    
                    
                    316,853Foreign
                        currencytranslation
                        adjusts
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (55,770
                    )
                    
                    
                    
                    
                    (55,770
                    )Net
                        loss for the year
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (5,460,302
                    )
                    
                    (5,460,302
                    )Balance
                        at June 30, 2007
                    
                    4,130
                    
                    $
                    4,130,000
                    
                    
                    20,556,553
                    
                    $
                    20,556
                    
                    $
                    66,988,147
                    
                    $
                    (10,194
                    )
                    $
                    (1,001,407
                    )
                    $
                    1,329,612
                    
                    $
                    -
                    
                    $
                    (475,430
                    )
                    $
                    (37,132,343
                    )
                    $
                    33,848,941
  See
          accompanying notes to these consolidated financial
          statements.




F-6


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS




For
                the YearsEnded
                June 30,2007
            
            2006**Cash
                flows from operating activities:**Net
                loss from continuing operations
            
            $
            (5,460,302
            )
            $
            (1,353,053
            )Adjustments
                to reconcile net loss to net cashused
                in by operating activities:Depreciation
                and amortization
            
            
            2,641,272
            
            
            3,020,048Provision
                for uncollectible accounts
            
            
            189,873
            
            
            30,218Gain
                on forgiveness of debt
            
            
            -
            
            
            (8,294
            )Loss
                on sale of assets
            
            
            2,977
            
            
            35,090Minority
                interest in subsidiary
            
            
            1,935,589
            
            
            954,120Stock
                issued for services
            
            
            88,099
            
            
            200,194Stock
                issued for convertible note payable interest
            
            
            311,868
            
            
            -Stock
                issued for dividends payable to preferred stockholder
            
            
            159,684
            
            
            -Bonues
                stock dividend issued by subsidiary
            
            
            345,415
            
            
            -Fair
                market value of warrants and stock options granted
            
            
            136,571
            
            
            25,618Beneficial
                conversion feature
            
            
            2,208,334
            
            
            14,389Amortization
                of capitalized cost of debt
            
            
            2,815,358
            
            
            100,172**Changes
                in operating assets and liabilities:**Increase
                in accounts receivable
            
            
            (2,858,608
            )
            
            (1,351,660
            )Increase
                in other current assets
            
            
            (3,199,796
            )
            
            (3,789,179
            )Increase
                in accounts payable and accrued expenses
            
            
            560,138
            
            
            430,419**Net
                cash used in operating activities**
            
            
            (123,528
            )
            
            (1,691,918
            )**Cash
                flows from investing activities:**Purchases
                of property and equipment
            
            
            (2,420,470
            )
            
            (2,709,569
            )Sales
                of property and equipment
            
            
            366,088
            
            
            301,684Purchases
                of certificates of deposit
            
            
            -
            
            
            (1,534,371
            )Proceeds
                from sale of certificates of deposit
            
            
            1,737,481
            
            
            -(Payments)/Accruals
                of acquisition payable
            
            
            (4,027,753
            )
            
            4,086,204Increase
                in intangible assets
            
            
            (3,295,262
            )
            
            (5,027,968
            )Cash
                brought in at acquisition
            
            
            -
            
            
            473,890**Net
                cash used in investing activities**
            
            
            (7,639,916
            )
            
            (4,410,130
            )**Cash
                flows from financing activities:**Proceeds
                from sale of common stock
            
            
            1,030,093
            
            
            1,400,000Proceeds
                from the exercise of stock options and warrants
            
            
            1,008,250
            
            
            669,382Capital
                contributed from sale of subsidiary stock
            
            
            -
            
            
            4,031,001Dividend
                to preferred shareholders payable
            
            
            77,640
            
            
            -Reduction
                of restricted cash
            
            
            4,533,555
            
            
            (4,533,555
            )Proceeds
                from convertible notes payable
            
            
            -
            
            
            5,500,000Proceeds
                from loans from officers
            
            
            165,000
            
            
            -Net
                proceeds on loans and capital lease obligations
            
            
            2,359,017
            
            
            82,650**Net
                cash provided by financing activities**
            
            
            9,173,555
            
            
            7,149,478**Effect
                of exchange rate changes in cash**
            
            
            106,285
            
            
            74,611**Net
                increase in cash and cash equivalents**
            
            
            1,516,396
            
            
            1,122,041Cash
                and cash equivalents, beginning of year
            
            
            2,493,768
            
            
            1,371,727**Cash
                and cash equivalents, end of year**
            
            $
            4,010,164
            
            $
            2,493,768


See
        accompanying notes to these consolidated financial
        statements.


F-7


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 Continued




For
                  the YearsEnded
                  June 30,2007
              
              2006SUPPLEMENTAL
                  DISCLOSURES:Cash
                  paid during the period for:Interest
              
              $
              232,783
              
              $
              244,390Taxes
              
              $
              70,184
              
              $
              45,511NON-CASH
                  INVESTING AND FINANCING ACTIVITIES:Common
                  stock issued for payment of note payable and related
                  interest
              
              $
              27,500
              
              $
              71,018Common
                  stock issued for accrued expenses and accounts payable
              
              $
              40,750
              
              $
              7,044Common
                  stock issued to consultants for R&D services
              
              $
              269,126
              
              $
              -Common
                  stock issued for acquisition of subsidiary
              
              $
              2,295,649
              
              $
              1,848,680Common
                  stock to be issued for acquisition of subsidiary
              
              $
              -
              
              $
              1,628,979Common
                  stock issued for conversion of debentures
              
              $
              150,000
              
              $
              150,000Warrants
                  issued to convertible note holders
              
              $
              -
              
              $
              2,108,335Warrants
                  issued for cost of debt
              
              $
              -
              
              $
              340,799Stock
                  issued for the conversion of Preferred Stock
              
              $
              1,370,000
              
              $
              -Preferred
                  stock issued for conversion of convertible note payable
              
              $
              5,500,000
              
              $
              -


See
          accompanying notes to these consolidated financial
          statements.
  
 F-8





NETSOL
      TECHNOLOGIES INC AND SUBSIDIARIES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




**NOTE
      1 - BUSINESS AND CONTINUED OPERATIONS**





NetSol
      Technologies, Inc. and subsidiaries (the “Company”), formerly known as NetSol
      International, Inc. and Mirage Holdings, Inc., was incorporated under the laws
      of the State of Nevada on March 18, 1997. During November of 1998, Mirage
      Collections, Inc., a wholly owned and non-operating subsidiary, was dissolved.




In
      March
      2000, the Company formed NetSol (PVT), Limited as a wholly owned subsidiary.
      The
      subsidiary was merged into the Company’s subsidiary, NetSol Technologies,
      Limited in April 2006.





**Business
      Combinations Accounted for Under the Purchase Method:**





Network
      Solutions PVT, Ltd. and NetSol UK, Limited





On
      September 15, 1998 and April 17, 1999, the Company purchased from related
      parties, 51% and 49%, respectively, of the outstanding common stock of Network
      Solutions PVT, Ltd., a Pakistani Company, and 43% and 57% of the outstanding
      common stock of NetSol UK, Limited, a United Kingdom Company, for the issuance
      of 938,000 restricted common shares of the Company and cash payments of
      $775,000, for an aggregate purchase price of approximately $12.9 million. These
      acquisitions were accounted for using the purchase method of accounting, and
      accordingly, the purchase price was allocated to the assets purchased and
      liabilities assumed based upon their estimated fair values on the date of
      acquisition, which approximated $300,000. Included in the accompanying
      consolidated financial statements are other assets acquired at fair market
      value
      consisting of product licenses, product renewals, product enhancements,
      copyrights, trademarks, trade names and customer lists. At the date of
      acquisition, the management of the Company allocated approximately $6.3 million
      to these assets, based on independent valuation reports prepared for the
      Company. The excess of the purchase prices over the estimated fair values of
      the
      net assets acquired, was recorded as goodwill, and was being amortized by using
      the straight-line method from the date of each purchase. Effective April 1,
      2001, the management determined that the remaining useful life of all its
      acquired intangible assets to be approximately five years, and accordingly,
      accelerated the amortization of these intangibles. During the fiscal year ended
      June 30, 2006 these amounts were fully amortized.





**Business
      Combinations Accounted for Under the Purchase Method:**





CQ
      Systems





On
      January 19, 2005, the Company entered into an agreement to acquire 100% of
      the
      issued and outstanding shares of common stock of CQ Systems Ltd., a company
      organized under the laws of England and Wales. The acquisition closed on
      February 22, 2005. The
      initial purchase price was £3,576,335 or $6,730,382, of which one-half was due
      at closing payable in cash and stock and the other half was due when the audited
      March 31, 2006 financial statements were completed. On the closing date, $1.7
      million was paid and 681,965 shares were issued to the shareholders of CQ,
      valued at $1,676,795 at an average share price of $2.46 was recorded. In
      addition, the agreement called for the accumulated retained earnings amounting
      to £423,711 or $801,915 of CQ Systems as of the closing date to be paid to the
      shareholders in cash and stock. In April 2005, the additional cash of £350,000
      or $662,410 was paid and 77,503 shares of the Company’s common stock valued at
      $139,505 were issued. The total amount paid at closing was $4,178,710. In
      June
      2006, the final installment for the purchase of CQ Systems was determined based
      on the audited revenues for the twelve month period ending March 31, 2006.
      Based
      on the earn-out formula in the purchase agreement, £2,087,071 or $3,785,210 was
      due in cash and stock. On June 12, 2006, 884,535 shares of the Company’s
      restricted common stock were issued to the shareholders of CQ Systems. In July
      2006, the cash portion of $1,936,530 plus $31,810 of interest was paid to the
      shareholders.





F-9


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


McCue
      Systems




On
      May 6,
      2006, the Company entered into an agreement to acquire 100% of the issued and
      outstanding stock of McCue Systems, Inc. (“McCue”), a California corporation.
      The acquisition closed on June 30, 2006. The initial purchase price was
      estimated at $8,471,455 of which one-half was due at closing payable in cash
      and
      stock. The other half is due in two installments over the next two years based
      on the revenue after the audited December 31, 2006 and 2007 financial statements
      are completed. On the closing date, $2,117,864 payable and 958,213 shares to
      be
      issued valued at $1,628,979 were recorded. The cash was paid on July 5, 2006
      and
      the shares were also issued in July 2006. The total amount paid at closing
      was
      $3,746,843. In June 2007, the second installment due was determined based on
      the
      audited revenues for the twelve month period ending December 31, 2006. Based
      on
      the earn-out formula in the purchase agreement, $1,807,910 was due in cash
      and
      stock. On June 27, 2006 397,700 shares of the Company’s restricted common stock
      were issued to the shareholders of McCue Systems. In July and August 2006,
      $450,000 and $429,007, respectively, of the cash portion was paid to the
      shareholders.




**Business
      Combinations Accounted for Under the Pooling of Interest
      Method:**





Abraxas
      Australia Pty, Limited





On
      January 3, 2000, the Company issued 30,000 Rule 144 restricted common shares
      in
      exchange for 100% of the outstanding capital stock of Abraxas Australia Pty,
      Limited, an Australian Company. This business combination was accounted for
      using the pooling of interest method of accounting under APB Opinion No. 16.





**Formation
      of Subsidiary:**





During
      the period ended December 31, 2002, the Company formed a subsidiary in the
      UK,
      NetSol Technologies Ltd., as a wholly-owned subsidiary of NetSol Technologies,
      Inc. This entity serves as the main marketing and delivery arm for services
      and
      products sold and delivered in the UK and mainland Europe.





**Joint
      Venture:**





TiG-Netsol





In
      January 2005, the Company formed TiG-NetSol (Pvt) Limited (“TiG-Netsol”) as a
      joint venture with a UK based public company TIG Plc., with 50.1% ownership
      by
      NetSol Technologies, Inc. and 49.9% ownership by TiG. TiG-NetSol was
      incorporated in Pakistan on January 12, 2005 under the Companies Ordinance,
      1984
      as a private company limited by shares. The business of TiG-Netsol is export
      of
      computer software and its related services developed in Pakistan.





NetSol
      Omni





In
      February 2006, the Company purchased 50.1% of the outstanding shares for $60,012
      in Talk Trainers (Private) Limited, (“Talk Trainers”), a Pakistan corporation
      which provides educational services, professional courses, training and Human
      Resource services to the corporate sector. The major stockholder of Talk
      Trainers was Mr. Ayub Ghauri, brother to the executive officers of the Company,
      and therefore the acquisition was recorded at historical cost as the entities
      are under common control. As the effects of this transaction are immaterial
      to
      the Company overall, no pro forma information is provided. During the quarter
      ended June 30, 2006, Talk Trainers changed its name to NetSol Omni (Private)
      Limited.





F-10


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**Merger
      of Subsidiaries**





On
      April
      28, 2006, the Companies wholly-owned subsidiary NetSol (PVT), Limited (“PK
      Private”) merged into NetSol Technologies (PVT), Ltd, both located in Lahore,
      Pakistan. As the subsidiaries were under common control, the assets and
      liabilities of PK Private were recorded at historically values at the time
      of
      the merger. The consolidated financial statements reflect the income and
      expenses of PK Private for the fiscal year up to the date of the merger.





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Principles
      of Consolidation:**




The
      accompanying consolidated financial statements include the accounts of the
      Company and its wholly owned subsidiaries, McCue Systems, Inc. (“McCue”), NetSol
      Technologies Limited (“UK”), NetSol-Abraxas Australia Pty Ltd. (“Abraxas”),
      NetSol-CQ Limited (“CQ”), and its majority-owned subsidiaries, NetSol
      Technologies (Pvt), Ltd.(“PK Tech”), NetSol Connect (Pvt), Ltd. (now,
      NetSol Akhter Pvt. Ltd.) (“Connect”),
      TIG-NetSol (Pvt) Limited (“TIG”), and
      NetSol Omni (Private) Limited (“Omni”) .
      All
      material inter-company accounts have been eliminated in consolidation.




**Business
      Activity:**





The
      Company designs, develops, markets, and exports proprietary software products
      to
      customers in the automobile finance and leasing industry worldwide. The Company
      also provides system integration, consulting, IT products and services in
      exchange for fees from customers.





**Use
      of Estimates:**





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from those
      estimates.





**Cash
      and Cash Equivalents:**





Equivalents





For
      purposes of the statement of cash flows, cash equivalents include all highly
      liquid debt instruments with original maturities of three months or less which
      are not securing any corporate obligations.





Concentration





The
      Company maintains its cash in bank deposit accounts, which, at times, may exceed
      federally insured limits. The Company has not experienced any losses in such
      accounts.




**Accounts
      Receivable:**





The
      Company’s customer base consists of a geographically dispersed customer base.
      The Company maintains reserves for potential credit losses on accounts
      receivable. Management reviews the composition of accounts receivable and
      analyzes historical bad debts, customer concentrations, customer credit
      worthiness, current economic trends and changes in customer payment patterns
      to
      evaluate the adequacy of these reserves. Reserves are recorded primarily on
      a
      specific identification basis.





**Revenues
      in excess of billings:**





“Revenues
      in excess of billings” represent the total of the project to be billed to the
      customer over the revenues recognized under the percentage of completion method.
      As the customer is billed under the terms of their contract, the corresponding
      amount is transferred from this account to “Accounts Receivable.”




F-11


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**Property
      and Equipment:**





Property
      and equipment are stated at cost. Expenditures for maintenance and repairs
      are
      charged to earnings as incurred; additions, renewals and betterments are
      capitalized. When property and equipment are retired or otherwise disposed
      of,
      the related cost and accumulated depreciation are removed from the respective
      accounts, and any gain or loss is included in operations. Depreciation is
      computed using various methods over the estimated useful lives of the assets,
      ranging from three to seven years.





The
      Company accounts for the costs of computer software developed or obtained for
      internal use in accordance with Statement of Position 98-1, “Accounting for
      the Costs of Computer Software Developed or Obtained for Internal Use.” The
      Company capitalizes costs of materials, consultants, and payroll and
      payroll-related costs for employees incurred in developing internal-use computer
      software. These costs are included with “Computer equipment and software.” Costs
      incurred during the preliminary project and post-implementation stages are
      charged to general and administrative expense.





**Intangible
      Assets:**





Intangible
      assets consist of product licenses, renewals, enhancements, copyrights,
      trademarks, trade names, customer lists and goodwill. The Company evaluates
      intangible assets, goodwill and other long-lived assets for impairment, at
      least
      on an annual basis and whenever events or changes in circumstances indicate
      that
      the carrying value may not be recoverable from its estimated future cash flows.
      Recoverability of intangible assets, other long-lived assets and, goodwill
      is
      measured by comparing their net book value to the related projected undiscounted
      cash flows from these assets, considering a number of factors including past
      operating results, budgets, economic projections, market trends and product
      development cycles. If the net book value of the asset exceeds the related
      undiscounted cash flows, the asset is considered impaired, and a second test
      is
      performed to measure the amount of impairment loss. Potential impairment of
      goodwill after July 1, 2002 is being evaluated in accordance with SFAS No.
      142.
      The SFAS No. 142 is applicable to the financial statements of the Company
      beginning July 1, 2002.





As
      part
      of intangible assets, the Company capitalizes certain computer software
      development costs in accordance with SFAS No. 86, “Accounting for the Costs of
      Computer Software to be Sold, Leased, or Otherwise Marketed.” Costs incurred
      internally to create a computer software product or to develop an enhancement
      to
      an existing product are charged to expense when incurred as research and
      development expense until technological feasibility for the respective product
      is established. Thereafter, all software development costs are capitalized
      and
      reported at the lower of unamortized cost or net realizable value.
      Capitalization ceases when the product or enhancement is available for general
      release to customers.





The
      Company makes on-going evaluations of the recoverability of its capitalized
      software projects by comparing the amount capitalized for each product to the
      estimated net realizable value of the product. If such evaluations indicate
      that
      the unamortized software development costs exceed the net realizable value,
      the
      Company writes off the amount which the unamortized software development costs
      exceed net realizable value. Capitalized and purchased computer software
      development costs are being amortized ratably based on the projected revenue
      associated with the related software or on a straight-line basis over three
      years, whichever method results in a higher level of amortization.





**Statement
      of Cash Flows:**





In
      accordance with Statement of Financial Accounting Standards No. 95, "Statement
      of Cash Flows," cash flows from the Company's operations are calculated based
      upon the local currencies. As a result, amounts related to assets and
      liabilities reported on the statement of cash flows will not necessarily agree
      with changes in the corresponding balances on the balance sheet.




F-12


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**Revenue
      Recognition:**





T he
      Company recognizes its revenue in accordance with the Securities and Exchange
      Commissions (“SEC”) Staff Accounting Bulletin No. 104, “Revenue
      Recognition” (“SAB 104”) and The American Institute of Certified Public
      Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, “Software Revenue
      Recognition,” as amended by
      SOP
      98-4 and SOP 98-9, SOP 81-1, “ Accounting
      for Performance of Construction-Type and Certain Production-Type
      Contracts,” and
      Accounting Research Bulletin 45 (ARB 45) “Long-Term Construction Type
      Contracts.” The
      Company’s revenue recognition policy is as follows:





*License
      Revenue:* ** The
      Company recognizes revenue from license contracts without major customization
      when a non-cancelable, non-contingent license agreement has been signed,
      delivery of the software has occurred, the fee is fixed or determinable, and
      collectibilty is probable. Revenue from the sale of licenses with major
      customization, modification, and development is recognized on a percentage
      of
      completion method,
      in conformity with ARB 45 and SOP 81-1. Revenue
      from the implementation of software is recognized on a percentage of completion method,
      in conformity with Accounting Research Bulletin (“ARB”) No. 45 and SOP 81-1. Any
      revenues from software arrangements with multiple elements are allocated to
      each
      element of the arrangement based on the relative fair values using specific
      objective evidence as defined in the SOPs. An
      output
      measure of “Unit of Work Completed” is used to determine the percentage of
      completion which measures the results achieved at a specific date. Units
      completed are certified by the Project Manager and EVP IT/
      Operations.





*Services
      Revenue:* Revenue
      from consulting services is recognized as the services are performed for
      time-and-materials contracts. Revenue from training and development services
      is
      recognized as the services are performed. Revenue from maintenance agreements
      is
      recognized ratably over the term of the maintenance agreement, which in most
      instances is one year.





**Fair
      Value:**





Unless
      otherwise indicated, the fair values of all reported assets and liabilities,
      which represent financial instruments, none of which are held for trading
      purposes, approximate carrying values of such amounts.





**Advertising
      Costs:**





The
      Company expenses the cost of advertising as incurred. Advertising costs for
      the
      years ended June 30, 2007 and 2006 were $643,081 and $593,811
      respectively.





**Ne** **t
      Income/Loss Per Share:**





Net
      income/loss per share is calculated in accordance with the Statement of
      financial accounting standards No. 128 (SFAS No. 128), “Earnings per share.”
Basic net income/loss per share is based upon the weighted average number of
      common shares outstanding. Diluted net income per share is based on the
      assumption that all dilutive convertible shares and stock options were converted
      or exercised. Dilution is computed by applying the treasury stock method. Under
      this method, options and warrants are assumed to be exercised at the beginning
      of the period (or at the time of issuance, if later), and as if funds obtained
      thereby were used to purchase common stock at the average market price during
      the period.





The
      weighted average number of shares used to compute basic and diluted loss per
      share is the same in these consolidated financial statements for the years
      ended
      June 30, 2007 and 2006 since the effect of dilutive securities is
      anti-dilutive.




F-13


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**Other
      Comprehensive Income & Foreign Currency Translation:**





SFAS
      130
      requires unrealized gains and losses on the Company’s available for sale
      securities, currency translation adjustments, and minimum pension liability,
      which prior to adoption were reported separately in stockholders’ equity, to be
      included in other comprehensive income. The accounts of NetSol UK and NetSol
      -
      CQ Systems use British Pounds; NetSol Technologies (Pvt) Ltd., NetSol Private,
      NetSol Connect, TiG-Netsol, and NetSol Omni use Pakistan Rupees; NetSol Abraxas
      uses the Australian dollar as the functional currencies. NetSol Technologies,
      Inc., and McCue Systems, Inc., uses U.S. dollars as the functional currencies.
      Assets and liabilities are translated at the exchange rate on the balance sheet
      date, and operating results are translated at the average exchange rate
      throughout the period. During the years ended June 30, 2007 and 2006,
      comprehensive income included net translation income of $55,770 and $101,031,
      respectively. Other comprehensive loss, as presented on the accompanying
      consolidated balance sheet in the stockholders’ equity section amounted to
      $475,430 as of June 30, 2007.





**Accounting
      for Stock-Based Compensation:**





The
      Financial Accounting Standards Board issued Statement of Financial Accounting
      Standards No. 123, Accounting for Stock-Based Compensation, which applies the
      fair-value method of accounting for stock-based compensation plans. In
      accordance with this standard, the Company accounts for stock-based compensation
      in accordance with Accounting Principles Board Opinion No. 25, Accounting for
      Stock Issued to Employees.





In
      March
      2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 44 (Interpretation 44), “Accounting for Certain Transactions Involving Stock
      Compensation.” Interpretation 44 provides criteria for the recognition of
      compensation expense in certain stock-based compensation arrangements that
      are
      accounted for under APB Opinion No. 25, Accounting for Stock-Based Compensation.
      Interpretation 44 became effective July 1, 2000, with certain provisions that
      were effective retroactively to December 15, 1998 and January 12, 2000.
      Interpretation 44 did not have any material impact on the Company’s financial
      statements.





In
      December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
      an
      Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
      companies to recognize in the statement of operations the grant- date fair
      value
      of stock options and other equity-based compensation issued to employees. FAS
      No. 123R is effective beginning in the Company's first quarter of fiscal year
      ended June 30, 2007.





**INCOME
      TAXES**





The
      Company is incorporated in the State of Nevada and registered to do business
      in
      the State of California and has operations in primarily three tax jurisdictions
      - the United Kingdom (“UK”), Pakistan and the United States (“US”). For certain
      operations in the US, Pakistan and the UK, the Company has incurred net
      accumulated operating losses for income tax purposes The Company believes that
      it is more likely than not that these net accumulated operating losses will
      not
      be utilized in the future. Therefore, the Company has provided full valuation
      allowance for the deferred tax assets arising from the losses at these locations
      as of June 30, 2007. Accordingly, the Company has no net deferred tax
      assets.





United
      States of America




As
      of
      June 30, 2007, the Company and its subsidiary in the US had approximately
      $29,846,716 in net operating loss carry forwards available to offset future
      taxable income. Federal net operating losses can generally be carried forward
      20
      years. The deferred tax assets for the United States entities at June 30, 2007
      consists mainly of net operating loss carry forwards and were fully reserved
      as
      the management believes it is more likely than not that these assets will not
      be
      realized in the future.





The
      following table sets forth the significant components of the net deferred tax
      assets for operation in the US as of June 30, 2007 and
      2006.


2007
              
              2006Net
                  Operating Loss Carryforward
              
              $
              29,846,716
              
              $
              27,091,578Total
                  Deferred Tax Assets
              
              
              11,938,686
              
              
              10,836,631Less:
                  Valuation Allowance
              
              
              (11,938,686
              )
              
              (10,836,631
              )Net
                  Deferred Tax Asset
              
              $
              -
              
              $
              -


F-14


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


The
      following is a reconciliation of the provision for income taxes at the U.S.
      federal income tax rate to the income taxes reflected in the Statement of
      Operations:


2007
              
              2006Tax
                  expense (credit) at statutory rate - federal
              
              
              -34
              %
              
              -34
              %State
                  tax expense net of federal tax
              
              
              -6
              %
              
              -6
              %Changes
                  in valuation allowance
              
              
              40
              %
              
              40
              %Foreign
                  income tax:UK
              
              
              -30
              %
              
              -30
              %Pakistan
              
              
              35
              %
              
              35
              %Changes
                  in valuation allowance
              
              
              -2
              %
              
              3
              %Tax
                  expense at actual rate
              
              
              3
              %
              
              8
              %





Pakistan





As
      of
      June 30, 2007 the Company’s Pakistan subsidiaries had net operating loss carry
      forwards which can be carried forward for six years to offset future taxable
      income. The deferred tax assets for the Pakistan subsidiaries at June 30, 2007
      consists mainly of net operating loss carry forwards and were fully reserved
      as
      the management believes it is more likely than not that these assets will not
      be
      realized in the future.





The
      following table sets forth the significant components of the net deferred tax
      assets for operation in Pakistan as of June 30, 2007 and
      2006.


2007
              
              2006Net
                  Operating Loss Carryforward
              
              $
              1,496,002
              
              $
              1,423,264Total
                  Deferred Tax Assets
              
              
              523,601
              
              
              498,142Less:
                  Valuation Allowance
              
              
              (523,601
              )
              
              (498,142
              )Net
                  Deferred Tax Asset
              
              $
              -
              
              $
              -





UK





As
      of
      June 30, 2007 and 2006, the Company’s UK subsidiaries had net operating loss
      carry forwards which can be carried forward indefinitely to offset future
      taxable income. The deferred tax assets for the Pakistan subsidiaries at June
      30, 2007 consists mainly of net operating loss carry forwards and were fully
      reserved as the management believes it is more likely than not that these assets
      will not be realized in the future.




F-15


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


The
      following table sets forth the significant components of the net deferred tax
      assets for operation in the UK as of June 30, 2007 and 2006.


2007
              
              2006Net
                  Operating Loss Carryforward
              
              $
              1,649,025
              
              $
              283,180Total
                  Deferred Tax Assets
              
              
              494,707
              
              
              84,954Less:
                  Valuation Allowance
              
              
              (494,707
              )
              
              (84,954
              )Net
                  Deferred Tax Asset
              
              $
              -
              
              $
              -





***Aggregate
      net deferred tax assets***





The
      following table sets forth the significant components of the aggregate net
      deferred tax assets of the Company as of June 30, 2007 and 2006:


2007
              
              2006Aggregate:Total
                  Deferred Tax Assets
              
              
              11,967,580
              
              
              11,249,820Less:
                  Valuation Allowance
              
              
              (11,967,580
              )
              
              (11,249,820
              )Net
                  Deferred Tax Asset
              
              $
              -
              
              $
              -


Income
      tax payable was approximately $160,306 and $106,021 for the years ended June
      30,
      2007 and 2006, respectively.





**Derivative
      Instruments:**





In
      June
      1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting
      for Derivative Instruments and Hedging Activities.” SFAS No. 133, as amended by
      SFAS No. 137, is effective for fiscal years beginning after June 15, 2000.
      SFAS
      No. 133 requires the Company to recognize all derivatives as either assets
      or
      liabilities and measure those instruments at fair value. It further provides
      criteria for derivative instruments to be designated as fair value, cash flow
      and foreign currency hedges and establishes respective accounting standards
      for
      reporting changes in the fair value of the derivative instruments. After
      adoption, the Company is required to adjust hedging instruments to fair value
      in
      the balance sheet and recognize the offsetting gains or losses as adjustments
      to
      be reported in net income or other comprehensive income, as appropriate. The
      Company has complied with the requirements of SFAS 133, the effect of which
      was
      not material to the Company’s financial position or results of operations as the
      Company does not participates in such activities.





**Impairment
      of Long-Lived Assets and Long-Lived Assets to be Disposed
      of:**





Effective
      January 1, 2002, the Company adopted Statement of Financial Accounting Standards
      No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
      144"), which addresses financial accounting and reporting for the impairment
      or
      disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for
      the
      Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
      and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
      the Results of Operations for a Disposal of a Segment of a Business." The
      Company periodically evaluates the carrying value of long-lived assets to be
      held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
      to be recorded on long-lived assets used in operations when indicators of
      impairment are present and the undiscounted cash flows estimated to be generated
      by those assets are less than the assets' carrying amounts. In that event,
      a
      loss is recognized based on the amount by which the carrying amount exceeds
      the
      fair market value of the long-lived assets. Loss on long-lived assets to be
      disposed of is determined in a similar manner, except that fair market values
      are reduced for the cost of disposal.




F-16


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


For
      goodwill not identifiable with an impaired asset, the Company establishes
      benchmarks at the lowest level (entity level) as its method of assessing
      impairment. In measuring impairment, unidentifiable goodwill is considered
      impaired if the fair value at the lowest level is less than its carrying amount.
      The fair value of unidentifiable goodwill is determined by subtracting the
      fair
      value of the recognized net assets at the lowest level (excluding goodwill)
      from
      the value at the lowest level. The amount of the impairment loss is equal to
      the
      difference between the carrying amount of goodwill and the fair value of
      goodwill. In the event that impairment is recognized, appropriate disclosures
      are made.





Goodwill
      of a reporting unit is reviewed for impairment if events or changes in
      circumstances indicate that the carrying amount of its goodwill or intangible
      assets may not be recoverable. Impairment of reporting unit goodwill is
      evaluated based on a comparison of the reporting unit’s carrying value to the
      implied fair value of the reporting unit. Conditions that indicate that an
      impairment of goodwill exists include a sustained decrease in the market value
      of the reporting unit or an adverse change in business climate.





**Reporting
      segments:**





Statement
      of financial accounting standards No. 131, Disclosures about segments of an
      enterprise and related information (SFAS No. 131), which superceded statement
      of
      financial accounting standards No. 14, Financial reporting for segments of
      a
      business enterprise, establishes standards for the way that public enterprises
      report information about operating segments in annual financial statements
      and
      requires reporting of selected information about operating segments in interim
      financial statements regarding products and services, geographic areas and
      major
      customers. SFAS No. 131 defines operating segments as components of an
      enterprise about which separate financial information is available that is
      evaluated regularly by the chief operating decision maker in deciding how to
      allocate resources and in assessing performances. The Company allocates its
      resources and assesses the performance of its sales activities based upon
      geographic locations of its subsidiaries (see Note 16).





**New
      Accounting Pronouncements:**





In
      September 2006, FASB issued SFAS 157 “Fair Value Measurements”. This Statement
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (“GAAP”), and expands disclosures about
      fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This Statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The management is currently
      evaluating the effect of this pronouncement on the consolidated financial
      statements.




In
      September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit
      Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
      88, 106, and 132(R)”. This Statement improves financial reporting by requiring
      an employer to recognize the over funded or under funded status of a defined
      benefit postretirement plan (other than a multiemployer plan) as an asset or
      liability in its statement of financial position and to recognize changes in
      that funded status in the year in which the changes occur through comprehensive
      income of a business entity or changes in unrestricted net assets of a
      not-for-profit organization. This Statement also improves financial reporting
      by
      requiring an employer to measure the funded status of a plan as of the date
      of
      its year-end statement of financial position, with limited exceptions. An
      employer with publicly traded equity securities is required to initially
      recognize the funded status of a defined benefit postretirement plan and to
      provide the required disclosures as of the end of the fiscal year ending after
      December 15, 2006. An employer without publicly traded equity securities is
      required to recognize the funded status of a defined benefit postretirement
      plan
      and to provide the required disclosures as of the end of the fiscal year ending
      after June 15, 2007. However, an employer without publicly traded equity
      securities is required to disclose the following information in the notes to
      financial statements for a fiscal year ending after December 15, 2006, but
      before June 16, 2007, unless it has applied the recognition provisions of this
      Statement in preparing those financial statements:





1.  A
      brief
      description of the provisions of this Statement




F-17


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


2.  The
      date
      that adoption is required




3.  The
      date
      the employer plans to adopt the recognition provisions of this Statement, if
      earlier.





The
      requirement to measure plan assets and benefit obligations as of the date of
      the
      employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. The management is currently
      evaluating the effect of this pronouncement on the consolidated financial
      statements.





In
      July
      2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
      in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48)”. FIN 48
      clarifies the accounting and reporting for uncertainties in income tax law.
      This
      interpretation prescribes a comprehensive model for the financial statement
      recognition, measurement, presentation and disclosure of uncertain tax positions
      taken or expected to be taken in income tax returns. This statement is effective
      for fiscal years beginning after December 15, 2006. Management is currently
      in
      the process of evaluating the expected effect of FIN 48 on our results of
      operations and financial position.





In
      February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities—including an amendment of FASB Statement No.
      115.” The statement permits entities to choose to measure many financial
      instruments and certain other items at fair value. The objective is to improve
      financial reporting by providing entities with the opportunity to mitigate
      volatility in reported earnings caused by measuring related assets and
      liabilities differently without having to apply complex hedge accounting
      provisions. The statement is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. Management is currently
      evaluating the effect of this pronouncement on the consolidated financial
      statements.





**Reclassifications:**





For
      comparative purposes, prior year’s consolidated financial statements have been
      reclassified to conform with report classifications of the current
      year.





**NOTE
      3 - MAJOR CUSTOMERS**





During
      fiscal year ended June 30, 2007, there were no customers who represented 10%
      or
      more of the Company’s total revenue.





The
      Company is a strategic business partner for DaimlerChrysler (which consists
      of a
      group of many companies), which accounts for approximately 2% and 11% of revenue
      for the fiscal years ended June 30, 2007 and 2006 and Toyota Motors (which
      consists of a group of many companies) accounts for approximately 9% and 12%
      of
      revenue for the fiscal year ended June 30, 2007 and 2006. Accounts receivable
      at
      June 30, 2007 and 2006 for these companies was $1,701,666 and $1,546,642.





**NOTE
      4 - OTHER CURRENT ASSETS**





Other
      current assets consist of the following as of June 30, 2007:


Prepaid
                  Expenses
              
              $
              776,785Advance
                  Income Tax
              
              
              187,219Employee
                  Advances
              
              
              166,469Security
                  Deposits
              
              
              260,199Advance
                Rent
              
              
              186,656Other
                  Receivables
              
              
              656,727Other
                  Assets
              
              
              44,694Total
              
              $
              2,278,749




F-18


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      5 - PROPERTY AND EQUIPMENT**





Property
      and equipment, net, consist of the following at June 30, 2007:


Office
                  furniture and equipment
              
              $
              1,216,833Computer
                  equipment
              
              
              6,776,051Assets
                  under capital leases
              
              
              1,321,159Building
              
              
              3,247,352Construction
                  in process
              
              
              274,698Land
              
              
              600,481Autos
              
              
              213,336Improvements
              
              
              419,797Subtotal
              
              
              14,069,707Accumulated
                  depreciation
              
              
              (6,485,955
              )$
              7,583,752





For
      the
      years ended June 30, 2007 and 2006, fixed asset depreciation expense totaled
      $1,015,835 and $1,053,382, respectively. Of these amounts, $567,145 and
      $663,397, respectively, are reflected as part of cost of goods sold.





**NOTE
      6 - INTANGIBLE ASSETS**





Intangible
      assets consist of the following at June 30, 2007:


Product
                Licenses
              
              
              Customer
                Lists
              
              
              TotalIntangible
                  asset - June 30, 2006
              
              $
              10,920,327
              
              $
              5,438,594
              
              $
              16,358,921Additions
              
              
              3,470,253
              
              
              12,500
              
              
              3,482,753Effect
                  of translation adjustment
              
              
              113,128
              
              
              -
              
              
              113,128Accumulated
                  amortization
              
              
              (6,730,860
              )
              
              (3,023,689
              )
              
              (9,754,549
              )Net
                  balance - June 30, 2007
              
              $
              7,772,848
              
              $
              2,427,405
              
              $
              10,200,253Amortization
                  expense:Year
                  ended June 30, 2007
              
              $
              930,793
              
              $
              694,644
              
              $
              1,625,437Year
                  ended June 30, 2006
              
              $
              1,377,385
              
              $
              589,281
              
              $
              1,966,666





F-19


NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


The
      above
      amortization expense includes amounts in “Cost of Goods Sold” for capitalized
      software development costs of $85,523 and $69,973 for the fiscal years ended
      June 30, 2007 and 2006, respectively.





At
      June
      30, 2007, product licenses, renewals, enhancements, copyrights, trademarks,
      and
      tradenames, included unamortized software development and enhancement costs
      of
      $5,782,366. Software development amortization expense was $227,335 and $105,389
      for the years ended June 30, 2007 and June 30, 2006, respectively.





Amortization
      expense of intangible assets over the next five years is as
      follows:


FISCAL
                  YEAR ENDINGAsset
              
              6/30/08
              
              6/30/09
              
              6/30/10
              
              6/30/11
              
              6/30/12
              
              TOTALProduct
                  Licences
              
              $
              949,173
              
              $
              869,325
              
              $
              586,094
              
              $
              197,105
              
              $
              85,523
              
              $
              2,687,220Customer
                  Lists
              
              
              694,644
              
              
              694,644
              
              
              606,852
              
              
              431,266
              
              
              -
              
              
              2,427,406$
              1,643,817
              
              $
              1,563,969
              
              $
              1,192,946
              
              $
              628,371
              
              $
              85,523
              
              $
              5,114,626





Goodwill
      is comprised of amounts recognized in the acquisition of the
      following:


Balance
                  at
              
              
              Balance
                  atJune
                  30, 2007
              
              
              June
                  30, 2006NetSol
                  PK Tech
              
              $
              1,166,611
              
              $
              1,166,611CQ
                  Systems
              
              
              3,471,813
              
              
              3,471,813McCue
                  Systems
              
              
              3,010,846
              
              
              1,395,251NetSol
                  Omni
              
              
              59,231
              
              
              59,231Total
              
              $
              7,708,501
              
              $
              6,092,906





There
      was
      no impairment of goodwill for the years ended June 30, 2007 and
      2006.





**NOTE
      7 - OTHER ASSETS - LONG TERM**





As
      of
      June 30, 2007, one of the Company’s subsidiaries has reclassified two of its
      accounts receivable as long-term amounting to $1,015,404, at present value
      discount of $62,628. The discount was calculated using a rate of 6% and a time
      period of one year as the collection is scheduled in July 2008.





During
      the year, PK Tech has outgrown its current facility and has looked to other
      sources to house its growing numbers of employees. The owner of the adjacent
      land agreed to build an office to the Company’s specifications and the Company
      agreed to help pay for the development of the land in exchange for discounted
      rent for the next three years. As of June 30, 2007, the Company has paid a
      total
      of $479,519 in connection with this agreement. Of this amount, $186,656 has
      been
      classified as current, representing one-year of rental payments, with the
      balance of $292,863 shown as long-term assets.





**NOTE
      8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES**





Accounts
      payable and accrued expenses consist of the following at June 30,
      2007:


Accounts
                  Payable
              
              $
              1,039,141Accrued
                  Liabilities
              
              
              2,159,537Accrued
                  Payroll
              
              
              14,869Accrued
                  Payroll Taxes
              
              
              71,921Interest
                  Payable
              
              
              120,119Deferred
                  Revenues
              
              
              40,597Taxes
                  Payable
              
              
              114,468Total
              
              $
              3,560,652




F-20


NETSOL
      TECHNOLOGIES INC AND SUBSIDIARIES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




NOTE 9
      - DEBTS




**NOTES
      PAYABLE**





Notes
      payable consist of the following at June 30, 2007:




Balance
                  at
              
              Current
              
              Long-TermName
              
              6/30/07
              
              Maturities
              
              MaturitiesD&O
                  Insurance
              
              $
              66,207
              
              $
              66,207
              
              $
              -Professional
                  Liability Insurance
              
              
              641
              
              
              641
              
              
              -Noon
                  Group
              
              
              565,045
              
              
              565,045
              
              
              -Subsidiary
                  Capital Leases
              
              
              255,205
              
              
              255,205
              
              
              339,759$
              887,098
              
              $
              887,098
              
              $
              339,759





In
      February 2005, the Company received a loan from Noon Group in the amount of
      $500,000. The note carries an interest rate of 9.75% per annum and is due in
      one
      year. The maturity date of the loan may be extended at the option of the holder
      for an additional year. In March, 2006, the note was extended for another year.
      During the fiscal year ended June 30, 2007, $48,750 of accrued interest was
      recorded for this loan. In April 2006, $51,250 of accrued interest was paid.
      Total unpaid accrued interest at June 30, 2006 was $65,044. In July 2007, the
      full principle and interest were paid.





In
      October 2006, the Company renewed its professional liability insurance for
      which
      the annual premium is $7,816. The Company has arranged for financing with the
      insurance company with a down payment of $2,267 and nine monthly payments of
      $646 each. During the fiscal year ended June 30, 2007, the Company paid $5,772.
      The balance owing at June 30, 2007 was $641 and is classified as a current
      liability in the accompanying consolidated financials statements.





In
      January 2007, the Company renewed its directors and officers’ liability
      insurance for which the annual premium is $163,620. In January 2007, the Company
      arranged financing with AFCO Credit Corporation with a down payment of $16,784
      with the balance to be paid in nine monthly installments of $16,784 each. The
      balance owing as of June 30, 2007 was $66,207.





In
      addition, the various subsidiaries had current capital leases of $255,205 as
      of
      June 30, 2007.




F-21




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




**LOANS
      PAYABLE - BANK**




The
      Company’s Pakistan subsidiary, NetSol Technologies (Private) Ltd., has two loans
      with a bank, secured by the Company’s assets. These notes consist of the
      following as of June 30, 2007:




TYPE
                  OF
              
              MATURITY
              
              INTEREST
              
              BALANCELOAN
              
              DATE
              
              RATE
              
              USDExport
                  Refinance
              
              
              Every
                  6 months
              
              
              7.5
              %
              $
              1,968,827Running
                  Finance
              
              
              On
                  demand
              
              
              12.0
              %
              
              123,050Total
              
              
              
              
              
              
              
              $
              2,091,877




The
      Company’s subsidiary, NetSol UK, has a line of credit with HSBC Bank. Interest
      rate charged on amounts drawn-down is 1.75% over base rate. At June 30, 2007
      this rate was 5.5%. As of June 30, 2007, the line of credit balance was £502,046
      or $1,006,051. In July 2007, this line of credit was converted into a term
      loan
      (see Note 21).





Total
      loans payable - bank at June 30, 2007 was $3,097,928.





**OTHER
      PAYABLE - ACQUISITION**





As
      of
      June 30, 2007, Other Payable - Acquisition consists of total payments of
      $962,406 due to the shareholders of McCue Systems.





McCue
      Systems





On
      June
      30, 2006, the acquisition with McCue Systems, Inc. (“McCue”) closed (see Note
      20). As a result, the first installment consisting of $2,117,864 cash and
      958,213 shares of the Company’s restricted common stock was recorded. The cash
      portion was shown as “Other Payable - Acquisition” and the stock was shown as
“Shares to Be Issued” as of June 30, 2006. During the fiscal year ended June 30,
      2007, $2,059,413 of the cash portion of was paid to the McCue shareholders
      and
      in July 2006 the stock was issued. In June 2007, the second installment on
      the
      acquisition consisting of $903,955 in cash and 408,988 shares of the Company’s
      restricted common stock became due and was recorded. The cash portion was shown
      as “Other Payable - Acquisition” and the stock portion was issued on June 27,
      2007. The balance at June 30, 2007 was $962,406. In July and August 2007
      $879,007 of the cash was paid, leaving a balance of $83,399 to be paid which
      represents the few remaining McCue shareholders that have not been located
      as of
      this date.





**DUE
      TO OFFICERS**





The
      officers of the Company from time to time loan funds to the Company. One of
      the
      officers had deferred the increase in his wages. During the fiscal year ended
      June 30, 2007, $43,750 of accrued wages was added to the balance due to officers
      and $62,458 was remitted to one officer against the amounts owing to him. In
      addition, the board of directors authorized a bonus in the amount of $50,000
      each to the three founding officers for recognition of past service and the
      growth in the Company. During the quarter ended March 31, 2007, the officers
      used the bonus to exercise options (see Note 13). In addition, one subsidiary
      had $4,567 due to an officer of the subsidiary.




F-22




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




On
      September 1, 2006, an officer of the Company loaned $165,000 to the Company
      for
      its immediate short-term cash needs in the corporate office. The loan has a
      maturity date of three months and is interest free and has been automatically
      extended. The terms of the loan were approved by the Company’s board of
      directors. The balance of this loan was repaid in July 2007.





In
      2006,
      an officer of the Company loaned $150,000 to the Company for its immediate
      short-term cash needs in the corporate office.





The
      balance due to officers as of June 30, 2007 was $356,422.





**CAPITAL
      LEASE OBLIGATIONS**





The
      Company leases various fixed assets under capital lease arrangements expiring
      in
      various years through 2012. The assets and liabilities under capital leases
      are
      recorded at the lower of the present value of the minimum lease payments or
      the
      fair value of the asset. The assets are depreciated over the lesser of their
      related lease terms or their estimated useful lives and are secured by the
      assets themselves. Depreciation of assets under capital leases is included
      in
      depreciation expense for the fiscal years ended June 30, 2007 and
      2006.





Following
      is the aggregate minimum future lease payments under capital leases as of June
      30, 2007:




Minimum
                  Lease PaymentsDue
                  FYE 6/30/08
              
              $
              313,135Due
                  FYE 6/30/09
              
              
              252,328Due
                  FYE 6/30/10
              
              
              130,217Due
                  FYE 6/30/11
              
              
              2,106Due
                  FYE 6/30/12
              
              
              1,229Total
                  Minimum Lease Payments
              
              
              699,015Interest
                  Expense relating to future periods
              
              
              (104,051
              )Present
                  Value of minimum lease payments
              
              
              594,964Less:
                  Current portion
              
              
              (255,205
              )Non-Current
                  portion
              
              $
              339,759




Following
      is a summary of fixed assets held under capital leases as of June 30,
      2007:




Computer
                  Equipment and Software
              
              $
              661,646Furniture
                  and Fixtures
              
              
              50,007Vehicles
              
              
              458,839Building
                  Equipment
              
              
              150,666Total
              
              
              1,321,158Less:
                  Accumulated Depreciation
              
              
              (508,294
              )Net
              
              $
              812,864




F-23




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




**NOTE 10
      - DIVIDEND PAYABLE - PREFERRED SHAREHOLDERS**




On
      October 30, 2006, the convertible notes payable (see note 12) were converted
      into 5,500 shares of Series A 7% Cumulative Convertible Preferred Stock. The
      dividend is to be paid quarterly, either in cash or stock at the Company’s
      election. The dividend for the fiscal year ended June 30, 2007 totaled $237,326.
      Of this $159,686 has been paid in stock and the remaining balance of $77,640
      is
      payable and is reflected in these consolidated financial statements. This amount
      was paid with the issuance of 48,956 shares of the Company’s common stock on
      July 9, 2007.




**NOTE
      11 - CONVERTIBLE DEBENTURE**




On
      March
      24, 2004, the Company entered into an agreement with several investors to
      acquire Series A Convertible Debentures (the “Bridge Loan”) whereby a total of
      $1,200,000 in debentures were procured through Maxim Group, LLC. The Company
      received a net of $1,049,946 after placement expenses. In addition, the
      beneficial conversion feature of the debenture was valued at $252,257. The
      Company had recorded this as a contra-account against the loan balance and
      amortized the beneficial conversion feature over the life of the loan.




Under
      the
      terms of the Bridge Loan agreements, and supplements thereto, the debentures
      bore an interest at the rate of 10% per annum, payable on a quarterly basis
      in
      common stock or cash at the election of the Company. The maturity date was
      24
      months from the date of signing, or March 26, 2006. Pursuant to the terms of
      a
      supplemental agreement dated May 5, 2004 between NetSol and the debenture
      holders, the conversion rate was set at one share for each $1.86 of principal.




In
      addition, each debenture holder was entitled to receive at the time of
      conversion warrants equal to one-half of the total number of shares issued.
      The
      total number of warrants that may be granted was 322,582. The warrants expire
      in
      five years and have an exercise price of $3.30 per share. The fair value of
      the
      warrants was calculated and recorded using the Black-Scholes method at the
      time
      of granting, when the debenture was converted.





During
      the fiscal year ended June 30, 2006, three of the convertible debenture holders
      elected to convert their notes into common stock. As part of the conversion,
      warrants to purchase a total of 40,323 common shares were issued to the note
      holders. The warrants were valued using the fair value method at $21,505 and
      was
      recorded as an expense in the accompanying consolidated financial statements
      for
      the fiscal year ended June 30, 2006.





**NOTE
      12 - CONVERTIBLE NOTE PAYABLE**





On
      June
      15, 2006, the Company entered into an agreement with 5 accredited investors
      whereby the Company issued 5 convertible notes payable for an aggregate
      principal value of $5,500,000. These notes had interest at the rate of 12%
      per
      annum and were due in full one year from the issuance date or on June 15, 2007
      (the “Financing”).  The Convertible Notes could immediately convert into
      shares of common stock of the Company at the conversion value (initially set
      at
      one share per $1.65 of principal dollar) to the extent that such conversion
      does
      not violate Nasdaq Market Place rules.  Upon the approval of the
      stockholders, to the extent not already converted into common shares, the
      Convertible Notes Payable will immediately convert into shares of Preferred
      Stock. On October 18, 2006, the shareholders approved the issuance of the shares
      and on October 30, 2006 the notes were converted into 5,500 shares of Series
      A
      7% Cumulative Preferred Stock (see note 13). During the fiscal year ended June
      30, 2007, $251,167 of interest was accrued. On December 13, 2006, the note
      holders agreed to accept shares of the Company’s common stock in payment of the
      interest owed to them. In addition, the note holders required the Company to
      issue a total of 60,000 shares of the Company’s common stock valued at $88,201
      as a premium to receive payment in shares rather than cash. This amount is
      included in “interest expense” in the accompanying consolidated financial
      statements.




F-24




NETSOL
      TECHNOLOGIES INC AND SUBSIDIARIES


NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




The
      beneficial conversion feature expense based on the net value of the loan after
      reducing the proceeds by the value of the warrants issued was
      $2,208,334.





The
      common stock shares issued under this financing agreement, including warrants,
      were to be registered within 120 days after closing (or October 19, 2006).
      If
      the Company did not meet the registration requirement, the Company was to pay
      in
      cash as liquidated damages for such failure and not as a penalty to each Holder
      an amount equal to one percent (1%) of such Holder's Purchase Price paid by
      such
      Holder pursuant to the Purchase Agreement for each thirty (30) day period until
      the applicable Event has been cured. The registration statement became effective
      on January 19, 2007. During the fiscal year ended June 30, 2007, the Company
      accrued $168,667 as liquidation damages due and has paid the full amount. As
      a
      result, the Company recorded an additional $12,223 in liquidation damages during
      the fiscal year ended June 30, 2007. This amount is included in “Accrued
      Liabilities” in the accompanying consolidated financial statements.





As
      part
      of the agreement, the investors received warrants to purchase 1,666,668 shares
      of the Company’s common stock. The warrants have an exercise price of $2.00 and
      expire in five years. These warrants were valued using the Black-Scholes model
      at $2,108,335 and have been capitalized as a contra-account against the note
      balance in these consolidated financial statements. These costs are being
      amortized over the life of the loan or a pro-rata basis as the loan is converted
      into common or preferred stock. As the loans were converted on October 30,
      2006,
      the balance of $2,022,363 was amortized and recorded as “amortization of debt
      discount” in the accompanying consolidated financial statements.





The
      Black-Scholes pricing model used the following assumptions:




Risk-free
                  interest rate
              
              
              6.00
              %Expected
                  life
              
              
              5
                  yearsExpected
                  volatility
              
              
              100
              %Dividend
                  yield
              
              
              0
              %




Under
      the
      agreement, any future financing whereby warrants are issued at an exercise
      price
      lower than the exercise price of the warrants in the agreement, an adjustment
      to
      the exercise price is to be made. During the fiscal year ended June 30, 2007,
      a
      financing was completed which included the issuance of warrants at an exercise
      price of $1.65 (see Note 13). Following the formula set out in the agreement,
      it
      was determined that the adjusted exercise price was $1.93 per share. As a
      result, the Company revalued the warrants for the adjusted exercise price using
      the Black-Scholes model at $2,120,000 and recorded an expense of $11,667 for
      the
      repricing of the warrants. The Black-Scholes pricing model used the same
      assumptions as for the original valuation of the warrants.





In
      connection with this financing, the Company paid $474,500 in cash for placement
      agent fees and legal fees. These costs were capitalized and are being amortized
      over the life of the loan or a pro-rata basis as the loan is converted into
      common or preferred stock. As the loans were converted on October 30, 2006,
      the
      balance of $454,729 of these costs were amortized and recorded as “amortization
      of capitalized cost of debt” in the accompanying consolidated financial
      statements.





As
      part
      of the financing, warrants to purchase 266,666 shares of the Company’s common
      stock were issued to the placement agent as part of its fee. The warrants have
      an exercise price of $1.65 and expire in two years. These warrants were valued
      using the Black-Scholes model at $340,799 and have been capitalized in these
      consolidated financial statements. These costs are being amortized over the
      life
      of the loan or a pro-rata basis as the loan is converted into common or
      preferred stock. As the loans were converted on October 30, 2006, the balance
      of
      $326,599 of these costs were amortized and recorded as “amortization of
      capitalized cost of debt” in the accompanying consolidated financial statements.




F-25




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




The
      Black-Scholes pricing model used the following assumptions:




Risk-free
                  interest rate
              
              
              6.00
              %Expected
                  life
              
              
              2
                  yearsExpected
                  volatility
              
              
              100
              %Dividend
                  yield
              
              
              0
              %





**NOTE
      13 - STOCKHOLDERS’ EQUITY**




**PREFERRED
      STOCK**




On
      October 30, 2006, the convertible notes payable (see note 12) were converted
      into 5,500 shares of Series A 7% Cumulative Convertible Preferred Stock. The
      preferred shares are valued at $1,000 per share or $5,500,000. The preferred
      shares are convertible into common stock at a rate of $1.65 per common share.
      The total shares of common stock that can be issued under these Series A
      Preferred Stock is 3,333,333. On January 19, 2007, the Form S-3 statement to
      register the underlying common stock and related dividends became effective.
      As
      of June 30, 2007, 1,370 of the preferred shares had been converted into 830,302
      shares of the Company’s common stock.





The
      Series A Convertible Preferred Stock carries certain liquidation and
      preferential rights. In the event of any voluntary or involuntary liquidation,
      dissolution or winding up of the Corporation, before any distribution of assets
      of the Corporation can be made to or set apart for the holders of Common Stock,
      the holders of Convertible Preferred Stock shall be entitled to receive payment
      out of such assets of the Corporation in an amount equal to $1,000 per share
      of
      Convertible Preferred Stock then outstanding, plus any accumulated and unpaid
      dividends thereon (whether or not earned or declared) on the Convertible
      Preferred Stock. In addition, the Convertible Preferred Stock ranks senior
      to
      all classes and series of Common Stock and existing preferred stock and to
      each
      other class or series of preferred stock established hereafter by the Board
      of
      Directors of the Corporation, with respect to dividend rights, redemption
      rights, rights on liquidation, winding-up and dissolution and all other rights
      in any manner, whether voluntary or involuntary.





**Business
      Combinations:**




CQ
      Systems, Inc.





In
      February 2005, the Company completed the acquisition of CQ Systems, (see Note
      19). As part of this agreement, the Company issued 759,468 shares of its
      restricted common stock valued at $1,816,301 to the shareholders of CQ
      Systems.





In
      June
      2006, the final installment was due for the acquisition and the Company issued
      884,535 shares of its restricted common stock valued at $1,848,680 to the
      shareholders of CQ Systems.





McCue
      Systems, Inc.





In
      June
      2006, the Company completed the acquisition of McCue Systems, Inc. (see Note
      20). During fiscal year end June 30, 2007 as part of this agreement, the Company
      issued 931,770 shares of its restricted common stock valued at $1,584,009 to
      the
      shareholders of McCue Systems for the initial down payment.




In
      June
      2007, the second installment became due for the acquisition and the Company
      issued 397,700 shares of its restricted common stock valued at $711,640 to
      the
      shareholders of McCue Systems. In addition, a total of 37,731 shares valued
      at
      $64,612 are shown in “Shares to Be Issued” in these consolidated financial
      statements representing McCue Systems shareholders that have not been located
      as
      of this date.




F-26




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT


**Private
      Placements**





In
      August
      2004, the Company sold 190,476 shares of the Company’s common stock for $200,000
      in a private placement. Of this amount $158,093 has been received as of June
      30,
      2005, with the balance of $41,907 shown in “Subscriptions Receivable” on the
      accompanying consolidated financial statements. During the year ended June
      30,
      2007 $30,093 was received. The total shares have been issued to the purchaser.





In
      January 2006, the Company sold 933,334 shares of the Company’s common stock for
      $1,400,000 in a private placement.





In
      June
      2007, the Company sold 757,576 shares of the Company’s common stock to two
      institutional investors for $1,250,000. These shares are shown in “Shares to be
      Issued” in the accompanying consolidated financial statements. The Company
      received $1,000,000 of this by June 30, 2007 and the remainder is shown as
      “Subscription Receivable.” The $250,000 cash due was received on July 2, 2007.
      The shares were issued in July 2007. As part of the agreement, the investors
      were granted 378,788 warrants with an exercise price of $1.65.




**Services,
      Accrued Expenses and Payables**





During
      the year ended June 30, 2006, the Company issued 10,500 restricted Rule 144
      common shares valued at $20,382 in exchange for services rendered. Compensation
      expense was calculated based upon the fair market value of the freely trading
      shares as quoted on NASDAQ through 2006 and 2005, over the service period.





In
      July
      2004, the Board of Directors and officers were granted the right to receive
      shares of the Company’s common stock if certain conditions were met during their
      2004 - 2005 term of office. These conditions were met and a total of 28,000
      restricted Rule 144 common shares were issued in August 2005 and 11,000 shares
      were issued in March 2006. The shares were valued at the fair market value
      at
      the date of grant of $57,034 or $1.46 per share.





In
      July
      2005, the Board of Directors and officers were granted the right to receive
      shares of the Company’s common stock if certain conditions were met during their
      2005 - 2006 term of office. These conditions were met and a total of 15,000
      restricted Rule 144 common shares were issued in August 2006. The shares were
      valued at the fair market value at the date of grant of $23,100 or $1.54 per
      share.





In
      October 2005, the Company issued 36,607 restricted Rule 144 common shares valued
      at $71,018 in payment of $50,000 in principal, $16,000 in penalties and $2,453
      in accrued interest on a note payable.





In
      October 2005, the Company entered into an agreement with a vendor whereby the
      Company issued the vendor 27,231 shares valued at $52,828 for the payment of
      outstanding invoices in the amount of $50,923. As a result, the Company recorded
      a loss on settlement of debt in the amount of $1,905.





In
      October 2005, the Company entered into an agreement with a vendor whereby the
      Company agreed to issue $2,500 worth of stock per month as payment for services
      rendered. The stock is to be issued after the end of each quarter. The Company
      issued 12,177 and 7,755 shares of its common stock during the fiscal years
      ended
      June 30, 2007 and 2006 valued at $21,250 and $15,000, respectively. The
      agreement was terminated on December 15, 2006.




In
      March
      2006, the Company entered into an agreement with a former consultant whereby
      the
      Company agreed to issue the consultant 10,000 restricted Rule 144 shares of
      its
      common stock valued at $19,200 for past services.




F-27




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




In
      March
      2006, a director exercised 15,000 options at $.75 per share for a total of
      $11,250. The value of the shares was applied against accrued fees
      payable.





In
      January 2006, the Company entered into an agreement with two consultants whereby
      the Company agreed to issue shares of the Company’s restricted common stock for
      their services. During the fiscal year ended June 30, 2007, the Company issued
      160,624 shares of restricted common stock valued at $269,128. The agreement
      was
      terminated in May 2007.





In
      October 2006, the Company entered into an agreement with a consultant whereby
      the Company agreed to issue 25,000 shares of the Company’s restricted common
      stock at the signing of the agreement. The shares were valued at $36,250 or
      $1.45 per share.





In
      October 2006, the Company entered into an agreement with a consultant whereby
      the Company agreed to issue a total of 40,000 of the Company’s restricted stock,
      to be paid at the end of each quarter of service. As of June 30, 2007, the
      Company has recorded as “Stock to Be Issued” 10,000 shares valued at $15,000 or
      $1.50 per share under this agreement.





**Issuance
      of shares for Conversion of Debt**





During
      the year ended June 30, 2006, three of the convertible debenture holders elected
      to convert their notes into common stock, respectively. The total of the notes
      converted was $150,000 and the Company issued 80,646 shares of its common stock
      to the note holders.





**Options
      and Warrants Exercised**





During
      the year ended June 30, 2006, the Company issued 285,383 shares of its common
      stock for the exercise of options valued at $343,132. Of these, $52,500 has
      been
      recorded as “Stock Subscription Receivable”. In addition, 3,030 shares valued at
      $5,000 have been shown as “Stock to Be Issued.”





During
      the year ended June 30, 2007, the Company issued 1,571,243 shares of its common
      stock for the exercise of options valued at $2,585,474. Of this, $1,173,750
      was
      recorded as “Stock Subscription Receivable”, $33,750 was a cashless exercise
      whereby the exercise price was applied against amounts owed by the Company
      to a
      Director, and $7,000 was applied to amounts owed by the Company to an employee.
      $150,000 was a cashless exercise whereby the exercise price was applied against
      amounts owed by the Company to three officers (see Note 9). In addition, 3,030
      shares of the Company’s common stock valued at $5,000 was issued against
      payments made in the previous year and was recorded as a reduction in “Shares to
      Be Issued.”





**Payment
      of Interest**





On
      December 13, 2006, the Company issued a total of 230,863 shares of the Company’s
      common stock valued at $339,137 or $1.47 per share to the convertible note
      holders as payment of the interest due to them (see note 12). This payment
      included 60,000 shares valued at $88,201 as premium shares to accept payment
      of
      the interest in the Company’s common stock rather than cash. These shares have
      been registered with the Securities and Exchange Commission.





**Payment
      of Dividend to Preferred Stockholders**





During
      the fiscal year ended June 30, 2007, the Company issued a total of 105,589
      shares of the Company’s common stock valued at $159,684 as payment of the
      dividend owed to the Preferred Stockholders (see Note 10).




F-28




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




**Stock
      Subscription Receivable**





Stock
      subscription receivable represents stock options exercised and issued that
      the
      Company has not yet received the payment from the purchaser.





During
      the year ended June 30, 2006, the Company recorded $52,500 in receivable and
      collected $369,900. The Company also recorded the cancellation of $43,650 due
      as
      a charge to additional paid-in capital as a result of a review of the records
      when the amount was recorded in 2000. It was determined the amount was not
      due
      and therefore was cancelled.  The
      balance of the receivable at June 30, 2006 was $299,250.




During
      the year ended June 30, 2007, issued a total of $1,673,750 of new receivables
      and received payments of $936,593. In addition, $35,000 was applied to amounts
      owing from a subsidiary. The balance at June 30, 2007 was
      $1,001,407.





**Treasury
      Stock**





During
      the year ended June 30, 2006, the Company issued 10,000 of its treasury shares
      valued at $17,002 for the payment of services. There was no activity in this
      account during the fiscal year ended June 30, 2007. The balance at June 30,
      2007
      was $10,194.





**Common
      Stock Purchase Warrants and Options**





From
      time
      to time, the Company issues options and warrants as incentives to employees,
      officers and directors, as well as to non-employees.





Common
      stock purchase options and warrants consisted of the following as of June 30,
      2007:




AggregatedExercise
              
              Intrinsic#
                  shares
              
              Price
              
              Value**Options:**Outstanding
                  and exercisable, June 30, 2006
              
              
              8,585,500
              
              $
              0.75
                  to $5.00
              
              $
              269,125Granted
              
              
              180,606
              
              $
              1.65Exercised
              
              
              (1,573,743
              )
              $
              0.75
                  to $1.94Expired
              
              
              (90,000
              )
              $
              2.64
                  to $5.00Outstanding
                  and exercisable, June 30, 2007
              
              
              7,102,363
              
              $
              0.75
                  to $5.00
              
              $
              129,521**Warrants:**Outstanding
                  and exercisable, June 30, 2006
              
              
              2,598,937
              
              $
              1.75
                  to $5.00
              
              $
              13,333Granted
              
              
              403,788
              
              $
              1.65
                  to $3.70Exercised
              
              
              -Expired
              
              
              -Outstanding
                  and exercisable, June 30, 2007
              
              
              3,002,725
              
              $
              1.65
                  to $5.00
              
              $
              58,091
  The
          average life remaining on the options and warrants as of June 30, 2007
          is as
          follows:
  WeightedNumber
                  
                  AverageOutstanding
                  
                  Remainingand
                  
                  ContractualExercise
                      Price
                  
                  Exercisable
                  
                  Life***OPTIONS:***$0.01
                      - $0.99
                  
                  
                  39,000
                  
                  
                  4.56$1.00
                      - $1.99
                  
                  
                  2,963,363
                  
                  
                  8.00$2.00
                      - $2.99
                  
                  
                  3,270,000
                  
                  
                  7.76$3.00
                      - $5.00
                  
                  
                  830,000
                  
                  
                  6.77Totals
                  
                  
                  7,102,363
                  
                  
                  7.73***WARRANTS:***$1.00
                      - $1.99
                  
                  
                  2,324,622
                  
                  
                  4.07$2.00
                      - $2.99
                  
                  
                  120,000
                  
                  
                  1.35$3.00
                      - $5.00
                  
                  
                  558,103
                  
                  
                  1.87Totals
                  
                  
                  3,002,725
                  
                  
                  3.56
  All options and warrants are vested and are exercisable
        as of June 30, 2007.


**Options:**





During
      the year ended June 30, 2006, 3,848,413 options were granted to employees of
      the
      company and are fully vested and expire ten years from the date of grant unless
      the employee terminates employment, in which case the options expire within
      30
      days of their termination. The exercise price of these options ranges between
      $1.65 and $3.00. No expense was recorded for the granting of these
      options.




F-29




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




During
      the year ended June 30, 2006, a total of 2,500 options were granted to a
      consultant and are fully vested from the date of grant. The options expire
      in
      ten years and have an exercise price of $1.98 per share. The options were valued
      using the fair value method at $4,113 or $1.65 per share and recorded the
      expense in the accompanying consolidated financial statements. The Black-Scholes
      option pricing model used the following assumptions:




Risk-free
                  interest rate
              
              
              3.25
              %Expected
                  life
              
              
              10
                  yearsExpected
                  volatility
              
              
              82
              %Dividend
                  yield
              
              
              0
              %




Prior
      to
      July 1, 2006, the Company measured stock compensation expense using the
      intrinsic value method of accounting in accordance with Accounting Principles
      Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
      related interpretations (APB No. 25).





The
      company adopted SFAS No. 123-R effective July 1, 2006 using the modified
      prospective method. Under this transition method, stock compensation expense
      recognized in the six months ended December 31, 2006 includes compensation
      expense for all stock-based compensation awards vested during the six months
      ended December 31, 2006, based on the grant-date fair value estimated in
      accordance with the provisions of SFAS No. 123-R.





For
      periods presented prior to the adoption of SFAS No. 123R, pro forma
      information regarding net income and earnings per share as required by SFAS
      No. 123R has been determined as if the Company had accounted for its
      employee stock options under the original provisions of SFAS No. 123. The
      fair value of these options was estimated using the Black-Scholes option pricing
      model. For purposes of pro forma disclosure, the estimated fair value of the
      options is amortized to expense over the option’s vesting period. The pro forma
      expense to recognize and adjusted net earnings per share for the fiscal year
      ended June 30, 2006 is as follows:




2006Net
                  income (loss) - as reported
              
              $
              (1,353,053
              )Stock-based
                  employee compensation expense,included
                  in reported net loss, net of tax
              
              
              -Total
                  stock-based employee compensationexpense
                  determined under fair-value-basedmethod
                  for all rewards, net of tax
              
              
              (5,674,402
              )Pro
                  forma net loss
              
              $
              (7,027,455
              )Earnings
                  per share:Basic,
                  as reported
              
              
              (0.09
              )Diluted,
                  as reported
              
              
              (0.09
              )Basic,
                  pro forma
              
              
              (0.48
              )Diluted,
                  pro forma
              
              
              (0.48
              )




F-30




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT


Pro
      forma
      information regarding the effect on operations is required by SFAS 123, and
      has
      been determined as if the Company had accounted for its employee stock options
      under the fair value method of that statement. Pro forma information using
      the
      Black-Scholes method at the date of grant based on the following assumptions:




2006Expected
                  life (years)
              
              
              10
                  yearsRisk-free
                  interest rate
              
              
              3.25%
                  - 6.0
              %Dividend
                  yield
              
              
              -Volatility
              
              
              54%
                  - 100
              %




Impact
      of
      adoption of SFAS No. 123-R for the fiscal year ended June 30, 2007:




During
      the quarter ended June 30, 2007, 180,606 options were granted to employees
      with
      an exercise price of $1.65 per share and an expiration date of one-year. All
      options granted have been exercised as of June 30, 2007. Using the Black-Scholes
      method to value the options, the Company recorded $102,584 in compensation
      expense for these options in the accompanying consolidated financial statements.
      The Black-Scholes option pricing model used the following
      assumptions:




Risk-free
                  interest rate
              
              
              7
              %Expected
                  life
              
              
              1
                  yearsExpected
                  volatility
              
              
              83
              %




Methods
      of estimating fair value:




Under
      both SFAS No. 123-R and under the fair value method of accounting under
      SFAS No. 123 (i.e., SFAS No. 123 Pro Forma), the fair value of stock
      options is determined using the Black-Scholes model.





Under
      SFAS No. 123-R, the company's expected volatility assumption is based on the
      historical volatility of the Company's stock. The expected life assumption
      is
      primarily based on historical exercise patterns and employee post-vesting
      termination behavior. The risk-free interest rate for the expected term of
      the
      option is based on the U.S. Treasury yield curve in effect at the time of grant.





SFAS
      No. 123-R requires forfeitures to be estimated at the time of grant and
      revised in subsequent periods, if necessary, if actual forfeitures differ from
      those estimates.





**Warrants:**





During
      the year ended June 30, 2006, three debenture holders converted their notes
      into
      common stock. As part of the conversion, warrants to purchase a total of 40,323
      common shares were issued to the note holders. The warrants expire in five
      years
      and have an exercise price of $3.30 per share. The warrants were valued using
      the fair value method at $21,505 and ranged between $0.45 and $0.71 per share
      and recorded the expense in the accompanying consolidated financial statements.
      The Black-Scholes option pricing model used the following
      assumptions:




Risk-free
                  interest rate
              
              
              3.25
              %Expected
                  life
              
              
              5
                  yearsExpected
                  volatility
              
              
              44%
                  - 56
              %Dividend
                  yield
              
              
              0
              %
  F-31
  NETSOL
          TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENT


On
      October 11, 2006, the Company entered into an agreement with a consultant
      whereby the Company agreed to grant the consultant a total of 100,000 warrants
      with an exercise price of $1.85 and 100,000 warrants with an exercise price
      of
      $3.70. The warrants vest equally over the term of the agreement on a quarterly
      basis commencing on January 11, 2007 and vest only upon completion of the
      quarter’s service as earned. The agreement was terminated on March 31, 2007. The
      warrants are exercisable until October 10, 2011. During the fiscal year ended
      June 30, 2007, a total of 25,000 of the warrants had vested. The warrants were
      valued using the fair value method at $33,987 or $1.44 and $1.28 per share
      and
      recorded the expense in the accompanying consolidated financial statements.
      The
      Black-Scholes option pricing model used the following assumptions:




Risk-free
                  interest rate
              
              
              7.0
              %Expected
                  life
              
              
              5
                  yearsExpected
                  volatility
              
              
              100
              %Dividend
                  yield
              
              
              0
              %




**NOTE
      14 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN**





**The
      2001 Plan**





On
      March
      27, 2002, the Company enacted an Incentive and Non-statutory Stock Option Plan
      (the “2001 Plan”) for its employees and consultants under which a maximum of
      2,000,000 options may be granted to purchase common stock of the Company. Two
      types of options may be granted under the Plan: (1) Incentive Stock Options
      (also known as Qualified Stock Options) which may only be issued to employees
      of
      the Company and whereby the exercise price of the option is not less than the
      fair market value of the common stock on the date it was reserved for issuance
      under the Plan; and (2) Non-statutory Stock Options which may be issued to
      either employees or consultants of the Company and whereby the exercise price
      of
      the option is less than the fair market value of the common stock on the date
      it
      was reserved for issuance under the plan. Grants of options may be made to
      employees and consultants without regard to any performance measures. All
      options issued pursuant to the Plan are nontransferable and subject to
      forfeiture.





Any
      Option granted to an Employee of the Corporation shall become exercisable over
      a
      period of no longer than ten (10) years and no less than twenty percent (20%)
      of
      the shares covered thereby shall become exercisable annually. No Incentive
      Stock
      Option shall be exercisable, in whole or in part, prior to one (1) year from
      the
      date it is granted unless the Board shall specifically determine otherwise,
      as
      provided herein. In no event shall any Option be exercisable after the
      expiration of ten (10) years from the date it is granted, and no Incentive
      Stock
      Option granted to a Ten Percent Holder shall, by its terms, be exercisable
      after
      the expiration of ten (10) years from the date of the Option. Unless otherwise
      specified by the Board or the Committee in the resolution authorizing such
      option, the date of grant of an Option shall be deemed to be the date upon
      which
      the Board or the Committee authorizes the granting of such Option.





The
      number and exercise prices of options granted under the 2001 Plan for the years
      ended June 30, 2007 and 2006 are as follows:




Exercise
              
              
              
              Exercise2007
              
              Price
              
              2006
              
              PriceOutstanding
                  and exercisable, beginning of year
              
              
              46,000
              
              $
              0.75
                  to $2.50
              
              
              111,000
              
              $
              0.75
                  to $2.50Granted
              
              
              -
              
              
              
              
              
              -Exercised
              
              
              (15,000
              )
              $
              1.00
                  to $1.25
              
              
              (65,000
              )
              $
              0.75
                  to $1.75Expired
              
              
              -
              
              
              -
              
              
              -
              
              
              -Outstanding
                  and exercisable, end of year
              
              
              31,000
              
              $
              0.75
                  to $1.25
              
              
              46,000
              
              $
              0.75
                  to $1.25
  F-32
  NETSOL
          TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENT


**The
      2002 Plan**





In
      January 2003, the Company enacted an Incentive and Non-statutory Stock Option
      Plan (the “2002 Plan”) for its employees and consultants under which a maximum
      of 2,000,000 options may be granted to purchase restricted Rule 144 common
      stock
      of the Company. Two types of options may be granted under the Plan: (1)
      Incentive Stock Options (also known as Qualified Stock Options) which may only
      be issued to employees of the Company and whereby the exercise price of the
      option is not less than the fair market value of the common stock on the date
      it
      was reserved for issuance under the Plan; and (2) Non-statutory Stock Options
      which may be issued to either employees or consultants of the Company and
      whereby the exercise price of the option is less than the fair market value
      of
      the common stock on the date it was reserved for issuance under the plan. Grants
      of options may be made to employees and consultants without regard to any
      performance measures. All options issued pursuant to the Plan are
      nontransferable and subject to forfeiture.





Any
      Option granted to an Employee of the Corporation shall become exercisable over
      a
      period of no longer than ten (10) years and no less than twenty percent (20%)
      of
      the shares covered thereby shall become exercisable annually. No Incentive
      Stock
      Option shall be exercisable, in whole or in part, prior to one (1) year from
      the
      date it is granted unless the Board shall specifically determine otherwise,
      as
      provided herein. In no event shall any Option be exercisable after the
      expiration of ten (10) years from the date it is granted, and no Incentive
      Stock
      Option granted to a Ten Percent Holder shall, by its terms, be exercisable
      after
      the expiration of ten (10) years from the date of the Option. Unless otherwise
      specified by the Board or the Committee in the resolution authorizing such
      option, the date of grant of an Option shall be deemed to be the date upon
      which
      the Board or the Committee authorizes the granting of such Option.




F-33




NETSOL
      TECHNOLOGIES INC AND SUBSIDIARIES


NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




The
      number and weighted average exercise prices of options granted under the 2002
      Plan for the year ended June 30, 2007 and 2006 are as follows:




Exercise
              
              
              
              Exercise2006
              
              Price
              
              2006
              
              PriceOutstanding
                  and exercisable, beginning of year
              
              
              1,059,500
              
              $
              0.75
                  to $2.50
              
              
              1,139,500
              
              $
              0.75
                  to $2.50Granted
              
              
              -
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              (47,500
              )
              $
              0.75
                  to $2.30
              
              
              (80,000
              )
              $
              0.75Expired
              
              
              (40,000
              )
              $
              3.00
                  to $5.00
              
              
              -
              
              
              -Outstanding
                  and exercisable, end of year
              
              
              972,000
              
              $
              0.75
                  to $5.00
              
              
              1,059,500
              
              $
              0.75
                  to $5.00




**The
      2003 Plan**





In
      March
      2004, the Company enacted an Incentive and Non-statutory Stock Option Plan
      (the
“2003 Plan”) for its employees and consultants under which a maximum of
      2,000,000 options may be granted to purchase restricted Rule 144 common stock
      of
      the Company. Two types of options may be granted under the Plan: (1) Incentive
      Stock Options (also known as Qualified Stock Options) which may only be issued
      to employees of the Company and whereby the exercise price of the option is
      not
      less than the fair market value of the common stock on the date it was reserved
      for issuance under the Plan; and (2) Non-statutory Stock Options which may
      be
      issued to either employees or consultants of the Company and whereby the
      exercise price of the option is less than the fair market value of the common
      stock on the date it was reserved for issuance under the plan. Grants of options
      may be made to employees and consultants without regard to any performance
      measures. All options issued pursuant to the Plan are nontransferable and
      subject to forfeiture.





Any
      Option granted to an Employee of the Corporation shall become exercisable over
      a
      period of no longer than ten (10) years and no less than twenty percent (20%)
      of
      the shares covered thereby shall become exercisable annually. No Incentive
      Stock
      Option shall be exercisable, in whole or in part, prior to one (1) year from
      the
      date it is granted unless the Board shall specifically determine otherwise,
      as
      provided herein. In no event shall any Option be exercisable after the
      expiration of ten (10) years from the date it is granted, and no Incentive
      Stock
      Option granted to a Ten Percent Holder shall, by its terms, be exercisable
      after
      the expiration of ten (10) years from the date of the Option. Unless otherwise
      specified by the Board or the Committee in the resolution authorizing such
      option, the date of grant of an Option shall be deemed to be the date upon
      which
      the Board or the Committee authorizes the granting of such Option.




F-34




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




The
      number and weighted average exercise prices of options granted under the 2003
      Plan for the year ended June 30, 2007 and 2006 are as follows:




Exercise
              
              
              
              Exercise2007
              
              Price
              
              2006
              
              PriceOutstanding
                  and exercisable, beginning of year
              
              
              970,000
              
              $
              1.00
                  to $5.00
              
              
              787,500
              
              $
              1.00
                  to $5.00Granted
              
              
              180,606
              
              $
              1.65
              
              
              182,500
              
              $
              1.70
                  to $2.55Exercised
              
              
              (355,606
              )
              $
              1.25
                  to $1.65
              
              
              -
              
              
              -Expired
              
              
              (50,000
              )
              $
              2.64
                  to $5.00
              
              
              -
              
              
              -Outstanding
                  and exercisable, end of year
              
              
              745,000
              
              $
              1.70
                  to $5.00
              
              
              970,000
              
              $
              1.25
                  to $5.00
  **The
      2004 Plan**





In
      March
      2005, the Company enacted an Incentive and Non-statutory Stock Option Plan
      (the
“2004 Plan”) for its employees and consultants under which a maximum of
      5,000,000 options may be granted to purchase common stock of the Company. A
      registration statement on form n S-8 was filed on April 7, 2006 registering
      the
      shares of common stock underlying the options in this plan. Two types of options
      may be granted under the Plan: (1) Incentive Stock Options (also known as
      Qualified Stock Options) which may only be issued to employees of the Company
      and whereby the exercise price of the option is not less than the fair market
      value of the common stock on the date it was reserved for issuance under the
      Plan; and (2) Non-statutory Stock Options which may be issued to either
      employees or consultants of the Company and whereby the exercise price of the
      option is less than the fair market value of the common stock on the date it
      was
      reserved for issuance under the plan. Grants of options may be made to employees
      and consultants without regard to any performance measures. All options issued
      pursuant to the Plan are nontransferable and subject to forfeiture.





Any
      Option granted to an Employee of the Corporation shall become exercisable over
      a
      period of no longer than ten (10) years and no less than twenty percent (20%)
      of
      the shares covered thereby shall become exercisable annually. No Incentive
      Stock
      Option shall be exercisable, in whole or in part, prior to one (1) year from
      the
      date it is granted unless the Board shall specifically determine otherwise,
      as
      provided herein. In no event shall any Option be exercisable after the
      expiration of ten (10) years from the date it is granted, and no Incentive
      Stock
      Option granted to a Ten Percent Holder shall, by its terms, be exercisable
      after
      the expiration of ten (10) years from the date of the Option. Unless otherwise
      specified by the Board or the Committee in the resolution authorizing such
      option, the date of grant of an Option shall be deemed to be the date upon
      which
      the Board or the Committee authorizes the granting of such Option.





The
      number and weighted average exercise prices of options granted under the 2004
      Plan for the year ended June 30, 2007 and 2006 are as follows:




Exercise
              
              
              
              Exercise2006
              
              Price
              
              2006
              
              PriceOutstanding
                  and exercisable, beginning of year
              
              
              4,730,000
              
              $
              1.65
                  to $3.00
              
              
              3,000,000
              
              $
              1.94
                  to $2.91Granted
              
              
              -
              
              
              -
              
              
              1,888,413
              
              $
              1.65
                  to $3.00Exercised
              
              
              (1,155,637
              )
              $
              1.65
                  to $1.94
              
              
              (158,413
              )
              $
              1.65
                  to $1.75Expired
              
              
              -
              
              
              -
              
              
              -
              
              
              -Outstanding
                  and exercisable, end of year
              
              
              3,574,363
              
              $
              1.65
                  to $3.00
              
              
              4,730,000
              
              $
              1.65
                  to $3.00




**The
      2005 Plan**





In
      April
      2006, the Company enacted an Incentive and Non-statutory Stock Option Plan
      (the
“2005 Plan”) for its employees and consultants under which a maximum of
      5,000,000 options may be granted to purchase restricted Rule 144 common stock
      of
      the Company. Two types of options may be granted under the Plan: (1) Incentive
      Stock Options (also known as Qualified Stock Options) which may only be issued
      to employees of the Company and whereby the exercise price of the option is
      not
      less than the fair market value of the common stock on the date it was reserved
      for issuance under the Plan; and (2) Non-statutory Stock Options which may
      be
      issued to either employees or consultants of the Company and whereby the
      exercise price of the option is less than the fair market value of the common
      stock on the date it was reserved for issuance under the plan. Grants of options
      may be made to employees and consultants without regard to any performance
      measures. All options issued pursuant to the Plan are nontransferable and
      subject to forfeiture.




F-35




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




Any
      Option granted to an Employee of the Corporation shall become exercisable over
      a
      period of no longer than ten (10) years and no less than twenty percent (20%)
      of
      the shares covered thereby shall become exercisable annually. No Incentive
      Stock
      Option shall be exercisable, in whole or in part, prior to one (1) year from
      the
      date it is granted unless the Board shall specifically determine otherwise,
      as
      provided herein. In no event shall any Option be exercisable after the
      expiration of ten (10) years from the date it is granted, and no Incentive
      Stock
      Option granted to a Ten Percent Holder shall, by its terms, be exercisable
      after
      the expiration of ten (10) years from the date of the Option. Unless otherwise
      specified by the Board or the Committee in the resolution authorizing such
      option, the date of grant of an Option shall be deemed to be the date upon
      which
      the Board or the Committee authorizes the granting of such Option.





The
      number and weighted average exercise prices of options granted under the 2005
      Plan for the year ended June 30, 2006 are as follows:




Exercise
              
              
              
              Exercise2007
              
              Price
              
              2006
              
              PriceOutstanding
                  and exercisable, beginning of year
              
              
              -
              
              
              -
              
              
              -
              
              
              -Granted
              
              
              1,780,000
              
              $
              1.70
                  to $2.55
              
              
              1,780,000
              
              $
              1.70
                  to $2.55Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -Expired
              
              
              -
              
              
              -
              
              
              -
              
              
              -Outstanding
                  and exercisable, end of year
              
              
              1,780,000
              
              $
              1.70
                  to $2.55
              
              
              1,780,000
              
              $
              1.70
                  to $2.55





**NOTE
      15 - COMMITMENTS AND CONTINGENCIES**





**Leases**





The
      Company’s headquarters
      is located in California in approximately 1,919 rentable square feet and a
      monthly rent of $4,754per month. The term of the lease is for one year and
      expires on December 31, 2007. A security deposit of $4,447 was made and is
      included in other current assets in the accompanying consolidated financial
      statements.





The
      Australia lease is a three-year lease that expires in September 2007 and
      currently is rented at the rate of $1,380 per month. The Beijing lease is a
      two
      year lease that expires in August 2009. The monthly rent is $4,315 per month.
      The NetSol-CQ System facilities, located in Horsham, United Kingdom, are leased
      until June 23, 2011 for an annual rent of £75,000 (approximately $144,900).
      NetSol McCue, Inc., located in Burlingame, California, premises are leased
      until
      June 30, 2009 with a monthly rent of $16,178.




F-36




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




The
      NetSol Karachi lease is a 3 year lease that expires on December 4, 2008 and
      currently is rented at the rate of $1,726 per month. The NetSol Islamabad lease
      is a 15 year lease that expires on August 31, 2016 and currently is rented
      at
      the rate of $1,417 per month. The NetSol Rawalpindi lease is a 2 year lease
      that
      expires on January 4, 2008 and currently is rented at the rate of $800 per
      month.





Upon
      expiration of its leases, the Company does not anticipate any difficulty in
      obtaining renewals or alternative space. Rent
      expense amounted to $804,295 and $521,496 for the years ended June 30, 2007
      and
      2006, respectively.




*Lahore
      Technology Campus*





In
      May
      2004, the newly built Technology Campus was inaugurated in Lahore, Pakistan.
      This facility consists of 50,000 square feet of computer and general office
      space. This facility is state of the art, purpose-built and fully dedicated
      for
      IT and software development; the first of its kind in Pakistan. Title to this
      facility is held by NetSol Technologies Ltd. and is not subject to any
      mortgages. In order to cater for future business expansion and taking advantage
      of depressing real estate market, the company purchased two new cottages
      adjacent to its main building. Total covered area of these cottages is 4,900
      sq
      feet and it cost was $250,000 approx. The management has moved its accounts,
      finance, internal audit, company secretariat and costing and budgeting
      department into these cottages. For the recreation of its valuable human
      resources, the management has also established a gymnasium there.





**Employment
      Agreements**





Effective
      January 1, 2007, the Company entered into an Employment Agreement with our
      Chief
      Executive Officer. Pursuant to the Employment Agreement between him and the
      Company (the "CEO Agreement"), the Company agreed to employ him as its
      Chief Executive Officer from the date of the CEO Agreement through December
      31,
      2009. Under the CEO Agreement, he is entitled to an annualized base salary
      of $275,000 and is eligible for annual bonuses at the discretion of the
      Compensation Committee. The Company retained the right to
      increase the base compensation as it deems necessary. In addition, he is
      entitled to participate in the Company's stock option plans, is entitled to
      two
      weeks of paid vacation per calendar year and is to receive a car allowance
      totaling $3,000 per month for the term of the CEO Agreement. Finally, during
      the
      term of the CEO Agreement, the Company shall pay the amount of premiums or
      other
      costs incurred for the coverage of him, his spouse and dependent family members
      under the Company's health and related benefit plans.





Effective
      January 1, 2007, the Company entered into an Employment Agreement with our
      President of the EMEA Region and Chief Executive Officer of the Global Products
      Division. Pursuant to the Employment Agreement between him and the Company
      (the "President EMEA Agreement"), the Company agreed to employ him as its
      President of the EMEA region and Chief Executive Officer of the Global Products
      Division from the date of the President EMEA Agreement through December 31,
      2009. Under the President EMEA Agreement, he is entitled to an annualized
      base salary of $225,000 and is eligible for annual bonuses at the discretion
      of
      the Compensation Committee. The Company retained the right to increase the
      base
      compensation as it deems necessary. In addition, he is entitled to
      participate in the Company's stock option plans, is entitled to two weeks of
      paid vacation per calendar year and is to receive a car allowance totaling
      $2,000 per month for the term of the President EMEA Agreement. Finally, during
      the term of the President EMEA Agreement, the Company shall pay the amount
      of
      premiums or other costs incurred for the coverage of him, his spouse and
      dependent family members under the Company's health and related benefit
      plans.




F-37




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




Effective
      January 1, 2007, the Company entered into an Employment Agreement with our
      President of the APAC Region and Chief Executive Officer of the Global Services
      Division. Pursuant to the Employment Agreement between him and the Company
      (the "President APAC Agreement"), the Company agreed to employ him as its
      President APAC and Chief Executive Officer of the Global Services Division
      from
      the date of the President APAC Agreement through December 31, 2009. Under the
      President APAC Agreement, he is entitled to an annualized base salary of
      $175,000 and is eligible for annual bonuses at the discretion of the
      Compensation Committee. The Company retained the right to increase the base
      compensation as it deems necessary. In addition, he is entitled to
      participate in the Company's stock option plans, is entitled to two weeks of
      paid vacation per calendar year. Finally, during the term of the President
      APAC
      Agreement, the Company shall pay the amount of premiums or other costs incurred
      for the coverage of him, his spouse and dependent family members under the
      Company's health and related benefit plans.





Effective
      May 1, 2006, the Company entered into an Employment Agreement with our Secretary
      and General Counsel. Pursuant to the Employment Agreement between her and
      the Company (the "General Counsel Agreement"), the Company agreed to
      employ her as its Secretary and General Counsel from the date of the
      General Counsel Agreement through April 30, 2008. Under the General Counsel
      Agreement, she was entitled to an annualized base salary of $110,000 and is
      eligible for annual bonuses at the discretion of the Chief Executive Officer.
      Effective August 1, 2007, her annualized salary was raised to $130,000. The
      Company retained the right to increase the base compensation as it deems
      necessary. In addition, she is entitled to participate in the Company's
      stock option plans and, is entitled to two weeks of paid vacation per calendar
      year. Finally, during the term of the General Counsel Agreement, the Company
      shall pay the amount of premiums or other costs incurred for the coverage of
      her, her spouse and dependent family members under the Company's health and
      related benefit plans.





Effective
      July 20, 2005, we entered into an employment agreement with the Chief
      Financial Officer. The agreement was amended effective May 1, 2006 to provide
      a
      yearly salary of $95,000. Effective August 1, 2007, her annualized salary was
      raised to $132,000 and is eligible for annual bonuses at the discretion of
      the
      Chief Executive Officer. The Company retained the right to increase the base
      compensation as it deems necessary. In addition, she is entitled to
      participate in the Company's stock option plans and, is entitled to two weeks
      of
      paid vacation per calendar year. Finally, during the term of the Chief Financial
      Officer Agreement, the Company shall pay the amount of premiums or other costs
      incurred for the coverage of her and her dependent family members under the
      Company's health and related benefit plans.





The
      agreements also provide for reimbursement of reasonable business-related
      expenses. The agreements also provide for certain covenants concerning
      non-competition, non-disclosure, indemnity and assignment of intellectual
      property rights.




**Litigation**





As
      of
      June 30, 2007 and 2006, to the best knowledge of the Company’s management and
      counsel, there is no material litigation pending or threatened against the
      Company.




F-38




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




**NOTE
      16 - SEGMENT AND GEOGRAPHIC AREAS**





The
      following table presents a summary of operating information and certain year-end
      balance sheet information for the years ended June 30, 2007 and 2006:




2007
              
              2006Revenues
                  from unaffiliated customers:North
                  America
              
              $
              4,953,083
              
              $
              45,250Europe
              
              
              5,482,972
              
              
              7,414,960Asia
                  - Pacific
              
              
              18,846,031
              
              
              11,230,202Consolidated
              
              $
              29,282,086
              
              $
              18,690,412Operating
                  income (loss):Corporate
                  headquarters
              
              $
              (3,358,739
              )
              $
              (3,688,598
              )North
                  America
              
              
              29,257
              
              
              -Europe
              
              
              (704,530
              )
              
              898,141Asia
                  - Pacific
              
              
              6,680,880
              
              
              2,531,110Consolidated
              
              $
              2,646,868
              
              $
              (259,347
              )Identifiable
                  assets:Corporate
                  headquarters
              
              $
              13,263,112
              
              $
              17,630,388North
                  America
              
              
              2,070,829
              
              
              2,329,837Europe
              
              
              4,833,181
              
              
              4,318,911Asia
                  - Pacific
              
              
              29,362,019
              
              
              18,746,011Consolidated
              
              $
              49,529,141
              
              $
              43,025,147Depreciation
                  and amortization:Corporate
                  headquarters
              
              $
              1,406,989
              
              $
              1,887,646North
                  America
              
              
              131,850
              
              
              -Europe
              
              
              268,795
              
              
              173,258Asia
                  - Pacific
              
              
              833,638
              
              
              959,144Consolidated
              
              $
              2,641,272
              
              $
              3,020,048Capital
                  expenditures:Corporate
                  headquarters
              
              $
              3,986
              
              $
              4,367North
                  America
              
              
              20,820
              
              
              -Europe
              
              
              249,690
              
              
              192,752Asia
                  - Pacific
              
              
              2,145,974
              
              
              2,512,450Consolidated
              
              $
              2,420,470
              
              $
              2,709,569





**NOTE
      17 - MINORITY INTEREST IN SUBSIDIARY**





The
      Company had minority interests in several of its subsidiaries. The balance
      of
      the minority interest as of June 30, 2007 was as follows:




MIN
                  INTBALANCE
                  ATSUBSIDIARY
              
              MIN
                  INT %
              
              6/30/07PK
                  Tech
              
              
              28.13
              %
              $
              1,876,212NetSol-TiG
              
              
              49.90
              %
              
              1,413,848Connect
              
              
              49.90
              %
              
              262,575Omni
              
              
              49.90
              %
              
              -Total
              
              
              
              
              $
              3,552,635




F-39




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




NetSol
      Technologies, Limited (“PK Tech”)





In
      August
      2005, the Company’s wholly-owned subsidiary, NetSol
      Technologies (Pvt), Ltd. (“PK Tech”) became listed on the Karachi Stock Exchange
      in Pakistan. The Initial Public Offering (“IPO”) sold 9,982,000 shares of the
      subsidiary to the public thus reducing the Company’s ownership by 28.13%. Net
      proceeds of the IPO were $4,890,224. As a result of the IPO, the Company is
      required to show the minority interest of the subsidiary on the accompanying
      consolidated financial statements.





For
      the
      fiscal years ended June 30, 2007 and 2006, the subsidiary had net income of
      $4,747,590 and $1,780,892, of which $1,375,247 and $500,965, respectively,
      was
      recorded against the minority interest. The balance of the minority interest
      at
      June 30, 2007 was $1,876,212.





On
      May 18
      2007, the subsidiary’s board of directors authorized a 15% stock bonus dividend
      to all its stockholders as of that date. The net value of shares issued to
      minority holders was $345,415.





NetSol-TiG:





In
      December 2004, NetSol forged a new and a strategic relationship with a UK based
      public company TIG Plc. A new Joint Venture was signed by the two companies
      to
      create a new company, TiG NetSol Pvt Ltd. (“NetSol-TiG”), with 50.1% ownership
      by NetSol Technologies, Inc. and 49.9% ownership by TiG. The agreement
      anticipates TiG’s technology business to be outsourced to NetSol’s offshore
      development facility.





During
      year ended June 30, 2005, the Company invested $253,635 and TiG invested
      $251,626 and the new subsidiary began operations during the quarter ended March
      31, 2005.





For
      the
      fiscal years ended June 30, 2007 and 2006, the subsidiary had net income of
      $1,401,444and $879,134, of which $596,802 and $438,688 was recorded against
      the
      minority interest, respectively. The balance of the minority interest at June
      30, 2007 was $1,413,848.





NetSol
      Connect:





In
      August
      2003, the Company entered into an agreement with United Kingdom based Akhter
      Group PLC (“Akhter”). Under the terms of the agreement, Akhter Group acquired
      49.9 percent of the Company’s subsidiary; Pakistan based NetSol Connect PVT Ltd.
      (“Connect”), an Internet service provider (“ISP”), in Pakistan through the
      issuance of additional Connect shares. As part of this Agreement, Connect
      changed its name to NetSol Akhter. The partnership with Akhter Computers is
      designed to rollout connectivity and wireless services to the Pakistani national
      market.




F-40




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




As
      of
      June 30, 2005, a total of $751,356 had been transferred to Connect, of which
      $410,781 was from Akhter. In June 2006, a total of $40,000 cash was distributed
      to each partner as a return of capital.





For
      the
      fiscal years ended June 30, 2007 and 2006, the subsidiary had net loss of
      $57,117 and net income of $14,304, respectively, of which ($28,501) and $7,318
      respectively, was recorded against the minority interest. The balance of the
      minority interest at June 30, 2007 was $262,575.





Talk
      Trainers (Private) Limited (“Talk Trainers”) - NetSol Omni





In
      February 2006, the Company purchased for $60,012 50.1% of the outstanding shares
      in Talk Trainers (Private) Limited, (“Talk Trainers”), a Pakistan corporation
      which provides educational services, professional courses, training and human
      resource services to the corporate sector. The major stockholder of Talk
      Trainers was Mr. Ayub Ghauri, brother to the executive officers of the Company,
      and therefore the acquisition was recorded at historical cost as the entities
      are under common control. As the effects of this transaction are immaterial
      to
      the Company overall, no pro forma information is provided. During the quarter
      ended June 30, 2006, Talk Trainers changed their name to NetSol
      Omni.





For
      the
      fiscal years ended June 30, 2007 and 2006, the subsidiary had a net loss of
      $71,298 and net income of $14,689, of which ($7,959) and $8,315 was recorded
      against the minority interest. The balance of the minority interest at June
      30,
      2007 was $0.





**NOTE
      18 - GAIN ON SETTLEMENT OF DEBT**





During
      the year ended June 30, 2006, the Company entered into agreements with several
      vendors whereby the vendors agreed to accept as payment in full amounts less
      than the invoiced amount. As a result of these settlements, the Company recorded
      a net gain on settlement of debt of $8,294.





**NOTE
      19 - ACQUISITION OF CQ SYSTEMS**





On
      January 19, 2005, the Company entered into an agreement to acquire 100% of
      the
      issued and outstanding shares of common stock of CQ Systems Ltd., a company
      organized under the laws of England and Wales. The acquisition closed on
      February 22, 2005.





According
      to the terms of the Share Purchase Agreement, the Company acquired 100% of
      the
      issued and outstanding shares of CQ from CQ’s current shareholders, whose
      identity is set forth in the Share Purchase Agreement (the “CQ Shareholders”) at
      the completion date in exchange for a purchase price consisting of: a) 50.1%
      of
      CQ’s total gross revenue for the twelve month period ending March 31, 2005 after
      an adjustment for any extraordinary revenue, i.e. non-trading revenue (“LTM
      Revenue”) multiplied by 1.3 payable: (i) 50% in shares of restricted common
      stock of the Company at a per share cost basis of $2.313 and as adjusted by
      the
      exchange rate of U.S. Dollar to British Pound (at the spot rate for the purchase
      of sterling with U.S. dollars certified by NatWest Bank plc as prevailing at
      or
      about 11:00 a.m.) on January 19, 2005 and, (ii) 50% in cash; and b) 49.9% of
      CQ’s LTM Revenue for the period ending March 31, 2006 multiplied by 1.3 payable,
      at the Company’s discretion: (i) wholly in cash; or (ii) on the same basis and
      on the same terms as the initial payment provided, however that the cost basis
      of the Company’s common stock shall be based on the 20 day volume weighted
      average of the Company’s shares of common stock as traded on NASDAQ 20 days
      prior to March 31, 2005 and, provided that under no circumstances shall the
      total number of shares of common stock issued to the CQ Shareholders exceed
      19%
      of the issued and outstanding shares of common stock, less treasury shares,
      of
      the Company at January 19, 2005.





The
      initial purchase price was £3,576,335 or $6,730,382, of which one-half was due
      at closing payable in cash and stock and the other half is due when the audited
      March 31, 2006 financial statements are completed. On the closing date, $1.7
      million was paid and 681,965 shares were issued to the shareholders of CQ,
      valued at $1,676,795 at an average share price of $2.46 (see note 11) was
      recorded. In addition, the agreement called for the accumulated retained
      earnings amounting to £423,711 or $801,915 of CQ Systems as of the closing date
      to be paid to the shareholders in cash and stock. In April 2005, the additional
      cash of £350,000 or $662,410 was paid and 77,503 shares of the Company’s common
      stock valued at $139,505 were issued. The total amount paid at closing was
      $4,178,710.




F-41




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




In
      accordance with SFAS 141, the Company had recognized the lesser of the maximum
      amount of the contingent consideration based on earnings or the excess of the
      fair market value of assets acquired over the purchase price as a deferred
      liability. The deferred liability balance at June 30, 2005 was $313,397. The
      purchase price was allocated as follows:




***Purchase
                  Price Allocation:***Purchase
                  Price
              
              $
              7,532,297Less
                  contingent consideration
              
              
              (3,353,587
              )Net
                  purchase price
              
              $
              4,178,710Net
                  tangible assets
              
              $
              984,420*Intangible
                  Assets:*Product
                  License
              
              
              2,190,807Customer
                  Lists
              
              
              1,316,880Deferred
                  liability
              
              
              (313,397
              )Net
                  purchase price
              
              $
              4,178,710


In
      June
      2006, the final installment for the purchase of CQ Systems was determined based
      on the audited revenues for the twelve month period ending March 31, 2006.
      Based
      on the earn-out formula in the purchase agreement, £2,087,071 or $3,785,210 was
      due in cash and stock. On June 12, 2006, 884,535 shares of the Company’s
      restricted common stock were issued to the shareholders of CQ Systems. In July
      2006, the cash portion of $1,936,530 plus $31,810 of interest was paid to the
      shareholders. As a result of the final payment the Company recorded an addition
      of $3,471,813 to goodwill.





**NOTE 20
      - ACQUISITION OF McCUE SYSTEMS**





On
      May 6,
      2006, the Company entered into an agreement to acquire 100% of the issued and
      outstanding stock of with McCue Systems, Inc. (“McCue”), a California
      corporation. The acquisition closed on June 30, 2006.





According
      to the terms of the Share Purchase Agreement, the Company acquired 100% of
      the
      issued and outstanding shares of McCue from McCue’s current shareholders, whose
      identity is set forth in the Share Purchase Agreement (the “McCue Shareholders”)
      at the completion date in exchange for a purchase price consisting of: a) 50%
      of
      McCue’s total gross revenue for the audited twelve month period ending December
      31, 2005 after an adjustment for any revenue occurring outside of the company’s
      ordinary scope of operations as defined by US GAAP multiplied by 1.5 payable:
      (i) 50% in shares of restricted common stock of the Company at the 30 day volume
      weighted average price (“VWAP) for each of the 30 trading days prior to the
      execution date of this agreement or at the VWAP for each of the 30 trading
      days
      prior to November 30, 2005 whichever is the greater VWAP; and, (ii) 50% in
      cash;
      b) 25% of McCue’s total gross revenue for the twelve months ending December 31,
      2006 multiplied by 1.5 payable, at the Company’s discretion: (i) wholly in cash;
      or (ii) on the same basis and on the same terms as the initial payment provided
      that under no circumstances shall the total number of shares of common stock
      issued to the McCue Shareholders exceed 19% of the issued and outstanding shares
      of common stock, less treasury shares, of the Company at May 6, 2006; and c)
      25%
      of McCue’s total gross revenue for the twelve months ending December 31, 2007
      multiplied by 1.5 payable, at the Company’s discretion: (i) wholly in cash; or
      (ii) on the same basis and on the same terms as the initial payment provided
      that under no circumstances shall the total number of shares of common stock
      issued to the McCue Shareholders exceed 19% of the issued and outstanding shares
      of common stock, less treasury shares, of the Company at May 6,
      2006.




F-42




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




The
      initial purchase price was estimated at $8,471,455 of which one-half was due
      at
      closing payable in cash and stock. The other half is due in two installments
      over the next two years based on revenues after the audited December 31, 2006
      and 2007 financial statements are completed. On the closing date, $2,117,864
      payable and 958,213 shares to be issued valued at $1,628,979, adjusted for
      the
      market value at closing, was recorded. The cash was paid on July 5, 2006 and
      the
      shares were also issued in July 2006. The total amount recorded at closing
      was
      $3,746,843.




The
      purchase price was allocated as follows:




***Purchase
                  Price Allocation:***Purchase
                  Price
              
              $
              8,471,455Less
                  contingent consideration
              
              
              (4,235,727
              )Adjustment
                  for valuation of shares to market at closing
              
              
              (488,885
              )Net
                  purchase price
              
              $
              3,746,843Net
                  tangible assets
              
              $
              80,245*Intangible
                  Assets:*Product
                  License
              
              
              127,510Customer
                  Lists
              
              
              2,143,837Goodwill
              
              
              1,395,251Net
                  purchase price
              
              $
              3,746,843




In
      June
      2007, the second installment for the purchase of McCue Systems was determined
      based on the audited revenues for the twelve month period ending December 31,
      2006. Based on the earn-out formula in the purchase agreement, $1,807,910 was
      due in cash and stock. On June 27, 2007, 397,700 shares of the 408,988 shares
      due of the Company’s restricted common stock were issued to the shareholders of
      McCue Systems. The balance represents shareholders of McCue Systems that haven’t
      been located as of this date. In July and August 2007, $450,000 and $429,007
      of
      the cash portion was paid to the shareholders. As a result of the second payment
      the Company recorded an addition of $1,615,595 to goodwill.




F-43




NETSOL
        TECHNOLOGIES INC AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENT




The
      following is the proforma financial information of the Company assuming the
      transaction had been consummated at the beginning of the fiscal years ended
      June
      30, 2006:




For
                  the yearEnded
                  June 30,2006(Unaudited)***Statement
                  of Operations:***Revenues
              
              $
              24,537,975Cost
                  of Sales
              
              
              11,547,697Gross
                  Profit
              
              
              12,990,278Operating
                  Expenses
              
              
              13,393,543Income
                  (loss) from operations
              
              
              (403,265
              )Other
                  income and (expenses)
              
              
              (242,300
              )Income
                  (loss) before minority interest
              
              
              (645,565
              )Minority
                  interest in subsidiary
              
              
              (954,120
              )Net
                  Income (loss)
              
              $
              (1,599,685
              )Earnings
                  Per Share:Basic
              
              $
              (0.11
              )Diluted
              
              $
              (0.11
              )





**NOTE
      21 - SUBSEQUENT EVENTS**





On
      July
      16, and August 9, 2007, the cash payment of $450,000 and $429,007 due to the
      McCue Shareholders for the second payment of the acquisition was
      made.





On
      July
      2, 2007, the Company received the balance due of $250,000 due for the private
      placement of its common shares on June 29, 2007(see Note 13). The shares for
      this private placement were issued on July 3, 2007.





On
      July
      9, 2007, the dividend payable of $77,640 to preferred shareholders (see Note
      10)
      was made through the issuance of 48,956 shares of the Company’s common
      stock.





On
      July
      4, 2007, the Company entered into a debt agreement with AMZ Bank in Lahore,
      Pakistan for a total of $2,457,642. The loan is collateralized by approximately
      4,000,000 shares the Company owns in its Pakistan subsidiary, PK Tech. Finance
      costs associated with this debt totaled $39,445 and the Company received a
      net
      balance of $2,418,197. The loan has a maturity of three months and an interest
      rate based on the Karachi Interbank Offer Rate (KIBOR) plus 5%. At July 4,
      2007
      the KIBOR rate was 9.58%.





In
      July
      2007, the Company’s subsidiary, NetSol UK, entered into an agreement with HSBC
      Bank whereby the line of credit outstanding of £500,000 was converted into a
      note payable with a maturity of three years. The interest rate is 7.75% with
      monthly payments of £15,610 or approximately $31,280.





In
      July
      2007, one of the preferred shareholders converted 74 shares of preferred stock
      into 44,848 shares of the Company’s common stock.





In
      July
      2007, the Company repaid the note payable to Sir Noon, principle and interest
      of
      $565,045 (see Note 9).




F-44